AUDITING

UNIT 1 INTRODUCTION

Q. Define an Audit and state the various objects of an audit.. Or T o !ain objects of an audit are detection and "revention of errors and frauds. Co!!ent. Can auditin# "revent the!$ Ans. The word Audit is derived from the Latin word audire which means to hear. In olden times whenever the owners of a business suspected fraud, they appointed certain persons to check the accounts, who used to hear these accounts and express their opinion about their correctness or otherwise. uch persons were known as auditors. Thus, the term auditor means literally hearer, i.e., one who hears and is used ever since the days when public accounts were accepted and approval on the basis of hearin! the accounts read. The ori!inal ob"ect of an audit was to see whether the accountin! party has properly accounted for the receipts and payments of cash. If cash has been embe##led who did it and what was the amount. It was mainly an audit of cash book. The main ob"ect of modern audit is to fine out whether the balance sheet shows true and fair view of the state of affairs of a company and is drawn$up accordin! to the %ompanies Act. %"icer and &e#'er have defined, An audit may be said to be such an examination of the books, accounts and vouchers of a business as will enable the auditor to satisfy that the balance sheet is properly drawn$up so as to !ive a true and fair view of the state of the affairs of the business and whether the profit and loss account !ives a true and fair view of the profit or loss for the financial period. Accordin! to the best of his information and the explanations !iven to him and as shown by the books and if not in what respect he is not satisfied. The Institute of %hartered Accountants of India describes audit as the independent examination of financial information of any entity, whether profit$oriented or not and irrespective of its si#e or le!al form, when such examination is conducted with a view of expressin! an opinion thereon. To conclude audit may be defined as & '. An intelli!ent and a critical examination of the books of accounts of a business which, (. is done by an independent person or body of persons )ualified for the "ob, *. with the help of vouchers, documents, information and explanations received from the authorities so that, +. the auditor may satisfy himself with the accounts & ,i- balance sheet shows a true and fair view of the concern, ,ii- profit and loss account shows true and fair view of profit or loss.

Objects of an audit ( .iscovery of errors and frauds and its prevention is not the main ob"ective of audit. /b"ectives of Audit 0ain /b"ective 1xpression of expert opinion econdary /b"ective .etection and prevention of errors and frauds

)ain objective ( 1xpression of expert opinion, the business prepares balance sheet to show its financial position. It also prepares profit and loss account for the financial period. These are !iven to the auditor for checkin!. 2e checks whether the facts shown in the balance sheet and profit and loss account are true and prepares a report called audit report and express his opinion. %econdar* objective + Detection and "revention of errors ( 1rrors are normally innocent but sometime errors which mi!ht appear at first si!n, as innocent are ultimately found to be due to fraudulent in manipulation, and therefore, auditor may pay special attention to every error. The followin! are various types of errors & ,1- .rrors of O!ission ( The error of omission is one where a transaction is not recorded in the book of accounts either wholly or partially. ,/- .rrors of co!!ission ( 3hen a transaction has been recorded but has been wron!ly entered in the led!er, it is called error of commission. uch error may be intentional or unintentional vouchin! should be done carefully to detect such errors. ,0- .rrors of "rinci"'e ( 3hen the principle of accountin! are not followed in recordin! entries. It can be detected by independent checkin! and in)uiry. ,1- Co!"ensatin# errors ( A compensatin! error is one which is counter balanced by other error or errors. This is the most dan!erous type of error. This type of error will be detected by the trial balance. It may or may not affect the trial balance and will not be detected easily. Detection and "revention of fraud ( 4raud is really a false representation or entry which is made always intentionally. 4raud may be of two types. 4raud 0isappropriation of 0anipulation of Account

%ash 5oods )isa""ro"riation of cash ( There is a !reater chance of misappropriation of cash in bi! business. In a bi! business strict control must be exercised over cash. There must be system of checkin! the work of one clerk automatically by another. uch a system is known in auditin! as internal check. %ash may be misappropriated by ,i- cash received may not be recorded, ,ii- less amount recorded, ,ii- more payments may be shown, ,iv- bo!us payments may be shown.

The auditor should check cash book, rou!h cash book vouchers, wa!e sheets, invoice, a!ent returns etc. )isa""ro"riation of #oods ( 4raud may be in respect of !oods. This type of fraud is very difficult to detect when the !oods are less bulky and are of hi!her value. 6roper stock takin! methods and detailed checkin! by the auditor can brin! fraud to li!ht. 2raudu'ent !ani"u'ation of accounts ( This type of fraud is most difficult to discover. This is mostly committed by hi!her levels of mana!ement. It may be committed to show more profits than the actual ones to !et ,i- more commission, ,(- to obtain credit, ,*- to sell shares to show less profit, ,i- to purchase shares in the market at lower price, ,ii- to reduce income tax. The accounts may be falsified by not ,i- providin! depreciation, less7more depreciation, ,ii- by under valuation or over valuation of assets and liabilities, ,iii- by showin!, fictitious sales or purchases, ,iv- by char!in! revenue. 1xpenditure to capital account etc. The falsification of accounts is termed as windows dressin!. Auditor dut* + The duty of an auditor is very si!nificant in relation to the detection and prevention of error and fraud. Q. 3An auditor is a atch do# and not a b'ood hound.4 Co!!ent. (Imp.) Ans. The auditor should exercise care and skill while detectin! errors and fraud. 2e should make intelli!ent and careful en)uiry. 2is "ob is over if he feels that he had made in)uiry and was tactful. If to the best of his knowled!e care and skill, he certifies the accounts as correct, he cannot be held responsible for errors or fraud which is still there in the accounts. The decision in the 8in!ston %otton 0ills %ompany case makes clear that an auditor is a watch do! and not a blood hound. There are two important points & ,a- 4irstly, an auditor is a watch do!. 2e is to protect the interest of the owners and should try to find out errors and frauds in the accounts. ,b- econdly, he is not a blood hound. It is not part of his duty to take those task who have been found !uilty of committin! errors and fraud. 2owever, when there are circumstances arousin! his suspicion, he must be doubly alert. 2e must chan!e his audit procedures and do detailed checkin!, the auditor is not expected to apply in his duty nothin! more than reasonable skill and dili!ence as would be exercised by a professional of his cost e!ory. 2e is expected to do the audit accordin! to !enerally accepted auditin! practices. Q. 3Accountin# is a necessar* of auditin#. hi'e auditin# is a 'u5ur*.4 Discuss the advanta#es

Ans. The old controversy that 9accountancy is a necessity while auditin! is luxury: is over now in the present set up of the business world. The advanta!es of audit are & ,'- It ensures the correctness of the accounts to a lar!e extent. The truth and fairness of account is certified. ,(- 1rrors and frauds can be discovered )uickly. ,*- A re!ular audit makes the staff alert and vi!ilant.

,+- %omparision of accounts from year to year is possible. ,;- 2elpful in obtainin! additional capital or borrowin! money from banks or other sources. ,<- In case of loss by fire the compensation may be claimed from the insurance company on the basis of audited accounts. ,=- The auditin! help in the valuation of assets and !oodwill. ,>- Audited accounts are more reliable as evidence in the court of law. ,?- The audited accounts are accepted by tax authorities. ,'@- It instile confidence in the minds of investors and other. ,''- Auditor may !ive expert advice to accounts. ,'(- The audited accounts are more helpful in the settlement of accounts between the partners. Auditin! may be luxury for smaller concern because of hi!h cost of auditin! but in fact it is not a luxury for ma"ority books of accounts audited. It is compulsory for "oint stock company under the %ompanies Act, '?;<. Q. 3&ersona' traits of an auditor are i!"rison!ent for the successfu' conduct of audit.4 Co!!ent. Ans. The auditor ( The person who conducts an audit is known as the auditor. After due examination of accountin! records and statements in the form of an opinion a report is prepared by the auditor and is presented to the person who appoints the auditor, e.!. to the shareholders in the case of a company. In India only %hartered Accountants are professionally )ualified for the audit of accounts of companies. 2unctiona' c'assification of auditors ( /n the basis of functional division, auditors can be classified as follows & '. 1xternal auditors (. Internal auditors 1. .5terna' auditors 6 1xternal auditor are those person who practice the professional of accountancy havin! )ualifies in profession examination and are internal vis$A$vis the or!ani#ation of which they audit the account. They are appointed by the owners of the or!ani#ation, e.!. by the shareholders in case of a company. 3hen external auditor is appointed under a particular statute, such auditor will be known as the statutory auditor. Their scope of work is determined by the statute under which they have been appointed. An auditor is !enerally referred to as independent external auditor. /. Interna' Auditors ( Internal auditors are internal to the or!ani#ation in which they are appointed to perform the specific work. They may be professionally )ualified. They are appointed by the mana!ement. The scope of work is also specified by the mana!ement. They may be appointed on contract basis or employee to undertake auditin! of book and records scope of internal auditor may extent even beyond the financial accountin! and may include investi!ation, production audit, performance audit etc. even thou!h the internal auditor is an employee yet he must be independent to the extent practicable. The basic foundation of any type of auditin! whether of external envisa!es ,demands- that the auditor must be independent of the activity for which he is activity for which he is !oin! to conduct an audit. Qua'ities of an auditor ( 4ollowin! are some )ualities which an auditor must have in himself &

1. Inte#rit* (Inte!rity means auditor should be honest, sincere and strai!ht forward in his approach to his profession work. Inte!rity is of utmost important not only for individual auditor but for the entire auditin! profession. /. Inde"endence ( Independence means that the auditor should not subordinate his "ud!ement to that of client or any other person. Auditor should be free of any such interest as mi!ht affect his independent subse)uent$consciously independence must be real and evident. 0. Objectivit* ( The view of auditor should be fair, unbiased and impersonal. 2is opinion should be based on an ob"ective consideration of facts. 2e must be fair and must not allow pre"udice or bias to over ride his ob"ectivity. 1. 7o#ica' uti'ities ( Auditor must have a lo!ical approach, as basic too is of the auditin! are derived form lo!ic. Auditor should have the capacity to analy#e and interpret problems and facts. 2e should be able to make lo!ical conclusions about the course of action to be followed. 8. A areness ( Auditor should be aware of various encondic le!al technolo!ical factors as well as other professional developments. Awareness on re!ular basis is re)uired. /nly then he will be able to conduct an effective audit a chan!in! environment. 9. Co!!unication abi'ities ( 3hile conductin! an audit, auditor interacts with various officer and staff of the or!ani#ation well as with other people. To put forth his the views, in)uiries, recommendations etc. auditor must be proficient in communication whether written or oral. :. Tactfu'ness ( .urin! the course of audit, auditor deals with many people namely officers and staff of the or!ani#ation under audit. %o$auditor his assist etc. auditor must be able to not offend them and also maintainin! his position firmly. ;. Technica' co!"etence ( It relates to knowled!e of the auditors about the followin! sub"ects that will contribute to competence of auditor & Auditin! Accountin! Information technolo!y Law 1conomics Business finance Behavioral science. <. Confidentia'it* ( Auditor must respect the confidentiality of information ac)uired in the course of his work. 2e should not disclose any information to a third party without le!al duty or without proper authority. In addition to above an auditor should be hard workin! systematic and methodical. 2e should have capacity to hear the ar!uments or views of others. In the words of Lord Custice Lindley & 9An auditor must be honest, i.e. he must not certify what he does not believe to be true and must not reasonable care and skill before he believes that what he certifies is true.: D. 3hat are the limitations of auditin! E Ans. Inherent limitations of audit $ The opinion expressed by auditor is neither an assurance as to future viability of the enterprise nor the efficiency or effectiveness with

which mana!ement has conducted the affairs of the enterprise. 4urther, the process of auditin! is such that it suffers from certain inherent limitations, i.e. the limitation which can not be overcome irrespective of the nature and extent of audit procedures. 4ollowin! are inherent limitations & ,',(,*,+AuditorFs work involves exercise of "ud!ement, e.!. in decidin! the extent of audit procedures to be followed. 0uch of evidence available to auditor an enable him to draw only reasonable conclusions there from. The audit evidence obtained by an autodor is !enerally persuasive in nature rather than conclusive. 5enerally, the entire audit process is dependent on existence of an effective system of internal control. Inherent limitations of internal control system also contribute to inherent limitations of audit. There is also likelihood that some material mis$statements of the financial information resultin! from fraud and error, if either exists, may not be detected. A part from above mentioned inherent limitations followin! are some other limitations which should also be considered & Auditin! is considered as a post$mortem examination. Auditin! is considered as a mechanical work lack of audit. 6ro!ram as per desired situation will contribute to drawbacks of auditin!. ,c.ependence of auditors on the opinion of experts in re!ard to some technical matters should be keep in mind. ,duccess of audit depends on the sincerity with which auditor performs his duties. 1xpalin the relationship of auditin! with other disciplines. ,a,b-

D.

Ans. '. Gelationship with accountin! $ Auditin! is closely associated with accountin! that many people consider auditin! as an inte!ral part of accountin!. Auditin! reviews the financial statements which are nothin! but a result of the over all accountin! process. It naturally calls on the part of auditor to have a thorou!h and sound knowled!e of !enerally accepted principles of accountin! before he should review the statements. Accountin! is concerned with recordin! of the transactions and preparation of statements of accounts. Auditin! involves a detailed and critical examination of accounts prepared by other. In fact auditin! be!ins, where accountin! ends. ,(Gelationship with law $ the relationship between auditin! and law is very close one. Auditin! involves examination of various transactions from the view$point of whether or not these have been properly entered into, it necessities that an auditor should have a !ood knowled!e of business laws affectin! the entity. 2e should be familiar with Law of %ontracts, %ompany Law, Income Tax Act, 1xcise and %ustoms Law, He!otiable Instruments Act etc.

The ri!hts duties and reportin! responsibilities of a company auditor are prescribed under the %ompanies Act. 1ven where the appointants of an auditor is not in pursuance of le!al re)uirements, the provisions of certain laws are relevant, e.!. in determinin! whither a sale transaction is complete and can be records as such in books of accounts. Auditor will have to take into account the provisions of the F ale of 5oods ActF. ,*Gelationship with economics $ Auditin! is also related to economics auditors should have knowled!e of aconomics. In fact, auditin! is the process of collection and evaluation of evidence for the purpose of reportin! on economic information, economic information forms the sub"ect$matter of the auditorFs work. All transactions are economic facts which the accountant measures )uantitavely in monetary tem and auditor seek to !ive his opinion thereon, auditors are more concerned with micro$1conomics rather that macro$economic. Auditor is exprected to be familiar with the over all economic environment in which client is operatin!. ,+Gelationship between statistics and mathematics $ Auditin! has a close relationship with statistics and mathematics. taticFs deal with collection classification tabulation and interpretation of data. Auditor examines the statistical system and to auditin! as the auditor is also expected to have knowled!e of statistical samplin! so as to arrive at meanin!ful conclusions. The knowled!e of mathematics is also part of the auditor particularly at the time of verifications of inventories. ,;Gelationship with Behavioural cience $ Behavioural cience expalins why people behave the way they do it important for the auditor to understand the behavioural patterns of the people. The financial auditor thou!h deals with the fi!ure contained in financial statements yet or mana!ement auditor is expected to deal with human bein!s rather than financial fi!ures. The knowled!e of the human behaviour is indeed very essential for an auditor so as to effectively dischar!e his duties. ,<Gelationship with 1thics $ Auditin! has !ood relationship with ethics too. 1thical aspects are the foundation of entire accountin! profession rests. The auditor has certain ethical responsibilities relatin! to proper conduct. To ensure that auditor conduct themselves in an ethical manner, most professional accountancy bodies have laid down elaborate rules definin! the boundaries of ethical conduct. Therefore, in anditin!, ideas of ethics and ethical conduct are very important. ,=Gelationship with lo!ic $ The discipline of auditin! itself is a lo!ical construct and everythin! in auditin! must be bound by the rules of lo!ic. the auditin! approach and its basic tools are derived from lo!ic which is concerned with law we determine whether conclusions are valid or invalid. The process of auditin! is basically dependent on the

process of lo!ic. In fact, auditin! has its reads. In lo!ic on which it depends heavily for ideas and methods. D. FFAlthou!h, auditin! and acountin! are related they are distinct from each other.I 1valuate the above. Ans. Auditin# and acountin# 6 Auditin! is so closely associated with accountin! that many people consider auditin! as an inte!ral part of accountin!. Auditin! and accountin! are very closely related to each other, yet they are different. In fact, auditin! starts where accountin! ends. Accountin# '. Accountin! starts where book keepin! ends. Ho formar )ualification is mandatory for bein! an accountant. It is constructive in nature. Accountant is the employee of the business appointed. Accountant is paid monthly salary. Accountant works is conducted throu!hout the year. Account is not re)uired to submit a report on prepared account. '. (. *. +. ;. <. =. Auditin# Auditin! starts where accountancy ends. Auditor must a )ualified %.A. It is analytical in nature. Auditor is an independent outsider on a contract of business for a year. Auditor !ets a fixed amount as per contract with the client. Audit may be conducted at end of years or throu!hout the year. Addition sub$units report about correctness and present of accounts audited by him.

(. *. +. ;. <. =.

D. 3rite a short note on concept of true and false view. Ans. %oncept of true and fair $ The concept of true and fair is a fundamental concept in auditin!. The auditor is re)uired to express his opinions to whether the state of affairs and the result of the entity as curtained by him in the course of his audit are fairly represented in the accounts audit. ection ('',;- of the %ompanies Act, '?;< provides that the accounts of a company shall be deemed as not disclosin! a true and fair view if they do not disclose any matters which are re)uired to be disclosed & By virtue of provisions of schedule JI of the %ompanies Act. By virtue of a notification of !overnment modifyin! the term Ftrue and fairF has not been defined in any le!islation. 3hat constitutes a true and fair view is a matter of "ud!ement of auditor in particular circumstances of a case. An auditor has to see that & ,a6rofit and Loss Account and Balance heet have been prepared as per provisions of schedule JI of %ompanies Act. ,bAll unused exceptional or non recordin! items have been properly disclosed. ,cHo material asset is omitted. ,d0aterial liabilities are properly disclosed. ,eThe assets are neither under valued nor overvalued.

,f-

Accountin! policies have been followed consistently.

UNIT /

T=&.% O2 AUDIT

Q. >hat is !eant b* continuous audit$ And to hat c'ass of business is it a""'icab'e$ %tate brief'* the advanta#es and disadvanta#es of such an audit. %u##est "recaution to #uard a#ainst the disadvanta#es ,objections- to a continuous audit. Ans. A continuous audit is an audit which involves a detailed examination of the books of account at re!ular intervals say the auditor visits at re!ular intervals and check each and every entry. Accordin! to Spicer and Pegler, 9A continuous audit is one where the auditors is staff occaped continuously on the accounts the whole year round or where the auditor attends at intervals, fixed or otherwise durin! the currency of the financial year and performs audit.: A""'icabi'it* of continuous audit ( This type of audit is specially applicable to the followin! business & ,'- 3here the volume of transactions is lar!e. ,(- 3here the final accounts are prepared first after the close of the financial year. ,*- 3here accounts are be presented to mana!ement for decision makin! at re!ular intervals. ,+- 3here a !ood and efficient system of internal check does not exist. Advanta#es of continuous audit + ,'- 1rrors and frauds can be discovered )uicly. ,(- Auditor is able to !et technical details of the business. ,*- Duick presentation of accounts at the end of the year. ,+- Auditor visits at re!ular intervals to keeps clients staff re!ular. ,;- 0oral check on the clients staff. ,<- .etailed checkin! increases efficiency in audit work. ,=- Interim accounts can be prepared when re)uired. ,>- Audit staff can be kept busy throu!hout the year. Disadvanta#es of continuous audit + '. 1xpensive. It is an expensive type of audit. (. Alteration of figures. Audited fi!ures may be altered by dishonest clerk and frauds may be perpetrated. *. %lient work is dislocated because of the fre)uent visits of the auditor. +. The audit check may lose the thread of the work. ;. The work of the auditor becomes mechanical. <. %hances of collusion between accounts and audit staff.

'. No a'teration a''o ed. The auditor should !ive instruction that no alteration should be made in audited accounts without brin!in! it to his notice. (. A'teration b* rectif*in# entr*. If alteration is necessary, it should be made by passin! rectifyin! entry only. *. 6repare well drawn detailed audit pro!ramme. +. A note should be made in the audit note$book re!ardin! any )ueries which have been replied properly. ;. %heckin! of one book should be completed as far as possible at one visit to avoid loose ends. <. The auditor should put a secret tricks and codes to !uard a!ainst alteration of fi!ures. =. The audit of impersonal !eneral led!er should be conducted at the time of final audit. >. The auditor should pay surprise visits so that the clerks of the clients may not know the exact date of the visit of the auditor. ?. Before the auditor be!ins the work at the next visit, he should !lance over any alteration which does not bear his secret trick. D. FF1very business entity should have an annual audit by a )ualifies auditor. To for!o an audit because of its cost or false economy.FF 1valuate the statements. Ans. Advanta!es of an audit $ ,'- If safefuards the financial interests of persons who are hot associated with the mana!ement of the entity, whether they are the partners or shareholders. ,(It acts as a moral check on the employees, from committin! defalcation or embe##lement. ,*Audited accounts are of !reat help in the settlement of accounts at the time of admission or death of a partner in or!anisation. ,+Auditin! reviews of various controls in the or!ani#ations and reports weakness, inade)uacies etc. in them. ,;Auditer accounts are useful for !overnment while !rantin! subsidies. ,<0oney can be borrowed from banks or other financial institutions if accounts of business are audited. ,=Audit ascertains whether the necessary books of accounts have been properly kept and help the clients in makin! !ood the deficiencies in this respect. ,>5overnment may re)uire audited and certified statements before it !ives assistance or issues a license for a particular trade. ,?Audited statements of accounts are help in settin! liability for taxes, ne!otiatin! loans and for determinatin! the purchase consideration for a business. ,'@- they are useful for settin! trade disputes for hi!her wa!es or for bonus. ,''- %laims due to fire, theft and accident can be estimated from audited accounts and also be well$settled. ,'(- 1rrors and frauds in accounts are detected and preventive measures can be taken in time.

,'*-

Audit helps in detection of wasta!es and losses to show the different ways by which there mi!ht be checked especially those occur due to inade)uacy of internal control and internal checks. D. .istin!uish between internal audit and external audit. Interna' Audit Auditor will be appointed mana!ement of the entity. cope of the work will be defined by appointin! auditiority. Geport will be submitted to the mana!ement. /b"ective is to review financial and non financial operations as a service to mana!ement. Gesponsibility of auditor is to report to the mana!ement on the compliance of procedures with the followin! & Accountin! 4inancial Administrative control. .5terna' ,%tatutor*- Audit A appointment of auditor will be made by the owners, e.!. shareholder. cope is defined by law. Geport will be submitted to owners of entity. /b"ective is to ascertain the truthfulness and fairness of state of affairs of entity. Gesponsibility of auditor is to express audit opinion on the true and fair view of the financial statements.

Ans. '. (. *. +. ;. '. (. *. +. ;.

D. 3rite short notes on ,'- Interim audit ,(- 4inal audit. Ans. ,'- Interim audit $ An audit conducted between two annual audits is called interim audit. It is always carried out with an interim purpose for example for declaration of interim dividends. Interim audit does not en"oy statutory status thou!h !enerally carried out by professionally )ualified auditors. Advanta!es & '. It helps in )uick detection and rectification of errors and frauds. (. It exercises an effective check on staff of the enterprise. *. The final audit can be completed in a short span of time. .isadvanta!e & ,a,b,cThe clientFs staff may be after the books of accounts, after checkin! thereof. The audit is uneconomic for small si#ed concerns as a !reat deal of time and effort is re)uired. The staff conductin! an interim audit has to made extensive notes as to the fi!ures in the books of accounts. This causes an unnecessary increase in their work.

,(4inal audit $ the term final audit refers to situtation where the audit work is commenced only after the expiry of the period to be covered by audit. It is commonly understood to be an audit which does not be!in until the books have closed at the end of accountin! period and there after is carried on continuous until completed. Advanta!es & ,aThe possibility of fi!ures bein! altered after work has been done is also avoided. ,bAllocation of work for staff also becomes easier. ,cThere is no loss of link in the work as the entire audit is completed in a sin!le continuous session. ,d6eriodical audit economical and suitable particularly for small si#ed business units. ,eKse of statistical samplin! techni)ues, test checkin! leads to time and reduction. .isadvanta!es & ,aThere will be a delay in presentations of final account because work commences only in after the financial year. ,bAccounts can not be sub"ected to a detailed checkin! because the work is to be completed in a short time.F ,c4or lack of detailed checkin! errors and frauds may continue to remain undetected. D. Ans. '. (. *. +. Continuous Audit It is carried on at re!ular7irre!ular intervals. 0ore suitable for bi! scaled or medium si#ed or!anisations. All aspects of vouchin! and verification are carried out in details. 1arly detection and correction of frauds and errors can be made. 3rite short note on balance sheet audit. '. (. *. +. 2ina' Audit Audit is completed in a sin!le continuous session after the close of the financial year. uitable only for small si#ed or!anisation. Kse of statistical samplin! techni)ues and test checks is made. 4rauds and errors may remain undetected. .istin!uish between continuous audit and final audits.

D.

Ans. Balance heet audit $ Balance sheet audit means limited audit in which all the balance sheet items are verified. It may be noted that balance sheet audit is not confined to balance sheet items only where ever appropriate, tests are applied on those profit and loss account items which are directly related to assets.

Balance sheet audit is most suitable for those or!anisations which have an effective system of internal controls or where mechani#ed accountin! system is in operation. L 2owever, balance sheet audit provides the auditor with lesser assurance then a normal audit since the scope of the auditorFs examination is limited. An auditor has to & '. (. *. +. 1xamine partneship a!reements, 0/A, A/A etc. Jerify the ownership of all assets included in balance sheet. Jerify that all the liabilities are included and at proved amounts. %arefully examine all the ad"ustin! and closin! entries or other necessary entries to the preparation of balance sheet.

UNIT 0

INT.RNA7 CONTRO7 AND INT.RNA7 C?.C@

Q. .5"'ain and distin#uish interna' contro'A interna' checB and interna' audit. Ans. Interna' contro' ( Internal control is best re!arded as the whole system of controls, financial and other established by the mana!ement to conduct a business includin! internal check, internal audit and other form of control. Thus, internal control is M ,i- a system of controls, ,ii- controls are over financial and non$financial areas, ,iii- the mechanism of control is internal check and internal audit. The basic ob"ective of internal control is & ,i- 1fficient and proper conduct of accountin! transactions. ,ii- afe!uardin! the assets of company. ,iii- 6revention of errors and their detection. ,iv- Accounts becomes completely re!ular and reliable. Interna' contro' beside accountin! may also be administrative to ensure the adherence to mana!ement policy in various areas of business operations. An auditor is mainly concerned with !ood accountin! capacity control of internal control system. Interna' checB. Internal check is a techni)ue of internal control. It is a method of or!ani#in! the accountin! systems of a business concern where the duties of different clerks are arran!ed, in such a way that the work of one clerk is automatically checked by another so the possibilities of errors and frauds are minimi#ed unless there is a collusion between the clerks. Internal control is exercised in the form of internal check and Internal audit. Internal check is concerned with desi!nin! automatic checks. Internal audit is critical appraisal of functionin! various operations of the business. Interna' audit is the independent appraisal of activity within an or!ani#ation for the review of accountin!, financial and other business practices as a protective and

constructive aim of mana!ement. It is a type of control which functions, by measurin! and evaluatin! the effectiveness other type of control. Internal audit in fact is an independent appraisal activity within an or!ani#ation for the review of accountin financial and other operations as a basis for service to the mana!ement. The work is done by a separate set of staff who may or may not have professional )ualification. The functions of internal auditor are same as that of an auditor. 2e has to see that business is carried efficiently and resources are not wasted. 2e has to report to the mana!ement on policy matters. Thus, internal control is the whole system of control. Internal check and internal audit are its two important parts & To sum up it can be shown as Internal %ontrol Administrative or 0ana!ement %ontrol ,1xercised by mana!ementAccountin! %ontrol Internal %heck Internal Audit

Q. >hat is !eant b* the ter! interna' checB$ >hat are its objectsA advanta#es and disadvanta#es. >hat are the s"ecia' features of an efficient s*ste! of interna' checB$ To hat e5tent an auditor shou'd de"end on interna' checB s*ste!$ Ans. In a bi! business, the work connected with the preparation of accounts is distributed amon!st the various members of the staff. The reason is simple. If one person is made responsible to finish a particular work from the be!innin! to the end, there is a !reat scope for errors and fraud. This situation is to be avoided. Internal check system is an arran!ement of staff duties whereby no one persons allowed to carry throu!h and to record every aspect of fraud is prevented and at the same time the possibilities or error are reduced to a minimum. Thus, it is clear that the importance of an efficient system of internal check is )uite !reat. The system provides for an independent and automatic. 2ence, internal check is an arran!ement of duties in a business done in such a way that all the duties connected with the accountin! work are properly allocated so that one person may not be in a position to do sin!le in "ob from be!innin! to the end. 3ork of one person may be checked automatically and independently by another. Objectives of interna' checB ( ,i- 1arly detection of frauds, ,(- 6revention of errors and fraud, ,*- To enhance the efficiency of clerks in a business as the system is based on the principle of division of labour, ,+- The work distributed in such a way that no business transaction is left to record, ,;- To exercise moral control over staff. Advanta#es of interna' checB s*ste! ( The followin! are the advanta!es of internal check system & '. It help in the proper distribution of work between different members of the staff. (. 1rrors and frauds can be discovered )uickly. *. Internal check increases the E

+. ;. <. =. >.

A moral check is exercised over the clerks. The auditor can perform audit by simple checkin!. The accounts of the business becomes accurate. 4inal accounts can be prepared )uickly. The responsibility of the staff can be fixed.

Disadvanta#es ,7i!itations- ( Internal check system has followin! limitations & '. It can be applied to a lar!e concern only. (. The auditor may not carry on a throu!h checkin! and certain important irre!ularity may not discovered. *. The clerks of a business become )uick and not so serious. +. It is very expensive. To provide a safe!uard a!ainst its disadvanta!es it is essential to take these steps. 2unda!enta's of #ood s*ste! of interna' checB + The followin! are some important rule of makin! the system of internal check efficient and successful & ,i- Allocation of work amon!st the clerks should be proper, duties and ri!ht clearly defined. ,ii- Ho sin!le person should be allowed to do a "ob solely by himself from the end. ,iii- imilar nature of work should be !iven to same person. ,iv- There should be automatic checkin! of the work of one clerk by another. ,v- .ivision of work should not be expensive. ,vi- Ho clerk should be relied upon too much. ,vii- elf$balancin! system should be applied. ,viii- Labour savin! devices calculatin! machines, cash re!ister, time recordin! machines should be made use of. ,ix- There should be proper system of fillin! vouchers etc. ,x- A responsible officer should receive letters etc. ,xi- All the cash received should be sent daily to the bank. ,xii- Ho one should be permitted to take away any !oods without proper sanction. ,xiii- Cob relatin! to bad debts, returns, allowance etc. should be performed under strict control. ,xiv- 6erson dealin! with cash, securities etc. should be encoura!ed to !o on leave at re!ular intervals. ,xv- 6ayment of wa!es, valuation of stock, sales etc. should be done under the supervision of a responsible person. ,xvi- Last but not least the duties of various employees should be rotated ,chan!ed- from time to time. To hat e5tent an auditor shou'd de"end on the interna' checB s*ste! ( The answer to this will depend upon the si#e of the business. It is true that if there is an efficient system of internal check the work of an auditor becomes easy and simple. 4irst of all the auditor should examine the system of internal check. ,a- 2e should call for a brief statement from his client re!ardin! the internal check system in operation.

,b- 2e should examine the system in the li!ht of the si#e and nature of the business to find out whether it is !ood or not. ,c- 2e should find out the possibilities of errors and fraud to examine its reliability. The above examination can help the auditor in real assessment of the internal check system. If the system is not defective auditor can depend upon it. The auditor should examine the system very carefully. It is true that a !ood system can be of !reat help to the auditor. But if the system is defective and has some weakness. 2e should carry on a detailed checkin! of the books of accounts. If the auditor does not care of for these short$ comin! and fail to detect irre!ularity, he will be held responsible. %an a !ood internal check system reduce the liability of an auditorE The answer is no. The existence of !ood or efficient system of internal check can reduce, to a !reat extent, the work of the auditor but does not reduce his liability. But if the system is defective his work becomes very difficult. 3hatever may be the situation, the auditor is wholly and solely liable. Thus, a !ood and efficient system of internal check of much help to the auditor but is no way a device to relieve him of check is of much help to the auditor but is no way a device to relieve aim of his responsibility. To what extent should be depend upon the system, will depend upon the system will, depend upon the circumstances of each particular case and his own skill, experience and "ud!ement. UNIT 1 COUC?IND AND C.RI2ICATION

Q. Define vouchin# and e5"'ain its objects and i!"ortance. Couchin# is the essence or bacBbone of auditin#. >hat "oints shou'd be Be"t in !ind hi'e vouchin#$ Ans. It is an important duty of an auditor to certify the transaction entered in the books of accounts. The accountant is responsible for recordin! entries in the books of account. The )uestion arises how and on what basis such entries have been passed. The auditors duty is to check these entries, only then he can certify the accounts as correct and free from any error or fraud. The entries are recorded by the accountants in the books of ori!inal entry on the basis of a proper documentary evidence only. There should be no entry. 1very voucher must be recorded in the books. 3hen an auditor verify the ,a- authority, ,businessauthenticity of the transaction and !ives a report that the accounts are correct, complete and there is no errors or fraud, he has to see entries by proper documentary evidence. This is called vouchin!. Accordin! to DePaula, vouchin! does not mean merely the inspection of receipts with the cash book but includes the examination of receipts with the transaction of a business, to!ether with documentary and other evidence of sufficient validity to satisfy an auditor that such transactions are in order have been properly authori#ed and are correctly recorded in the books. Objects of vouchin# ( The ob"ects of vouchin! are M

,'- All transactions connected with the business have been recorded in the books of accounts. ,(- Ho transaction have been left to record. ,*- Transactions are duly authori#ed. ,+- Transactions which are not related with the business have been recorded. ,;- There is !enuine documentary evidence for each transactions and is available with the business. I!"ortance of vouchin# ( Jouchin! is very important part of an audit work. It consists of checkin! the entries in the financial books with the help of available documentary evidence, e.!., vouchers, contracts, invoices etc. It is a basis for checkin! accounts. The transactions are checked with reference to documentary evidence. Ho vouchin! should be left unrecorded in the financial books, the auditor has to satisfy himself with re!ard to vouchers before he certifies, profit and loss account and balance sheet shows true and fair state of affairs of business. Jouchin! must be done with care and caution. Jouchin! is an indispensable tool carry on further audit work. It is called backbone of auditin!. It may be len!thy process in many or!ani#ation. Couchin# is bacBboneEessence of auditin# ( Jouchin! has been said to be the essence or backbone of auditin!, as it is one of the most potent tools in the hands of auditors. It has been ri!htly stated that 9sufficient completed evidential matters as to be obtained throu!h inspection, observation, in)uiries and financial statements under the examination.: The entries may appear to be innocent on its face unless the auditor !oes behind the book of account and find source of entries he cannot fine out the truth. It is not only the mathematical accuracy of the books which is concern of the auditor but he has to !o beyond it and satisfy himself that the entries are actually correct and related to the business concern and the year under audit with the help of vouchin! the auditor may find such entries which are contrary to facts. Jarious errors and frauds may be detected throu!h vouchin! if it is carried out with care and intelli!ence. It is that vouchin! with auditors is able to know !enuineness of transactions, their re!ularity and validity. uccess of audit in fact depends upon vouchin!. That is why it called essence or backbone of auditin!. .5a!ination of vouchers ( The auditor should keep followin! points, while examine vouchers. Jouchers are documentary evidence in support of transaction. They may be primary$ori!inal or collateral subsidiary & '. All vouchers should be proper numbered and filed serially and in order of entries in their books. (. Joucher should related to the business. *. Joucher should be properly dated. +. Joucher should related to the period under audit. ;. The amount shown in the vouchers should be correctly calculated and totalled. <. Amount in vouchers should be written in both words and fi!ures. =. If the amount of voucher exceeds Gs.;,@@@ it should be properly stamped, bears a revenue stamp of Ge.'7$. >. Jouchers should be propori#ed.

?. Joucher should be cancelled after examination. '@. In case any explanation or clarification is re)uired with respect to any voucher, the same should be noted in the audit note book to any voucher the same should be noted in the audit note book. ''. %lear distinction should be made between capital and revenue items of expenditure. '(. uitable ad"ustment entries should be made in case of voucher relates to pre$ payment or accrued expenses or income. '*. A pre$receipted income should not be accepted as a voucher. '+. pecial attention should be paid to duplicate or missin! vouchers. ';. /ver writin! or erasion on a voucher should not be accepted. Alteration of any kind should be supported by si!nature of the maker with alteration by responsible official. '<. Jouchers by way of resolutions and minutes should be examined with reference to their validity in the li!ht of scope and limitations set out in the memorandum and articles of association, partnership deed etc. '=. Joucher should be in the name of the or!anisation. pecial attention should be paid to vouchers in the personal names. '>. Take the help of clients staff very carefully. Q. >hat is !eant b* the ter! verification of assets$ >hat are its objects$ Ans. The auditor of a business is re)uired to report in clear terms that balance sheet of the concern shows true and fair view of the state of affairs. In other words he has to examine and find out the correctness of the value of assets and liabilities. Jerification means provin! truth or confirmation about the correctness and authenticity of assets and liabilities. Jery often vouchin! and verification are considered to be one and the same thin!. It is so, the clear distinction can be drawn between the true vouchin! is to examine the correctness and authenticity of transactions recorded in the books of prime entry while verification is to confirm the value of assets and liabilities as shown in the balance sheet. Auditor has not only to examine the arithmetical accuracy and bonafide of the transactions in the books of accounts by vouchin! only but he has also to examine that the assets recorded in balance sheet actually exist. The fact that there is entry re!ardin! the purchase of an asset and the asset is in possession of the concern at the date the balance sheet has. It is possible that after the asset had been purchased and all the necessary entries made in the books of accounts the assets mi!ht have been sold or mort!a!ed and no entry had been made re!ardin! the facts in the account books. %"icer and &e#'erA 9The verification of assets implies an en)uiry in the value, ownership and title, existence and possession the presence of any char!e on the assets.: Jerification of assets involves the followin! & '. %omparin! the led!er accounts with balance sheet. (. Jerification the existence of the assets on the balance sheet. *. atisfyin! that they are free from any char!e or mort!a!e. +. Jerifyin! their proper value. ;. Assets were ac)uired for the business.

Objects of verification ( Accordin! to the 9 tatement of Auditin! 6ractices: issued by Institute of %hartered Accountants of India ,I%AI-, the auditors ob"ective in re!ard to verification of asset to satisfy that & ,a- they exist. ,b- they belon! to the client or any person authori#ed by him. ,c- they are in possession of the client or any person authori#ed by him. ,d- they are not sub"ect of undisclosed lien. ,e- they are stated in the balance sheet at proper amount in accordance with sound accountin! principle. ,f- they are recorded in the account ,this will include scrap and waste-. ,1- .5istence of assets ( The first step is that assets are properly disclosed in the balance sheet and are actually inspection of the assets. ,/- O nershi" of assets ( /wnership of assets may be examined with the help of documents of title. In case documents of title are held by third parties the auditor should obtain a certificate. ,0- &ossession of assets ( The auditor should ensure that assets are in the possession of the client. ,1- &ro"er va'uation of assets ( The auditors should find out that assets are properly valued in accordance with !enerally accepted accountin! principle as determined by law and !uidelines issued by the Institute of %hartered Accountants of India and standard auditin! practices. ,8- &ro"er "resentation ( All material assets should be properly disclosed in the balance sheet at the correct amount. Q. 3An auditor is not a va'ue *et it inti!ate'* concerned ith "ro"er va'uation.4 Co!!ent. Or 3An auditor is not a va'uer.4 An auditor is inti!ate'* connected ith va'ues.4 Discuss. Or .5"'ain fu''* ho these t o state!ents can reconci'ed$ Ans. Jaluation of assets is an important part of verification. The correct profit cannot be calculated unless the assets are properly valuated. /nly then the balance sheet will show true and fair position of the financial affairs of a business. The valuation as such involves to ensure the correct valuation of assets while in verification the auditor has to verify the authority and existence of property also besides its valuation. Thus, valuation means to test the exact value of an asset on the basis of its utility. It is actually the exact of money value at which an asset been shown in the books of account or in the financial statement. Hormally, valuation is done after deductin! depreciation for the value of an asset. If proper depreciation on assets is not provide for the result would be various serious. If the amount of depreciation char!ed to profit and loss account is more than actual, the profits dividend a part of which would thus, be paid out of capital. The result would that capital of the company be exhausted. &osition of an auditor re#ardin# va'uation assets ( An auditor is not a valuer and cannot be expected to act as such. All that he can do is to verify the ori!inal cost

price and to ascertain as far as possible that current values are fair and reasonable and are in accordance with the accepted commercial principles. Accordin# to 7ancaster ( 9An auditor is not liable, if in the absence of suspicious circumstances he relies on trusted officials of the company.: @in#ston Cotton )i''s 7td. An auditor has been very careful and cautious in examinin! the valuation of assets. The accuracy of the profit and loss account and balance sheet depends upon the accuracy of the valuation of assets. But auditor is not a valuer. 2e is not a technical expert who can estimate the volume of assets of different nature. 2e has no alternative but to depend upon the valuation made by experts directors, partners etc. But it does not mean that auditor is not responsible or he is free from his liability. If assets are incorrectly valued by the officials of the business and it entirely depends upon the report !iven by them. 2e will continue to be liable. 2e must exercise his best "ud!ement and take reasonable steps to verify the valuation of assets. 2e must pay special attention to the followin! two thin!s & '. 2ow far the principles of accountin! have been adopted in the valuation of assets. (. 3hatever steps are taken in the valuation of assets are based on the established auditor practices. If he is satisfied with the above two basis, he is free from his responsibility and liability. If not he must )ualify his audit report to the shareholders accordin!ly. A!ain, if there is the sli!htest suspicion re!ardin! the valuation, he should probe into the matter. 2e should made en)uiries from the responsible officials of the business. This is the only remedy before him for certifyin! valuation of assets. Q. ?o ou'd *ou vouch the fo''o in#$ Ans. ,1- Cash "a*!ents ( The vouchers related to cash payments should be properly authori#ed, serially numbered and filed in order. In vouchin! payments auditor should not merely seek the proof that money has been paid away. It means that it is not merely the duty of an auditor to see that the payment has been made but he should satisfy himself that the payment & ,a- has been actually made for the business itself, ,b- relates to the period under audit, ,c- has been made to the ri!ht person, ,d- is properly sanctioned, ,e- is supported by the proper voucher, ,f- the particulars !iven in the voucher tally with those of the cash book. The payment has been made but to whom and for what purpose these are some )uestions to be correctly answered. ,/- Inco!e fro! invest!ent ( In case the number or investment is lar!e, the auditor will do well to ask his client to keep an investment re!ister, such re!ister shall keep the necessary details in respect of each investment account. Investment and dividend received should be checked with the counterfoils of the interest and dividend coupons, where interest is received or collected throu!h bank it shall be vouched with help of bank pass book and intimation sent by the bank.

,0- &roceeds of the sa'e of invest!ent ( The proceeds of the sale of investment can be verifiably comparin! the amount received with the receipt and account for. ,1- &a*!ent to creditors ( 6ayment to creditors may be vouched with the receipt issued by the creditors. 0oney due to them can be compared with the accounts of the creditors and for !oods received the invoice can be referred to. 2e should check the method of comparin! the statement of accounts with their actual accounts. Before passin! an entry to confirm the correctness he hould refer to the relevant vouchers, i.e. minutes, contracts and other documentary evidence in support of it. ,8- >a#es ( The vouchin! of wa!e payment is one of the most important duties of the auditor. 2e should find out whether there is an internal check system is in existence and how effective it is. The internal check system will enable the auditor to determine error and fraud in the wa!e account. If the system is !ood, possibilities of errors and fraud are minimi#ed. An auditor must satisfy himself with re!ard to the work of maintainin! wa!e records, preparation of wa!e sheets and payment of wa!es. Thus, re!ardin! vouchin! of wa!es auditor should see that ,i- the wa!es recorded in the cash book have been actually paid, ,ii- these were actually due by the business, ,iii- such a payment was duly authori#ed. ,9- Director fees ( The payment of directors fee should be vouched with reference to directors minute book, the attendance re!ister and the receipts obtained from directors for this payment should be examined. The auditor should also study the articles of association and see the provisions in re!ard to the payment of directors fees. The resolution of shareholders should also be seen to ensure that correct payment has been made. ,:- &roceeds fro! sa'e of fi5ed assets ( 3henever, fixed assets such as land, buildin!, machinery, furniture etc. are sold, correspondence is made with the parties who are willin! to purchase them. 4ixed assets are usually sold throu!h a broker or an auctioneer. If assets are sold throu!h a broker, the brokers sold note should be examined by the authori#ed person. 2e should find out the profit and loss on the sale of fixed asset and its accountin! treatment. ,;- Fi''s receivab'e ( All details about bill receivable can be available in the bills receivable book. The receipts for bill receivable can be in two ways. ,i- Received fro! bi''s discounted ( The bills receivable which have been discounted but have not matured at the date of the balance sheet. The cash so receive should be properly entered in the cash book. The amount deducted for discount on such bill should be separately debited to the discount account. %ontin!ent liability in respect of such bill should be shown on the balance sheet. ,ii- Recei"t fro! bi''s !atured ( The cash receipt from bills receivable in respect of which the amount has the bills receivable book with the cash book and the pass book. pecial en)uiry should be made about bills which have matured. 6ut the amount in respect thereof has not been such bills mi!ht have been dishonoured. It is possible that such bills mi!ht have been paid but their proceeds mi!ht have been misappropriated by the cashier.

,<- Ca"ita' e5"enditure ( %apital expenditure means money spent on ac)uirin! fixed assets. The auditor should see that payment is in order that it is duly authori#ed and that the money spent has been properly capitali#ed. uch expenditure re)uires special attention. The auditor should examine relevant vouchers ,documents relatin! to the particular asset-. ,1G- &atents ( The auditor should incurred in ac)uirin! it should be capitali#ed. The expenses incurred on experiments, research should capitali#ed in cash patents are secured by makin! experiments and research. If patents has been ac)uired throu!h an a!ent the auditor should see that his commission is capitali#ed. ,11- 7oans ( The receipts of loan should be vouched with the a!reement of the tender. Auditor should see that company has raised loans as rules. 2e should examine that rate of interest, payable terms of repayment and the security offered. Ge!ardin! the loan !iven the auditor should expenses receipt !iven by the borrower and the loan a!reement bill or exchan!e. 2e should read carefully terms re!ardin! of interest, date of repayment of the loan and authority to them. If loan has been a!ainst mort!a!e, he should examine the mort!a!e deed and that title deed etc. ,1/- FanB char#es ( Bank char!es should be vouched after examination of pass book. Auditor should check calculation re!ardin! commission, interest in overdraft and loan etc. ,10- insurance c'ai! !one* ( Insurance money received a!ainst claim from an insurance company should be checked with correspondence passin! between the client and insurance company, the account rendered by the insurance company or broker. ,11- A#ents and trave''ers co!!ission ( The a!reement with travelers and the a!ents should be examined to find out the terms of appointment re!ardin! the ra!e commission calculation should be made and receipt !iven by the traveler or the a!ent should be examined and compared with the cash book. The auditor should test the payment of commission by examinin! the orders received throu!h the travellers. ,18- Fi''s &a*ab'e ( Geturned bills duly cancelled should be examined. It would be sufficient evidence of the amount havin! been paid reference may be made to the bank pass book bills payable books. ,19- &ett* cash ( There are !reater chances of misappropriation of cash as there are no vouchers for a number of petty payments. An auditor should make an en)uiry into the internal check system on the imprest system. The amount of petty cash in hands of the petty cashier should be accordin! to the re)uirement of the business. The cashier should check the petty cash at fre)uent intervals. The auditor should check the receipt of money by the petty cash keeper with the cash book and compare the dates. The auditor should recommend the adoption of the columned petty cash book which should be maintained on the imprest system. ,1- 2rei#htA carria#e and custo! duties ( The statement of account re!ardin! the payment of frei!ht and carria!e submitted by the shippers, clearin! or forwardin! a!ents to!ether with the receipts issued by them should be vouched to see that the payment has been duly made and account for.

Q. ?o ou'd *ou verif* the fo''o in#$ Ans. ,1- Dood i'' ( Gepresents the sum paid for anticipated future super fraud and therefore some authorities contend that cost of !oodwill should be written off a!ainst the future super profit earned been purchased !oodwill should be valued at cost from the financial point of view, it may be advisable that the value of !oodwill should be written off but le!ally there are no compulsions to write off !oodwill from the books of the company. In %ase of !oodwill it is the auditor duty to see that !oodwill represents actual cost. ,/- )otor vehic'es ( 0otor vehicles Amount is to be separately maintained. the auditor should compare it with the balance sheet in which it should be clearly stated under separate head. If the number of motor vehicles is very lar!e a separate re!ister should be maintained. The auditor should call or a schedule of motor vehicles and compare it with the re!ister so kept auditor should that all the vehicles are re!istered in the name of the client. 2e should further see purchases or sale, insurance premium receipt. 0otor vehicles should be shown in the balance sheet at the cost less depreciation. ,0- &'ant and )achiner* ( The money spent in the ac)uisition of plant and machinery is shown in plant and 0achinery account. The auditor should check the balance sheet with the help of led!er account and ensure that the asset is clearly stated. The auditor should examine the plant re!ister in which particular about the cost records about sales, provision for depreciation etc. are available. It is advisable for the auditor to ask for a schedule for various plants in which details about cost depreciation etc. should be clearly !iven. Auditor can verify the asset by comparin! the schedule with the plant re!ister. If a part of the asset has been purchased durin! the year, the invoice should be checked. If a part of the asset has been sold necessary entries, profit or loss must be verified. ,1- &ro"ert* ( The auditor is not competent to examine the title deeds relatin! to a property. In such a case he should insist upon the client to !et a certificate re!ardin! their validity from the solicitor or architect or surveyor or an en!ineer. The property may be freehold property and lease hold property. ,8- 2ree ho'd "ro"ert* 6 ,i- The auditor should examine the title deed relatin! to the property. ,ii- %orrespondence and brokers account should be examined in case it built. ,iii- Builders, contractors certificates should be examined in case it built. ,iv- In case the property has been mort!a!ed the title deeds will be with the mort!a!ee, the auditor should !et a certificate from the mort!a!e re!ardin! to possession of the title deeds and the amount of the loan. ,v- 6roperty should be shown in the balance sheet at cost, less depreciation. 3hile valuin! the land and buildin! it should be seen that no notice of appreciation or fall in their market value is taken into depreciation must be provided for buildin!. ,9- 7easeho'd "ro"ert* ( Lease deed should be examined to find out its value and duration. The auditor it is for a period or more than one year as per the re)uirement of the transfer of property Act. These lease money paid should be capitali#ed. Any le!al

expenses or other expenses incurred in ac)uirin! the lease should also be capitali#ed. Lease rent should be debited to the revenue account. The lease money and other capitali#ed expenses should be spread over the number of years. .epreciation, insurance premium etc. should be debited to revenue account in the case of lease of buildin!. ,:- Outstandin# e5"enses ( The auditor should !et a certificate from a responsible official to see that all expenses for the current year are included and that the payment for such expenses, which have not been paid, are included. ,;- Fi''s "a*ab'e ( The auditor should verify B76 book and B76 A7c, cashbook and examine the returned bills payable confirmation from the drawee may be asked in case of suspicion. Any char!e on asset should be disclosed in the balance sheet. ,<- Trade creditors ( The auditor should ask for a schedule of the creditors and check it with the purchase led!er which in its turn may be checked with the books of ori!inal entry with the purchase invoices, credit notes, !oods inward book, returns outward book, bills payable book, cash books etc. The auditor should see that all purchases durin! the year have been included in the purchases made at the close of the year. Auditor should find out that whether all purchases made at the close of year have been credited to the suppliers account by referrin! to the !oods inward book and the purchase book. 2e may also ask for the statements of accounts from the creditors to find out that accounts are correct. Auditor should compare the percenta!e of !ross profits with that of the previous years. If there is a si!nificant char!e auditor should en)uire the reasons for the chan!e. If the debt has not been paid for a lon! time, en)uiry should be made. It is possible that instead of payin! to the creditor the amount mi!ht have been misappropriate. ,1G- Contin#ent 'iabi'ities ( It is duty of an auditor to see that all know liabilities are brou!ht into account at the date of the balance sheet. There may be certain liabilities which may or may not arise after the preparation of the sheet. It is, therefore, necessary that provision should be made for such unknown liabilities. uch liabilities are called contin!ent liabilities. Thus, a contin!ent liability been defined as one which may or may not arise at a future date. A contin#ent 'iabi'it* !a* invo've an u'ti!ate 'oss ( A liability in a disputed case where dama!es may have to be paid or it be ac)uisition an asset at a future date. The auditor can find out such liabilities durin! the course of the audit while !oin! throu!h the books of account, correspondence minute books etc. The amount of the contin!ent liability may be definite or may not be so. 1xample, a bill received which has been discounted mi!ht be dishonoured at the date of maturity. The auditor should see that the re)uirements of the %ompanies Act are complied with and a liabilities is shown in the balance sheet. ,11- Invest!ent ( The auditor should ask for a schedule of investments. This schedule should !ive full particulars of the investments held by the client and compare it with accountin! records. The auditor should check all the investments simultaneously and compare them that they not be reproduced a!ain.

If investments are held by any trustee on behalf of the company, the trust deed executed by a nominee should be examined. If there is no trust deed, he should !et a certificate from the trustee. Auditor should see that provision of the concerned account are complied with of the act. After verification of the existence of the investments the auditor should examine that they are properly valued at the date of the balance sheet. The basis of the valuation of investments in the balance sheet will to lar!e extent depend upon the purpose for which they are held. The investment should be valued at cost price. ,1/- %tocB in trade ( The verification of the stock in trade at the close of the year re)uires a lot of care and caution. Auditor should be very careful while verifyin! and valuin! stock in trade. /therwise profit and loss will not show true profits7or loss of the concern. The auditor should examine the system of internal check in operation. If there is an efficient and effective internal check system, the possibilities of errors and fraud are minimi#ed. The method of stock takin!, few items of rou!h stock sheets totals and balance of stock sheet, value of different items of stock, principle followed in the valuation of stock !ood inward re!ister and percenta!e of !ross profit to sale of the current year should be compared with that of the previous years are to be verified by the auditor. The valuation of stock is normally made on the basis of cost price or market price which ever is lower. Auditor should certify the stock shown in the balance sheet. ,10- Cash in hand ( the auditor should visit the business house at the close of the financial year or on the followin! day and actually count the cash in hand and compare the balance of cash in hand with balance sheet. Another method of verification of cash in hand is to ask his client to deposit the whole of cash in hand includin! petty cash etc. into the bank on the closin! day and then drawin! a che)ue on the followin! day for expense etc. to reopen the cash book with cash drawn from counted. ,11- Cash at banB ( To verify cash at bank, the auditor should examine the bank pass book and compare it with the balance sheet or shown by the bank column of the cash book. Auditor should examine the reconciliation statement to find out the pass book balance a!rees with the cash book. Auditor may also ask the client to obtain a certificate re!ardin! the bank balance from the bank to prevent frauds in the account. ,18- FooB debts ( Accordin! to %ompanies Act, book debts of a company should be shown as ,i- debts considered !ood in respect of which the company is fully secu considered !ood for which the company holds no security other than the debtors personal security, ,iii- debts considered doubtful or bad. The auditor should see that debtors have been shown properly. 2e should examine the led!er accounts and should obtain a certificate schedule of all debts. 2e should compare the schedule with the led!er accounts. Auditor should examine provision for bad and doubtful debts, discount etc. .ebts written off should be examined. Auditor may also !et confirmation from the debtors.

red, ,ii- debts Lastly, he should examine that debts are shown in the balance sheet as per the provisions of the %ompanies Act. Q. Co!!ent on the fo''o in# + Auditin# or an e5a!ination of booBsA accounts and vouchers. Ans. )eanin# of auditin# ( An audit is an examination of the records to establish their reliability and the reliability of the statements drawn from them. In simple words, auditin! may be defined or the verification of financial position as disclosed by the 9balance sheet: and profit and loss account. 9Auditin! is defined as a systematic and independent examination of data, statements records operations and performance of an enterprise for a statanted purpose.: As per AA $I, 9An audit is the independent examination of financial information of any entity, whether profit oriented or not prospective of its si#e or le!al form, when such an examination economic information.: As auditor, while conductin! an audit, has to satisfy himself that & ,a- That accounts have been drawn up with reference to entries the book of accounts. ,b- The entries in the books of accounts are ade)uately supported by underlyin! papers and document. ,c- Hothin! which is not in the books of accounts has bound place in the financial statements. ,d- Hone of the entries in books of accounts has been omitted in the process of compilation. ,(- Geviewin! the systems and procedures to find out whether they are ade)uate and comprehensive. ,*- %heckin! the arithmetical accuracy of the books of accounts by the verification of postin!s, balance etc. ,+- 1xamine the documentary evidence to establish the accuracy, authenticity and validity of transactions recorded. ,;- Jerifyin! that the production between capital and revenue items is made. ,<- Jerification of the title, existence and valuation of assets appearin! in the balance sheet. ,=- 1xamine the whether statutory re)uirements have been complied with. ,>- Jerification of the liabilities stated in the balance sheet. ,?- %ompanies of balance sheet and profit and loss account and other statements with underlyin! records in order to see that they are in accordance there with. ,'@- %heckin! the results shown by profit and loss account and balance sheet see whether the results shown are true and fair. ,''- Geportin! to appropriate person body as to what extent accounts reveal a true and fair view of the state of affairs and of the 6rofits and loss account of the or!ani#ation. The auditor must examine all vouchers, invoices minutes of directors or partners. %orrespondence and other documentary all vouchers to establish the nature and authenticity of transactions. 2e must verify that there exists a proper authority in respect of each transaction. 2e should also verify the form in which final accounts are drawn up.

UNIT 8

AUDIT &7ANNIND AND DOCU).NTATION

Q. >rite short notes on ,i- Audit &ro#ra!!eA ,ii- Audit Note FooBA ,iii- >orBin# &a"ersA ,iv- Test ChecBin#A ,v- Consideration at the co!!ence!ent of ne audit. Ans. 1. Audit &ro#ra!!e ( Before the work of an audit is commenced the auditor should chalk out a pro!ramme as to what work is done by his assistants and by himself and the time by which the work is to be finished. The assi!nment for each of the assistants is to be laid down in the Audit Hote Book of the assistants. There are three methods by which the pro!ramme is carried out & ,a- There is a complete pro!ramme on the file from which the items to be completed by a particular assistant are ticked off, and thus, the assistant knows what he has to do and by which date each item is to be completed. ,b- In other cases, the auditor chalks out a pro!ramme for each assistant accordin! to the nature of the business of the client. In this case, there is no previous chalked out pro!ramme. ,c- In the third case, the auditor never prepares a pro!ramme in advance but may allow it to !o as the work pro!resses. 3hile preparin! the pro!rammes the auditor should keep in mind followin! two points & '. The points which are common to all kinds of audits. (. The special points relatin! to a particular type of audit. Advanta#es of audit "ro#ra!!es ,'- The auditor is in position to know properly of the work done by his assistants. ,(- The uniformity of the work can obtained as the same pro!ramme will be followed at subse)uent audits. ,*- .ivision of work amon!st the different assistants is possible. ,+- Gesponsibility of clerks can be fixed. ,;- In case a clerk !oes no leave, his work can be done by another clerk, who is in a position to know what has already been done. ,<- In case of a char!e of ne!li!ence a!ainst the auditor for not havin! done the work the auditor can depend himself by producin! the audit pro!ramme. ,=- It is a kind of !uidance to the audit clerk for the work he has to perform. It is also an assurance to the auditor that the "unior will not over look essential points. ,>- In case, any fraud or errors has remained undetected, the responsibility for ne!li!ence can be fixed on the clerk who had performed that as his si!nature are affixed on the audit pro!ramme. Disadvanta#es of Audit "ro#ra!!e + ,'- The assistant does not apply his common sense. 2e perform the work mechanically.

,(- An efficient clerk, losses his initiative because he adheres to the pro!ramme which has been fixed for him. 2e may not make any su!!estion. ,*- 1ven if the audit pro!ramme is well drawn up, it may not cover everythin! that come up durin! the course of audit . ,+- 1very business has a varies problems of its own, and hence, a ri!id pro!ramme cannot be laid down for each type of business. ,;- .rawin! of an audit pro!ramme may be unnecessary for a small concern. These disadvanta!es can be overcome by impressin! upon the audit clerk that the audit pro!ramme is only a !uidance and he should use his initiative and intelli!ence durin! the course of audit. 2e should be encoura!ed to make su!!estion. The audit pro!ramme should be flexible, i.e., should be chan!ed from time to time and made up to date accordin! to experience and chan!es made in the business so that it may become a useful tool to review and prepare audit and report. It can be used for plannin! susse)uent audit pro!ramme. /. Audit Note FooB ( An audit note book is a book which is maintained by the audit clerk. .urin! the course of audit, the clerk comes across many difficulties or new points which he has to discuss with his senior or the auditor. 2e marks several in)uiries which, so he thinks have not been satisfactorily answered. Lest he mi!ht for!et these be noted down these in a book which is called by different name such as audit note book. uch a Book is written record of )ueries made replies received thereto. This book may be of !reat help of the auditor preparin! his audit report from such a record. A separate audit note book is maintained for each concern. Contents of audit note booB ( Audit note book may cover followin! points & '. A list of books of account maintained by the client. (. The names of principal officers, their powers, duties and responsibilities. *. The technical terms used in the business. +. The points while re)uire for further explanation and clarification. ;. The particulars of the missin! vouchers. <. 1rrors and mistakes discovered. =. Total or balances of certain books of account, bank reconciliation statement. >. Hotes and )ueries which mi!ht be re)uired at a subse)uent audit. ?. The points which have to be incorporated in the audit report. '@. The matters which re)uires discussion with the senior or with the auditor. ''. Accountin! method followed in the business. '(. 6rovisions of articles and memorandum of association affectin! the accounts and audit. '*. .ates of commencement and completion of the audit. Uti'it* of an audit note booB ( An audit note book is of !reat value in case a suit filed a!ainst the auditor for ne!li!ence or breach of duty. 2e can prove or defend himself a!ainst this char!e if the points have been noted in the audit note book. An audit note book will serve the purpose of an evidence in favour of the auditor. An audit note book should be concise, clear and complete. It can act as a !uide for the clerk and will be !reat use in subse)uent audit. 0. >orBin# &a"ers ( 3orkin! papers are those paper which contained essential facts about accounts so that the auditor may or may not have a!ain to !o over the

accounts of his client in case he wants to refer to them later on durin! the course of his audit. .5a!"'e + '. Audit pro!ramme duly completed showin! the nature of work. (. The extent of checkin! made and initials. *. The schedule of the debtors and creditors, fixed assets, investments etc. +. 3orkin! trial balance. ;. %orrespondence between the auditor and debtors, creditors and banks etc. <. %ertificate re!ardin! shock in trade and its valuation. =. %ertificate from the mana!ement that all the outstandin! assets and liabilities have been included in the account etc. >. Ad"ustin! formal entries. ?. Abstracts from minute books. '@. 6articulars of investments. ''. 6articulars of )ueries made durin! the course of audit and the explanations !iven. Objects of orBin# "a"ers + '. 3orkin! papers show in detail the work performed by auditor and supports the auditor report. (. The auditor can form opinion about the efficiency or other workin! ability of the audit clerks. *. 3orkin! paper is permanent record. An auditor can defined himself in case a suit is filed a!ainst his ne!li!ence. +. 3orkin! papers are prepared by the audit clerks so they are means to !iven trainin! to them. ;. 3orkin! papers enable the auditor to satisfy the client about the weakness of the internal control system, inefficiency of the accountancy system. <. 3orkin! papers help the auditor to plan for the succeedin! year. =. 3orkin! papers enable the auditor to prepare audit report without much wasta!e of time. >. 2e can know that his assistants had followed his instructions. ?. .uties of audits staff can be chan!ed with minimum dislocation and omission of any workin! papers. '@. 4uture audit work can be carried on in the same se)uence on the basis of the previous workin! papers. .ssentia's of #ood orBin# "a"ers + ,i- The workin! papers should be completed in all respects. ,ii- They should be properly or!ani#ed and arran!ed. ,iii- The workin! papers should contain accurate information. ,iv- There must be clarity in thou!ht and experience. ,v- All relevant details should be kept in the workin! papers. ,vi- 3orkin! papers should be properly preserved filed, so that they may be made variable whenever they are needed. 1. Test checBin# ( Test checkin! is a substitute for detailed checkin!. It involves only partial checkin!. The auditor normally does not check completely all the records made into the books of accounts but he adopts samplin! techni)ues. 2e selects a

few items and if they are found correct he assumes that the rest of the entries would be correct. Thus, test checkin! is based on the simple rule that if a representative number of transactions selected at random by the auditor for test checkin! is found to be correct the remainin! ones would also be correct. Thus, the whole system of test checkin! implies selectin! and checkin! only a few selected transactions so as to enable the auditor to form him final "ud!ement as to the whole set of transactions. Test checkin! is also known as selective verification or samplin! process. The use of test checkin! is depend upon the system of internal check in operation. The choice for adoption of test checkin! will depend on the situation. Test checkin! should be applied and carried out intelli!ently and carefully otherwise it may lead to dan!erous conse)uences. %afe#uards for the a""'ication of test checBin# + '. Gepresentative sample transactions selected should covered the whole period of audit. (. The item that selected should be checked in detail. *. %ash book and pass book should be checked in detail. Advanta#es of test checBin# + '. Test checkin! saves time and ener!y. (. Test checkin! is very useful and purposive provided the selection of transaction made intelli!ently. *. The auditor can take different audits easily because the volume of work is reduced. +. .efinite conclusions can be drawn re!ardin! truthness and fairness of the accounts. ;. %ost of conductin! the audit is reduced. Disadvanta#es of test checBin# + '. 1rrors and frauds may remain undetected because test checkin! is based on the selection of representative transactions. (. Accounts clerk becomes careless because they know that auditor will not check their work in detail. *. Gisk and responsibility of audit increases. +. Test checkin! system is not possible in an or!ani#ation where internal control system exercised. To conclude test checkin! means to select and examine a responsible sample from a lar!e number of similar items. This method of checkin! the account minimi#e the work of auditor but does not reduce his liability in any way. 8. Consideration at the co!!ence!ent of ne audit ( An audit is conducted with some definite ob"ect in view. This ob"ect should be kept in the initial sta!es of the audit. '. The auditor should see that his appointment is in order. In case of "oint stock companies, it is accordance with the provisions of the %ompanies Act. If he does not do so, he will be held liable. If he has been appointed in place of another auditor, he should in)uire from the retirin! auditor, the reasons for the chan!es. (. 2e should obtain defined instructions from his client about the nature and scope of his work and duties. 3hether he is to do the accountancy work or audit work or

both, by which date work is to be completed, his audit fees, time by which the audit report is to be submitted. *. 2e should examine terms and conditions of his contract with mana!ement his ri!hts, duties and liabilities. This )uestion will not arise in case of the audit of companies because these are determined accordin! to %ompanies Act itself. +. Auditors should examine the system of accounts in operation and fine out the weakness if any in the accountin! system. ;. 2e should obtain the lists of books maintained by the clients, the specimen si!nature of the responsible officials of the company. <. Auditor should arran!e meetin! with key officials before startin! his work. =. 2e should examine the interval check system in operation and its weak points etc. >. 2e should obtain the lists of key officials of the companies, their power, duties etc. ?. 2e should make understandin! about the technical aspect of the business with the help of technical experts. '@. 2e should ask the client to balance the accounts, the final accounts and the balance sheet, file the vouchers, prepare the necessary schedules. ''. Auditor should never be!in his work until the book of accounts have been balanced. '(. Auditor should obtain previous years balance sheet duly audited by the auditor, if any. '*. 2e should study the audit report of previous year in the case of existin! company. '+. 2e should memorandum and articles of association of the company and prospectus in the case of new company. UNIT 9 CO)&AN= AUDITOR

Q. %tate the "rovisions of the Co!"anies ActA 1<89 ith re#ard to the a""oint!ent of an auditor. Ans. The audit of the books of accounts of a company has been made compulsory by the Indian %ompanies Act, '?;<. It contains provisions re!ardin! company audit and the auditor. It provides for the appointment remuneration, removal duties and )ualifications etc. of a company auditor. The appointment of auditors is dealt with ection ((+ of the %ompanies Act, '?;<. The provisions of which are as under. 1very company public or private must appoint an auditor or auditors to audit its annual accounts. The followin! are the provisions re!ardin! appointment of an auditor & 1. 2irst Auditor ,A""oint!ent b* Foard of Directors- ( The first auditor of a newly floated company are appointed by the Board of .irectors within one month of re!istration of the company and the auditor who appointed shall hold office till the conclusion of first annual !eneral meetin!. /. A""oint!ent of Auditor in Annua' Denera' !eetin# ,A""oint!ent b* %hareho'ders-

,i- If the board fails to appoint the auditor the company shall appoint its first auditor in !eneral meetin!. ,ii- 1very company shall at each !eneral meetin! appoint an auditor to hold office from the conclusion of that meetin! until the conclusion of the next annual !eneral meetin!. ,iii- The company shall within seven days of appointment !ive intimation thereof to every auditors so appointed. ,iv- The auditor who appointed shall within thirty days of the receipt from the company of the intimation of his appointment inform the Ge!istrar in writin!, what he has accepted or refused to accept for his appointment. 0. A""oint!ent b* Centra' Dovern!ent ( Appointment by %entral 5overnment were at an annual !eneral meetin! no auditors are appointed or responsible$ appointed the %entral 5overnment may appoint a person to fill the vacancy. The company shall within seven days of the %entral 5overnments power becomin! exercisable !ive notice of that fact to the 5overnment. If a company fails to !ive such notice, the company and every officer of the company who is in$defaulter shall be punishable with fine which may extent to five thousand rupees. 1. A""oint!ents of Auditor b* %"ecia' Reso'ution ( ection ((+, A was added in the %ompanies Act in '?=+, accordin! to which in case of a company in which not less than (;N of the subscribed share capital is held whether solely or in any combination by $ ,a- a public financial institution or a 5overnment company or %entral 5overnment or any tate 5overnment, or ,b- any financial or other instruction established by any provincial or tate Act in which a tate 5overnment holds not less that ;'N of the subscribed share capital, or ,c- a nationali#ed bank or an insurance company carryin! on !eneral insurance business the appointment or re$appointment of the auditors or auditors at annual !eneral meetin! shall be made by a special resolution. 8. A""oint!ent of Auditor of Dovern!ent Co!"anies ( The Auditor of 5overnment company is appointed or re$appointed by the %entral 5overnment on the advice of the %omptroller and Auditor 5eneral of India. 9. Casua' vacancies ( ,i- Any vacancy in the office of an auditor except one caused by prior resi!nation any may be filled by the board but the remainin! auditor or auditors may continue to act. ,ii- 3hen a vacancy has been caused by the resi!nation of the auditor, it shall be filled only in the !eneral meetin!. ,iii- An auditor appointed to fill a casual vacancy shall hold office till the conclusion of the next annual !eneral meetin!. Rea""oint!ent of Auditor ( he auditor appointed by whatever authority shall be re$appointed at the annual !eneral meetin! unless M ,a- he is not )ualified for re$appointment , or ,b- he has !iven the company notice in countin! of his unwillin!ness to be re$ appointed, or ,c- A resolution has been passed at that meetin! appointin! somebody instead of him or providin! expressly that he shall not be reappointed, or

,d- a notice has been !iven to the company of an intended resolution to appoint some person or persons in the place of a retirin! auditor and by reason of the death in capacity or dis)ualification of that person or of all those persons as the case may be, the resolution cannot proceeded with. A""oint!ent of Franch Auditor ( They are appointed by the statutory auditor where branches are to be audit by other than company auditor the shareholders may appoint branch auditor in !eneral meetin!. The !eneral body also authori#ed Board of .irectors to appoint Branch Auditor. Auditor a""ointed at A.D.). fai'in# to acce"t the a""oint!ent ( The appointment of an auditor is complete and effective only on his acceptance of the office of the auditor. If the auditor refuses to accept the appointment made by shareholders, it can be deemed that no auditor had been appointed by the company at its A.5.0. Hon acceptance by the auditor does not result in casual vacancy. the shareholders will appoint auditors in all cases except in the case of filin! casual vacancy or appointment of first auditor. This power cannot be dele!ated to Board of .irectors. Any resolution dele!atin! such power to Board of .irectors will be ultra vires. Re6a""oint!ent of the auditors ( A retirin! auditor, by whatsoever authority appointed shall be re$appointed unless M ,a- he is dis)ualified to be appointed. ,b- he has !iven a notice in writin! of his unwillin!ness to be re$appointed. ,c- a resolution has been passed at the meetin!, appointin! someone else or providin! expressly that he will not be re$appointed. ,d- where notice has been !iven of intended resolution to appoint some person in place of retirin! auditors and by reason of death, in capacity or dis)ualification of that person or all of those persons, the resolution cannot be proceeded with. A written certificate should be obtained from the propose auditor to the effect that the appointment or re$appointment is made will be in accordance with the %ompanys Act. A retirin! auditor cannot be deemed to be re$appointed automatically at the A50. A specified resolution is re)uired to re$appoint the auditors. Q. Discuss the ri#hts and duties of a co!"an* auditor. Ans. An auditor to fulfill his duties must have ri!hts without which it may not be possible for him to perform his duties honestly and he would be held liable for any loss caused to the company due to his ne!li!ence. The ri!hts of the auditor, his duties are !iven in the %ompanies Act, '?;<. Ri#htsE&o ers of an auditor ,1- Ri#ht of access to booBs of account ( The auditor has a ri!ht to access at all time to the books of accounts and vouchers of the company whether kept at the head office of the company or elsewhere. ,/- Ri#ht to ca'' for infor!ation and e5"'anations ( 2e has !ot a ri!ht to ask the directors and officers of the company to !ive any information and explanations as they may be necessary for the duly dischar!ed his duty as auditor. ,0- Ri#ht to receive notice of and attend #enera' !eetin# ( An auditor has a ri!ht to receive notice of the !eneral meetin! of the shareholders. 2e has also !ot a ri!ht to attend every meetin! of the shareholders irrespective of the fact whether accounts

related matter are bein! discussed or not at such meetin!. 2e has a ri!ht to speak such meetin! when the accounts are bein! discussed. Auditors has !ot this ri!ht but it is discretion of the auditor to exercise this ri!ht or not. ,1- Ri#ht to !aBe state!ents at the #enera' !eetin# ( 2e has a ri!ht to make any statement or explanation he desires at such meetin!s in connection with the accounts but he is bound to do so. An auditor may be present in the meetin!. 2e is not bound to answer any )uestion unless he is asked to do so by the %hairman of the meetin!. 2e should answer )uestions which relates to the accounts only. ,;- Gi!ht to correct wron! statement made by directors relatin! to the accounts. ,9- Ri#ht to be inde!nified ( 2e has a ri!ht to be indemnified out of the assets of the company a!ainst any liability incurred him in dependin! himself a!ainst civil and criminal proceedin!s by the company. ,:- Ri#ht to visit the branches ( The auditor of a company has the ri!ht to visit the branches of the company to audit the accounts provided to )ualified auditor to audit the account of these branches has been appointed and the exemption to !et the branch accounts audited has not been !ranted by the %entral 5overnment. In case, he has to audit the accounts of the branches he will have the ri!ht of access to all the books of the accounts and vouchers etc. of the branches at all time. If the company is a bankin! company and has branches outside India the auditor will have no ri!ht to visit such branches. But he will have the ri!ht of access to all the returns sent by the branch to the head office. ,;- Ri#ht to taBe 'e#a' and technica' advice ( An auditor has the ri!ht to take le!al, expert or technical advice, but he must !ive his opinion in the report that of experts. ,<- Ri#ht to re!uneration ( An auditor has the ri!ht to have his remuneration paid to him provided he has completed the work he undertook to do. ,1G- Ri#ht to si#n the audit re"ort ( An auditor of the company must si!n the audit report or si!n all le!al documents as re)uired under the %ompanies Act. ,11- Ri#ht to 'ien ( An auditor may exercise ri!ht of lien on the workin! papers by him. 2e has no ri!ht on the books of account. It does not extend to money left with by the client. ,1- Duties to an auditor 6 An auditor is appointed to keep a check on the directors. 2e has to !ive a report to the members even thou!h he mi!ht have been appointed by the directors. An auditor is the a!ent of shareholders. 2e has to examine the accounts maintained and supervised by the directors and to report to the shareholders whether the directors have performed their duties or not. It is not the duty of an auditor to see that his report has been sent or not to the shareholders. After havin! si!ned his report and the balance sheet and havin! sent to the ecretary of the company his duty is no more. ,/- )atters to be state in the audit re"ort ( The auditor while reportin! to the shareholders in his audit report he must state $ '. 3hether or not he has obtained all the information and explanation to the best of his knowled!e and belief were necessary for the purpose of his audit. (. 3hether in his opinion the profit and loss account shown true and fair view of the profit or loss.

*. 3hether balance sheet is properly drawn up and shows a true and fair view of the state of affair of company accordin! to the best of his information and explanation !iven to him and as shown in the book of account. +. 6roper books of accounts re)uired under the law have been kept by the company. ;. Geports on the accounts audited by the branch auditors have been received. <. %ertify that balance sheet and profit and loss account have been drawn up accordin! to the re)uirements of %ompanies Act. The auditor shall also in)uire $ ,i- Loans and advance by the company a!ainst security are properly secured and term of the loan are not a!ainst the interest of the company or its members. ,ii- Transaction represented by book entries are not a!ainst company interest. ,iii- ale of investments durin! the year at a price less than the purchase price in the case of non$bankin! company. ,iv- Loans and advances made by the company shown as deposits. ,v- 6ersonal expenses char!ed to revenue account. ,vi- hares allotted a!ainst cash, cash have received and shown in the balance sheet correctly. The auditors duty is to report if he is not satisfied with re!ard to any point or if he could not !ot any information or explanation in his opinion should be placed before the members. ,0- Dut* to assist investi#ators ( It is the duty of an auditor to assist the inspection in every possible way when the affairs of the company are bein! investi!ated. 2e can asked to produce the workin! papers. ,1- Dut* to certif* the statutor* Re"ort ( An auditor has to certify the correctness of the statutory report as far as incorporation of the company is concerned. ,8- Dut* to certif* "rofit and 'oss account in a "ros"ectus ( If an existin! company issued prospectus it should contain a statement of profits and losses. These must be certified by the company auditor. .uties of an auditor as prescribed by law cannot in any way be curtailed either by articles or by directors or by members thou!h these may be enlar!ed by passin! a resolution at the !eneral meetin! or makin! a provision in its article. Q. Discuss the 'iabi'ities of a co!"an* auditor. Ans. An auditor is appointed under the %ompanies Act, '?;< and hence, his appointment remuneration ri!hts and duties, liabilities and responsibilities are defined and laid down by the %ompanies Act, his liabilities may classified as & Liabilities of %ontrol Auditor %riminal Liabilities %ivil Liabilities Liability for ne!li!ence Liability for misfeasance 1. 7iabi'it* for ne#'i#ence ( An auditor is appointed by a company to safe!uard the interests of the shareholders, as such he perform his duties as an a!ent of the shareholders. 2e must exercise his reasonable care and dili!ence in the performance of his duties. If he fails to do and the principal suffers a loss, the auditor is held liable to

make !ood the loss. 2e can be compelled to compensate loss to the company resultin! from his ne!li!ence. The auditor cannot be held responsible to compensate loss if his ne!li!ence is proved without in any way causin! loss to the company. 2e is liable for dama!es if the company has suffered any loss due to his ne!li!ence in the performance of his duties. Loss without ne!li!ence Thus, an auditor is not liable for He!li!ence without loss To hold the auditor liable for ne!li!ence he followin! three states must be proved & ,a- That he was ne!li!ent. ,b- As a result of his ne!li!ence the client suffered a loss, and ,c- That the loss suffered by the person to whom the auditor owes a duty. The company may indemnify himself provided the "ud!ement was in his favour. /. 7iabi'it* for !isfeasance ( 0isfeasance means breach of trust or duty ,wron! done-. As an auditor is held for dama!es caused to a company on account of his ne!li!ence. imilarly, he is ne!li!ent in the performance of his duties if he commits his feasance. If an auditor does somethin! wron! fully in the performance of his duties resultin! in a financial loss to the company is !uilty of his feasance. The .irectors, 0ana!in! .irectors and other officials of a company may also held liable for misfeasance. 7e#a' "ositionA %ection 9/ 6 This section provides for the civil liability of an auditor for mis$statements in prospectus of the company, he has !iven consent he shall not be liable as a person who has authorised the issue of prospectus. 2e remain liable in respect of untrue statement if any as expert. %ection 810 ( If in the course of windin! up of a company, it appears that any officer ,includin! the auditor- of the company has misapplied or retained or become liable for any money or property of the company or has been !uilty of any ne!li!ence or breach of trust in relation to the company he can be held liable for dama!es caused to the company. 0. Cri!ina' 'iabi'it* ( An auditor is an officer of the company and in that capacity he is liable for his acts of omission7commission which can be construed as offence under the provision of the %ompanies Act. 6enalties for such offences may be imprisonment and or fine. 7e#a' "osition. %ection 90 ( 3hen a prospectus issued after the commencement of this Act includes any untrue statement, every person who authori#ed the issue is of the prospectus shall be punishable with imprisonment for a term which may extend to two years or with fine which may extend to fifty thousand rupees or with both unless he proves either that the statement was immaterial or that he had reasonable !round to believe that the statement was untrue. An auditor may punished if he authori#ed the issue of the prospectus. %ection ( If an auditors report is made or any document of the company is issued or authenticated otherwise than in conformity with the re)uirements of ection ((= and ((?, the auditor concerned and the person if any other than the auditor who si!ns the

report or si!ns or authenticates the document shall, if the default be punishable with fine which may extend to Gs.'@,@@@. %ection /1G ( The auditor of the company is re)uired to assist the inspector appointed by the %entral 5overnment to investi!ate the affairs of the company otherwise he will be punishable with imprisonment up to six months or with fine up to Gs.(,@@@ for everyday for the period of default. %ection /1/ ( The auditor is re)uired to assist the prosecutor, when on the basis of report submitted by an inspector, the %entral 5overnment takes action and prosecutes him in connection with the affairs of the company. If he does not he is !uilty of contentment of court and punishable. %ection 1:: ( In the course of windin! up a company, the auditor is sub"ect to a private examination of the court and is re)uired to return to the court any documents in his possession. If he fails to appear before the court, he can be arrested. %ection 1:; ( The auditor of a company, on the application of the official li)uidator, can be publically examined in the hi!h court. %ection 80< ( If an auditor destroys, mutilates, alters, falsifies or secrets or is privy to the destruction, mutilation, alteration, falsification or secretin! of any books, papers or securities or marks or privy to the makin! of any false or fraudulent entry in any re!ister books of account or document belon!in! to the company, he shall be punishable with imprisonment for a term which may extend to seven years and shall also be liable to fine. %ection 818 ( The court direct the li)uidator of a company in windin! up to prosecute the auditor if he is found !uilty of any criminal offence in relation. %ection 9/; ( If the auditor of a company makes a statement that any return, certificate, balance sheet, prospectus etc. which is false in any material particular knowin! it to be false or omits any material fact knowin! it to be material, he shall be punishable with imprisonment for term which may extend to two years and shall be liable to fine. %ection 9/< ( If any person ,includin! an auditor- intentionally !ives false evidence upon any examination or oath or solemn affirmation authori#ed under the Act or in any affidavit, deposition or solemn affirmation, in or about any matter arisin! under the act, he shall be punishable with imprisonment for term which may extend to seven years and be liable to fine. Liability under the Indian 6enal %ode, ection '?= of the Indian 6enal %ode ,I.6.%.- lays down whosoever issues or si!ns any certificate re)uired by law to be !ive or si!ned or related to any fact such certificate is false in material point, shall be punishable in the same manners if he !ives a false evidence. &o er of court to #rant re'ief to the auditor. %ection 900 ( If it appears the court that an auditor is or be liable in respect of ne!li!ence, may default, breach of duty, misfeasance or breach of trust but that he had acted honestly and reasonably it can relieve him either wholly or partly from his liability or such terms as it may think fit. 7iabi'it* of an auditor to third "arties ( Is an auditor liable to third partiesE The answer is no. An auditor is never appointed by third party. 2e has nothin! to do with such a party. There is no contract between the auditor and the third party. Q. >ho can be and ho can not be a""ointed auditor of a co!"an*$

Ans. Accordin! to ection ((<,'- and ection ((<,(- of the %ompany Act, '?;<, the necessary )ualifications of a company person shall be )ualified for appointment as an auditor of a company ,6ublic or 6rivate- unless he is a %hartered Accountant within the meanin! of the %hartered Accountant Act, '?+? and that provided a firm whereas all the persons practicin! in India are )ualified for appointment as aforesaid may be appointed by its firm name to be the auditors of a company in which case any partner so practicin! may in the name of the firm. Accordin! to ection ((<,(-, a person who holds a certificate under the restricted auditors certificate ,6art$B tates-. Gule, '?;< is also )ualified to act as auditor of a company. 2owever, the %entral 5overnment may by notification in the /fficial 5a#ette makes rules providin! for the !rant renewal suspension or cancellation of such certificates and may prescribe conditions and restrictions for such purposes. >ho can not be a""ointed. The %ompanies Act, vide ection ((<,*- lays down that none of the followin! persons are )ualified for appointment as auditors of a company & ,A- A body corporate. ,B- An officer or employee of the company. ,%- A person who is a partner or who is in the employment of the officer or employee of the company. ,.- A person who is indebted to the company for an amount exceedin! one thousand rupees or who has !iven any !uarantee or provide any security in connection with the indebtedness of any third person to the company for an amount exceedin! one thousand rupees. ,1- A person holdin! any security of the company carryin! votin! ri!hts. If an auditor becomes sub"ect to after his appointment to any of the dis)ualification, he shall be deemed to have vacated his office as such. Q. ?o can auditor of Hoint %tocB Co!"an* be re!oved$ %tate the re!ova' of auditor. Ans. 3hen the first auditors of a limited company are appointed the .irectors prior to the first annual !eneral meetin! such auditors may be removed by the members in !eneral meetin!. The !eneral meetin! may in their place, appoint any other person whose nomination notice has been !iven by any member not less than '+ days before the date of the meetin!. ,'- In the other case, an auditor may be removed from office before the expiry or his term only by the company in !eneral meetin! after obtainin! the previous approval of the %entral 5overnment. The %ompanies Act marks special provisions to ensure "ustice and fair play. The procedure is as follows & ,a- pecial notice of intent to move such resolution to remove the existin! auditor must be !iven to the company by a shareholder not less than '+ days before the annual !eneral meetin!. ,b- /n receipt of such a notice the company must forthwith send a copy there of to the retirin! auditor. ,c- The retirin! auditor shall have the ri!ht to send a representation to the company. The company shall forward such representation to members of the company.

,d- If a copy of the representation is not sent to the members either because it was received too late or because of default by out in the meetin! provided it is not defamatory publicity. ,e- The auditor who is to be removed has a ri!ht to attend the !eneral meetin! where his removal is to be discussed. 2e has a ri!ht to speak at such a meetin!. ,f- The auditor appointed in place of another should communicate with the retirin! auditor in writin! before acceptin! appointment. This is re)uired under the code of conduct !iven by the Institute of %hartered Accountants in India.

UNIT : CO)&AN= AUDIT

Q. >hat do *ou understand b* divisib'e "rofits$ >hat are the 'e#a' ru'es re#ardin# distribution of "rofits refer case 'a s on the subject$ Ans. .ivisible profits means those profits which can le!ally be distributed to the shareholders of a company in the form of dividends. The %ompanies Act lays down. Ho dividend shall be declared of paid by a company for any financial year exempt out of the profits of company for that eyar arrived at the after providin! for depreciation in accordance with the provision of the act or out the profits of the company for any financial year or year arrive at after depreciation in accordance with those provisions and remainin! undistributed or out other out of money provided in pursuance of a !uarantee !iven by that 5overnment. The %ompanies ,Amendment- Act, '?=+ also provides that no dividend shall be declared unless a sum not exceedin! '@N of the profits, is transferred to the reserves of the company. 2owever, the 5overnment may allow a company to transfer a hi!her percenta!e if it thinks fit. he followin! points must be kept in mind while computin! the profits of the company has not provided for depreciation for any previous financial year or years, it shall provide for depreciation and shall transfer not more than '@N of that profits to the reserve account before declarin! any dividends after the commencement of the %ompanies ,Amendment- Act, '?<@ and '?=+. If a company has suffered any loss in any previous financial year or years after the commencement of the %ompanies ,Amendment- Act, '?<@ the amount of such a loss or an amount which is e)ual to the amount provided for depreciation for that year or years whichever is less shall be set off a!ainst the profit of the company of the year for which dividend is proposed to be declared or paid. The %entral 5overnment may however, if it thinks necessary to do so in the interest of the public, allow any company to dividend for any financial year or years without the provision of depreciation if any of the previous years. .epreciation will be calculated in accordance with the provision of the %ompanies Act and Indian Income Tax Act or Gules made by the %entral 5overnment. Thus, it is left to the will of the company mana!ement to decide how much amount is to be distributed to the shareholders. But the company must bear in mind two principles & '. Knder no circumstances dividend should be paid out of capital.

(. 6rovisions !iven in the 0emorandum of Association, Articles of Association are not a!ainst the %ompanies Act and provision !iven in these documents are followed. Thus, divisible profits can be !iven if the above two rules are not violated. .ividend must not be paid so as to deprive the creditors or debenture holder of their security. The case of the %ommission of Income Tax, .elhi Vs. .elhi 4lour 0ills %ontrol Ltd. Q. >hat are ca"ita' "rofits$ Are such "rofits avai'ab'e for distribution as dividends$ Can a co!"an* divide its current "rofit ithout !aBin# #ood "ast 'osses$ Ans. %apital profits are those profits which are not earned durin! the re!ular course of business or in other works are not tradin! profits. uch profits are & '. 6remium received on the issue of shares or debentures. (. Amount received on the fortified shares minus the amount at should they are re$issued. *. 6rofits or incorporation. +. 6rofits earned by the redemption of the companys own debentures at discount in the market. ;. profits reali#ed on the sale of fixed assets. Accordin! to law, there is no ob"ection if some of the capital profits are distributed to the shareholders in the form of dividends provided the articles of the company do not prohibit such an action that sufficient workin! capital is retained in the business after the distribution of such profits. %apital profits are not tradin! profits. There are not a re!ular feature of the business. %apital profits should be distributed as dividends from the sound financial and business point of view. 6rofit earned prior to incorporation are actually not the profit if the company because company was not in existence when these profits were earned. 2ence !oodwill or brin!in! down the value of some of the assets which have been ac)uired. uch profits may be utili#ed in writin! of the intan!ible assets like. In re!ard to profits made on the redemption of its debenture by a company it has been held in the case of 3all Vs. London and 5eneral 6rovincial Trust %ompany Ltd. that a company which adopts the .ouble Accounts ystem should not treat profits made on redemption of its own debentures in the market as profits available for dividend. In case, capital profits have been made on account of appreciation in the value of assets. uch profits may be distributed under the followin! conditions & ,A- 3hen the Articles of Association of the company permits such a step. ,B- 3hen such a profits has actually been reali#ed. ,%- 3hen depreciation in the value of such assets has been set off a!ainst the appreciation value of the assets. ,.- 3hen all the other assets have been revalued. uch decisions were laid down in he Lubbock Vs. The British Bank of outh America and 4oster Vs. The Hew Trinidad Lake Asphatte %o. Ltd. There are however certain capital profits like premium received on the issue of shares which can not be distributed to the shareholders except in the form of bonus shares.

%an a company divide it current profit without makin! !ood pas lossesE The )uestion arises whether a company which had suffered a loss in the past can pay dividend out of the profits of subse)uent years without writin! off previous loss. There is no opinion on this sub"ect. ome says that the current profits could be distributed unless the previous loses had been written off. The ar!ument put forth was what when a loss occurs, capital of the company is lost. There it would not be proper to pay dividend out of profits in subse)uent years unless the lost capital was replaced by subse)uent profits. If that was not done, the dividend proposed to be paid would amount to the payment of dividend out of capital which is a!ainst the company law. ome other are of the opinion that it is not necessary to wipe of previous loss before a dividend is declare in the subse)uent year. This action out of capital. They say that when a loss is suffered the capital is !one. hareholders invest their money and they know that it is lost it need not be made !ood in subse)uent years. It would not amount to payment of dividend out of capital because the capital is already lost. But accordin! to the %ompanies Act, '?<@, past losses must be written off before any dividend can be declared by the loss was incurred whichever is less should be deducted out the profits of the subse)uent year in which it is proposed to pay dividend. 2ence, previous loss must be made !ood commercial point of view. Q. Distin#uish bet een interi! and fina' dividend. The directors of the co!"an* of hich *ou are the auditor consu't *ou as re#ards the "a*!ent of an interi! dividend$ >hat advice ou'd *ou #ive to the directors$ Ans. .ividend are declared at the end of each financial year after the profit and loss accounts are prepared. It is known as final dividend if it is declared in the annual !eneral meetin! of the company, and thus, declared before the declaration of final dividends, it is known as interim dividend. Interi! dividend ( If the Articles of Association of that company permit the director and they may pass a resolution in the meetin! of the Board of !eneral meetin! of the company. The power of declaration of interim dividend may be entrusted to the directors so that they may declare interim dividends after every six months. The followin! le!al points must be kept in mind before declaration recommendin! interim dividend & ,'- The auditor has audited the interim final accounts of the company. ,(- 5ross profits7sales ratio should be calculated to have clear idea of the expected rate7amount of profits. ,*- .epreciation for the whole year should be char!ed to the interim profit and loss accounts. ,+- If the Articles of Association provide specific or fixed rate of dividends to the preference shareholder then at the time of interim dividend the amount can also be paid. ,;- The rate of e)uity shares dividends should be below the rate proposed for the whole year so that if there are some losses necessary ad"ustment can be made. ,<- Auditor does not accept any liability for any irre!ularity in those interim accounts. ,=- Interim dividends is part of the total dividend payable at the end of the year in the annual !eneral meetin! of the shareholders. If the directors declares the hi!her interim dividend and at the time of final dividend the total profits are not sufficient it will

amount to payment of dividends out of capital. The director will be personally liable for this irre!ularity. ,>- The directors should not declare interim dividend in case if state of affairs of business is not satisfactory. ,?- .irectors should find out that sufficient cash is available to pay interim dividend but it should exclude money borrowed by the company. 2ina' dividend ( Hormally, a company declares the dividend at the end of the tradin! period after the preparation of final accounts, calculation of divisible profits. But it is left on the wishes of the Board of .irectors to recommend the rate of dividend. This amount has to be approved by the shareholders in the annual !eneral meetin!. %ompany must followed le!al rules in this connection & ,'- 4inal dividends can only be declare in the Annual 5eneral 0eetin! of the company. ,(- It is ultra virus to declares dividend other than in the meetin! of the shareholders. ,*- .ividend declared should not be past dividend of the account closed in the previous year. It is ille!al. ,+- hareholders have the power to reduce the rate of dividend recommended by the directors but they can not increase the rate of dividend. ,;- .ividends recommended by the directors is to be approved by the members in Annual 5eneral 0eetin! of the company. ,<- .ividend will paid in proportion to the paid$up capital on the basis of number of shares held by each member. ,=- .ividend will neither be nor paid on the amount of calls paid in advance. ,>- Articles of Association of the company may provide that dividend warranty of particular shareholder who has not paid calls may be withheld. ,?- The dividend may not be declared even thou!h there may be profit. 6rofit may be transferred to the reserves. ,'@- .irectors should carefully see that cash position of the company is adversely affected by payment of dividend. It is a unhealthy practices instead bonus shares may be !ive to shareholders when cash is not sufficient. Borrowed money should be utili#ed for payment of dividend. ,''- .irectors should try to maintain uniform rate of dividend as far as possible. Q. >rite notes on ,i- Difference bet een Investi#ation and Auditin#A ,ii- Audit of %hare Ca"ita'A ,iii- %hare Transfer AuditA ,iv- %tatutor* Audit. Ans. ,i- Difference bet een Investi#ation and Auditin# + Ans. ,i- Difference bet een Investi#ation and Auditin# + '. Audit is conducted on behalf of the shareholder or owners while investi!ation is usually carried out on behalf of outsiders who wish to purchase the business or who wish to lend money and thus want to know the earnin! capacity or the financial position of the concern. In some cases, it may also be carried out on behalf of the owners where they suspect any fraud or by the 5overnment at the instance of the shareholders or the %ourt. (. Accounts of a "oint stock company must be audited accordin! to law while investi!ation is not compulsory.

*. Investi!ation may be conducted even thou!h the accounts have been audited while audited account are not audited a!ain, except in the case of special audit under the %ompanies Act. +. The accounts are audited for one year while investi!ation may cover number of years. ;. The ob"ect of auditin! accounts is to find out whether Balance heet is drawn up accordin! to law and that 6rofit and Loss Account and Balance heet shows true and fair view of the state of affairs of the business while investi!ation is conducted with a particular ob"ect in view to know the financial position of the concern or its earnin! capacity. <. Audit is kind of test checkin! while investi!ation is a thorou!h examination of the books of account for a particular year or a number of years. =. Audit includes an examination of the books of the accounts business while investi!ation is not only examination of accounts but it also an in)uiry into other factors that affect the business. 4or example, the type and extent and committed the reason and the persons responsible for committin! etc. The investi!ator has to !o beyond the books of account. >. The investi!ator has to ascertain the actual earnin! capacity of the business makin! certain ad"ustments but this is not done by the auditor. Ans. ,i- Difference bet een Investi#ation and Auditin# + '. Audit is conducted on behalf of the shareholder or owners while investi!ation is usually carried out on behalf of outsiders who wish to purchase the business or who wish to lend money and thus want to know the earnin! capacity or the financial position of the concern. In some cases, it may also be carried out on behalf of the owners where they suspect any fraud or by the 5overnment at the instance of the shareholders or the %ourt. (. Accounts of a "oint stock company must be audited accordin! to law while investi!ation is not compulsory. *. Investi!ation may be conducted even thou!h the accounts have been audited while audited account are not audited a!ain, except in the case of special audit under the %ompanies Act. +. The accounts are audited for one year while investi!ation may cover number of years. ;. The ob"ect of auditin! accounts is to find out whether Balance heet is drawn up accordin! to law and that 6rofit and Loss Account and Balance heet shows true and fair view of the state of affairs of the business while investi!ation is conducted with a particular ob"ect in view to know the financial position of the concern or its earnin! capacity. <. Audit is kind of test checkin! while investi!ation is a thorou!h examination of the books of account for a particular year or a number of years. =. Audit includes an examination of the books of the accounts business while investi!ation is not only examination of accounts but it also an in)uiry into other factors that affect the business. 4or example, the type and extent and committed the reason and the persons responsible for committin! etc. The investi!ator has to !o beyond the books of account.

>. The investi!ator has to ascertain the actual earnin! capacity of the business makin! certain ad"ustments but this is not done by the auditor. ?. The report of the investi!ator is in detail. If refers to & ,a- The instructions !iven to him. ,b- The method of approach. ,c- The word carried out. ,d- The document relied upon. ,e- 2is findin!s and recommendations to its client. The report of the auditor only with re!ard to account of the client. '@. Investi!ators report is a positive report while the auditor short from and may be ne!ative. ''. The report of the investi!ation is sent to the party which appointed him for the purpose of while the report of auditor is sent to the chairman of the company who places it before the shareholders. '(. The investi!ator is not concerned whether the financial policy of the company is bein! followed or not but the auditor has to state that fact. ,ii- Audit of %hare Ca"ita' + Knder ection ><, the share capital of a company limited shares formed after the commencement of the %ompanies Act or issued after such commencement of two types & ,'- 1)uity share capital, ,(@ 6reference share capital. The audit or share capital is necessary on incorporation afterwards as well as whenever the .irectors to increase that subscribed share capital. To verify capital newly issued the auditor should have the followin! points in view & ,'- Auditor should find out whether the permission re)uired under the law issue allotment of capital has been obtained or not. ,(- 6rospectus or statement in lieu of prospectus has been filed with the Ge!istrar. This is necessary in case of the first allotment of shares. It should be seen by the auditor that prospectus includes all the necessary details re)uired under the %ompany Act. 6rospectus should duly si!ned and dated by the .irectors of the company. Allotment of shares has been made as per the provisions of the %ompany Act. The auditor should examine the followin! books and do,'- 0emorandum and Articles of Association, ,(- 6rospectus, ,*- .irectors 0inute Box, ,+- Application and Allotment Book, ,;- %opies of Letter of Allotment, Ge!ret %alls, %alls Book, %ash Book, 6ass Book, hare Ge!ister etc. The auditor should verify shares issued for cash, discount, premium bonus, shares issued for consideration other than cash. ,iii- %hare Transfer Audit + It is part of an auditors duty to check the share transfer or share transaction in detail but mostly he is asked by the client to do so, he is paid on extra remuneration for conductin! share transfer audit. The ob"ects of share transfer audit are & ,'- To prevent clerical errors, and ,(- To prevent the improper issue of duplicate share certificates or certified transfers. The auditor should take the followin! steps for conduction share transfer audit. ,'- Auditor should examine the Articles of Association as to the procedure to be followed in case of transfer of shares.

,(- 2e should see that due notices have been !iven to all the transferors and if the application for re!istration has been made by the transferor and if the application of partly paid shares, the provisions of the %ompanies Act have been complied with. ,*- Auditor should check the transfer forms. ,+- 2e should examine and verify the si!natures of the transferor form their specimen si!nature on the ori!inal application forms or previous transfer deeds. ,;- It should be seen that none of the transferees is dis)ualified for holdin! shares in the company. ,<- Auditor should vouch the entries in the share transfer "ournal on the basis of transfer forms. ,=- 2e should inspect the 0inutes Books of the Board of .irectors to find out that transfer is duly approved by Board. ,>- 2e should check the transfer and postin!s made from the share transfer "ournal into share re!ister of members. cuments for the purpose of auditin! share capital & ,?- 2e should cancel the hold share certificates by a distinctive mark and specially verify the particulars entered on the center foils of certificates issued to the transferees. ,'@- 2e should confirm that a duplication certificate issued in place of the one lost or destroyed has been issued with the consent of the Board of .irectors. ,''- hare certificates are issued on prefixed forms. ,'(- Knused stock of share certificates is bein! kept under safe certificates. ,'*- Letter of indemnity should be examined in the absence of share certificates. ,'+- If shares mort!a!ed with some other companies are transferred, auditor should ensure that due notice have been !iven to mort!atees. ,';- Ge!ardin! Transmission of shares on the death or insolvency of shareholder, the auditor should make provision of articles, and all other necessary le!al formalities strictly complied with. ,'<- Auditor should see that transfer fee is duly received and credited to the 67L Account. ,vi- %tatutor* Audit ( The audit which the auditor performs prior to the statutory meetin! of company is called as 9 tatutory Audit.: Knder ection '<; of the %ompanies Act every %ompany Limited by shares and every company limited by !uarantee and havin! a share capital shall within a period, not less than one month or more than six months from the date at which the company is entitled to commence business, hold a !eneral meetin! of the member of the company shall be called the statutory meetin!. The Board of .irectors shall at least twenty one days before the day on which the meetin! is held, forward a report. This report is called statutory report. A copy of the statutory report is sent to every member of the company. The tatutory Geport state & ,'- The total number of shares allotted. ,(- The total amount of cash received. ,*- Abstract of the receipt and payments. D. .istin!uish between auditin! and investi!ation.

Ans. Auditin! and investi!ation $ Auditin! is different from investi!ation, which is an other si!nificant service, a professional accountant renders investi!ation is critical examination of account with a special purpose. FFInvesti!ation involves in)uiry in to facts, behind the books and account, into the technical financial and economic position of business or or!anisation.FF ,(,*,+,;,<,=,>Auditin# Auditin! of accounts is usually for one financial years. Investi!ated accounts are not further audited. The auditor is concerned only with a prima facie evidence. Auditin! can be carried out only by %hartered Accountants. Auditin! may be based on test checkin! or samplin!. Audit is conducted on behalf of shareholders or proprietors. Auditin! is carried out to see whether the balance sheet and profit and loss account show true and fair view statement of affairs and operatin! result respectively. ,',(,*,+,;,<,=Investi#ation Investifation covers several year say * to ; years. Audit of account are further investi!ated for some special purpose in law. Investi!ator looks for substantive evidence are also seen. Investi!ator may not be a %hartered Accountant. Investi!ation is a throu!h examination of books and account of a particular purpose. Investi!ation is usually carried out on be self out outsiders. Investi!ation is done for some specific purpose like ascertainin! earnin! capacity financial position of or!anisation on, extent of mismana!ement etc.

UNIT ; T=&.% O2 R.&ORT Q. >hat is Iua'ified re"ort$ Under hat circu!stances the auditor can Iua'if* the re"ort$ Ans. An auditor may !ive an opinion sub"ect to certain reservation. 2e is said to !iven a )ualified opinion which implies that the auditor state the financial statement reflects a true and fair view sub"ect to reservation. Therefore, an auditor may !ive him particulars ob"ections in the audit report and state. ub"ect to above, we conclude that the balance sheet show a 9True and fair view.: A )ualified report is one in which the matters referred to in ection ((= ,(- of the %ompanies Act are answered in ne!ative in full or in part and as a result, the auditor has state the reasons for such )ualifications or reservations. Before !ivin! any )ualifications the auditors should note the followin! & ,'- 4or which item is it necessary to )ualify his reportsE

,(- 3hether the auditor is not satisfied with a particular matter of the company, or he is unable to express his proper opinion on a particular matter in the absence of some ade)uate informationE ,*- 3hether certain matters are so important that they affect the true and fair presentation of the affairs of the companyE ,+- 3hether the matter relatin! to the )ualification is concerned with the violation of an important provision of the %ompanies Act. An auditor is expected to report to shareholder of the company the violations or contraventions of the provisions of the %ompanies Act and other rules relatin! to the workin! of the company. ome of the example are !iven below & ,a- Inade)uate or no provision of depreciation on assets. ,b- In correct valuation of stock trade. ,c- Insufficient provision for bad and doubtful debts. ,d- 3ron! treatment of a transaction in the accounts. ,e- Hon$receipt of the report on branch accounts not audited by the auditor. ,f- 6rovisions of le!al enactments of the different statutes are not adhere by the company. ubmission of )ualified report is a real challen!in! task. The auditor should carefully verify the provisions for depreciation, bad debts, valuation of assets, details and explanation called for and compliance of le!al provisions may compel the auditor to submit his )ualified report and subse)uently he should be prepared to face the conse)uences to prove his alle!ations. >here to !aBe the Iua'ification in the re"ort. Hormally, )ualification with reasons must from part of the auditors report itself. 3here the picture of the )ualification is such that it should properly be included in the notes to accounts, the auditor should make a represence to such a note in his report. 2ow to )ualify the Auditors GeportE The )ualification should not create !rounds for suspicion or en)uiry but must !ive full information. 2e should avoid unnecessary points of )ualification which do not contain real ob"ections. An auditor had in a difficult position while )ualifyin! his report because he persuaded by the mana!ement to soften or avoid the )ualified opinion from the report. They take the plea that it would be a!ainst the interest of the members of the company. But the auditor should not be led away by the persuasion and if he believes that the fact must be brou!ht to the notice of the shareholders, he must perform his duty and in mind that he is in the company to safe!uard the interests of the shareholders and should not act in a manner which may pre"udice and interests. %"eci!en of the auditors on Iua'ified re"ort. %"eci!en To The hareholders of '?.(, an!a Internation Ltd., Hew .elhi. I have audited the annexed Balance heet of '?.(, an!a International Ltd. as at *'st 0arch, (@@< and also the annexed 6rofit and Loss Account of the company for the year ended on that date and report that & '. I have obtained all the information and explanations which to the best of my knowled!e and belief were necessary for the purpose of audit.

(. In my opinion proper books of account as re)uired by law have been kept the company as it appears from my examination of the books. *. The Balance heet and 6rofit and Loss Account dealt with by this audit report are in a!reement with the books of account. +. ub"ect to the )ualifications !iven below in my opinion and to the best thereof my explanation !iven to me the accounts !ive information re)uired by the %ompanies Act. In the manner so re)uired and !ive a true and fair view. ,a- In the case of Balance heet the state of affairs of the company as on *' st 0arch, (@@< and, ,b- In the case of 6rofit and Loss Account of the profits of the company for the year ended on that date. ,c- The provision of depreciation on machinery is insufficient. ,d- Jaluation of stock is more by Gs.'@@@@. %dE6 Indu %in#h Chartered Accountant

D.

3hat is audit report. 3hat are its basic elementsE

Ans. Audit report $ The statutory auditor of a company has to express an opinion his report on the true and fair character of the balances of and the result show by profit and loss account. As per AA (>, the basic elements of an audit report are as follows & ,aTitle ,bAddress ,cIntroductory para!raph ,dcope para!raph ,e/pinion para!raph ,f.ate ,!6lace of si!nature ,hAuditorFs si!nature D. 3hat are the various types of audit reportE

Ans. Types of audit reports & ,'%lean report7Kn)ualified opinion $ An opinion is said to be un)ualified when the auditor concludes that the financial statements !ive a true and fair view in accordance with the financial reportin! from work used for the preparation and presentation of financial statements. Therefore, the auditors issues a clean report when he does not have any reservation in respect of matters contained on financial statements. A clean report indicates that $ ,aThe financial statements have been prepared usin! the !enerally accepted accountin! principles.

,b-

The financial statements comply with relevant statutory re)uirements and re!ulation. ,cThere is ade)uate disclosure of all material matters element to proper presentation of financial information. ,dAny chan!e in accountin! principles or in method of their application and the effects there of have been properly determined and disclosed in financial statements. ,(Dualified report $ Dualifies report is one when auditor does not !ive a clean chit about the truthfulness and fairness of the financial statements but makes certain reservation is !enerally stated as & FF ub"ect to the above we report that the balance sheet shows a true and fair viewOOO..FF All the )ualifications should be contained in auditorFs report. The notes accounts should not contain the opinion of auditors. The auditor should reproduce the notes which are sub"ect matters of )ualifications. o that the readerFs can properly appreciate the si!nificance of those )ualifications. It is also necessary that the auditors should )ualify, wherever possible the effect of individual )ualifications as well as the total effect of all )ualifications on profit and loss or on the state of affairs. It is not possible to )uantity the effect of )ualifications accurately. The auditors may do so on the basis of estimates made by mana!ements after carryin! out such audit tests as are possible and clearly indicate that fact that the fi!ures are based on the mana!ement estimates. A )ualified opinion should be expressed when auditor concludes that & ,aAn un)ualified opinion can not be expressed. ,bThe effect of any disa!reement with mana!ement is not so material as to re)uire an adverse opinion. ,cThe limitation on scope is not so material as to re)uire a disclaimer of opinion. 4ollowin! are some circumstances when )ualified report is obli!atory& If proper books of accounts have not been kept in accordance with law. If there is non compliance with accountin! standards. If auditor is unable to !ive all re)uired information and explanations. If balance sheet and profit and loss accounts are not in a!reement with books of account and returns. ,*.isclaimer of opinion $ A disclaimer of opinion is !iven when the auditor is unable to form an overall opinion about the matters contained in the financial statements. It may happen in situations such as & ,a3hen books of accounts of the company sei#ed by income tax authorities. ,b3hen scope of audit work is restricted.

The auditor will state that he is unable to express an opinion because he has not been able to obtain sufficient audit evidence to form an opinion. ,+Adverse of ne!ative opinion $ The auditor issues a ne!ative report when he is of the opinion that he does not a!ree with affirmation made in financial statements. An adverse opinion should be expressed when the effect of a disa!reement is so material and pervasive to the financial statements that the auditor concludes that )ualification of the report is not ade)uate to disclose the misleadin! or incomplete nature of the financial statements. Hote & 3henever auditor issues )ualified opinion, disclaimer of opinion or ne!ative report he should also state in his report the reasons for same, so that the reader can assess their si!nificance and effect. ,;6iecemeal opinion $ the auditor may in some cases find that the financial statements he has examined present only a partial ture and fair view. In such cases, he may report that is unable to express an opinion limited to certain items in the statements, within which he is satisfied. In such a situation he will deliver the piecemeal opinion. As the matters su!!ests, the auditor !ives a divided opinion on matters with which he is satisfied and with which he is not. D. Ans. '. Audit Re"ort An audit report is an expression of opinion on the true and fair view presented by financial statements. The term audit report is used when the auditor express his opinion on the financial statements. Auditor is responsible for ensurin! that report based on factual data. '. Audit CertificateJ %ertificate is a written of the occur or if of the facts stated there in and does not involve any estimate of opinion. %ertificate is used when auditor verifies certain exact fi!ures, e.!. value of import or export of a company. Auditor is responsible for factual accuracy of what is stated there in. .istin!uish between audit report and audit certificate.

(.

(.

*.

*.

D.

3hat are the re)uirements of audit reports as per I%AI.

Ans. %ompliance with documents issued by I%AI $ Auditor will ensure the compliance with various statements and !uidance notes issued by I%AI. 3hile attestin! any matter, it will be the duty of member of I%AI to & ,a1nsure compliance with statements in re!ard to accountin! matters and to make ade)uate disclosures in their audit reports so that the users of financial statements may be aware of any deviations.

1nsure that statements relatin! to auditin! matters are followed in the audit of financial information covered by their reports. 2e material departures there from. i!nin! of audit report $ As per ections ((? of %ompanies Act, only the person appointed as the auditor of the company, or where a firm is so appointed, only a partner in the firm practicin! in India may si!n the auditorFs report or authenticate any other document of the company re)uired by law to si!ned or authenticated by the auditor. In case of a firm, the si!nin! or authentication may be done as follows& 4or PQR S %o. %hartered Accountants d7$ ,Hame of the partnerFsIn the case of the proprietary concern, si!nin! or authentication will be as follows & 4or AB% S %o. %hartered Accountants d7$ ,Hame of the 0ember6roprietor. As per ection (**, non$complaince with the provisions of ection ((? shall attract a maximum fine of Gs. '@@@@, if the default is willful. It was held that the duty of auditor after havin! si!ned the report annexed to a balance sheet is confined only to the forwardin! that report to the secretary of the company. It will be for the secretary or the directors to convince a !eneral meetin! and send the balance sheet and the report to the members or other re)uired persons entitled to receive it. ,Allen %rai! S %o.,London Ltd.The report of auditor must be read before the shareholders of the company is !eneral meetin! and should be kept open for the inspection of every member of the company. 4or non$compliance with any of the re)uirements of ection ((; to ection (*', the company and every officer of company who is in default will be liable to a fine which may extend up to Gs. ;@@@. D. 3rite a note on statutory reports.

,b-

Ans. tatutory report $ tatutory audit of public company implies the audit of the transactions of the company which are the sub"ect matter of the report under section

'<;,+-. The auditor has to certify as correct that part of the statutory report, which relates to& ,ahares allowed by the company. ,b%ash received in respect of such shares. ,c/ther receipts and payments of the company. Knder ection '<;,+- the auditor shall certify as correct an abstract of receipts and payments made up to a date within = days of the report exhibitin! under the distinctive heads, receipts of the company from shares7debentures and other sopurces, payments made and balance left in hand. The auditor must & ,a1xamine the internal check with re!ard to control over amounts collected. ,btudy the 0/A, A/A and prospectus for ascertainin! the amounts of and authorised capital terms of issue, underwritin! commission shares a!reed to be issued for consideration on other than cash etc. In addition to above followin! matters also deserve attention of auditor for statutory report & ,a,b,c,dD. 0inutes book %ash book Bank statements 5eneral lad!er

3rite a note on %AG/, (@@*.

Ans. %ompanies ,AuditorFs Geport /rder- (@@* $ It shall apply to every company includin! a forei!n company execept the followin! & ,aBankin! company as defined under Bankin! Ge!ulation Act,'?+?. ,bInsurance company as defined /7 (,('-. ,c%ompanies mentioned K7s (; of the %ompanies Act,'?;<. ,dA private limited company sub"ect to the followin!& '. A!!re!ate of paid$up capital and reserves should not be more than Gs. ;@ lakhs. (. There should be no public deposits acceptances. *. Amount of loan outstadin! should not be mor than Gs. '@ lakhs from any bank or financial institution. +. Turnover should not be more than Gs. ; crores. Auditor will have to report on the followin! matters& ,a4ixed assets & '. 3hether the company is maintainin! proper records to fixed assets. (. 3hether assets have been physically verified and whether disposal of fixed assets affects the !oin! concern. ,bInventories &

'. (. TcU '.

(. ,d,e-

,f-

,!,h,i,",k,l,m

3hether physical verification of conducted at re!ular intervals. 3hether the company is maintainin! proper records of inventories. Loans & 3hether the company has taken or !iven any loans ,secured or unsecured- from to the companies firms, firms and other parties covered K7s *@' & the maximum amount involved durin! the year should not be more than Gs. (@ crores. If overdue amount is more not is more than Gs. ' lakh, whether the company has taken reasonable steps for recovery. Are there ade)uate internal control procedures for the purpose of inventory, fixed assets and with re!ard to sale of !oods and services. Internal audit $ 2avin! re!ard to their si#e re!ard to their si#e and nature of the business, the auditor should report whether or not the followin! companies have an internal system& '. Listed companies. (. %ompanies havin! paid$up capital and reserves exceedin! Gs. ;@ lakhs as at the commencement of the financial year concerned. *. %ompanies havin! an avera!e over exceedin! Gs. ; crores for a period of three consecutive financial years immediately prededin! the financial year concerned. 3hether the provisions of sections ;>$A, ;>$AA or any other relevant provisions of the act and %ompanies ,Acceptance of .eposits- Gules, '?=; have been complied whth re!ard to the deposits accepted from public. 3hether any order has been passed by %ompany Law Board, Hational %ompany Law Tribunal, GBI or any other court. 3hether cost records have been made and maintained, if prescribed by %entral 5overnment K7s (@?,'- of the act. 3hether the company has defaulted in repayment of dues to a financial institution or bank or debentureholders. 3hether ade)uate records have been maintained !rantin! of loans and advances on the basis of the security. Terms loans were applied for the purpose for which the loans were obtained. 3hether the funds raised on short term basis have been used for lon! term investments except permanent workin! capital. 3hether or not securities or char!es have been created in respect of debentures issued. 0oney raised by public issue & 3hether the mana!ement has disclosed on the end, use of money raised by public issuesE 3hether the end use of money raised from public issues is capable or bein! determinedE If not, state the reason.

3hether the end use of money disclosed the financial statements by a way of note is si!nificantly different from the actual end useE 1xamine the various documents submitted to 1BI and also examine the report of Board of .irectors to find out whether the funds have been utili#ed for the purpose for with they were raised. In case of a listed company where the issue si#e is more than Gs. ;@@ crores ensure monitorin! a!ency is appointed. ,n3hether any fraud on or by the company has been noticed or reported durin! the year, if yes, the nature and amount involved is to be indicated. Gevision Assi!nments & ,',(3hat are the reportin! re)uirements in companies ,Auditor Geport /rder in respect of money raised by public issuesE ,Hov. (@@;-. 3hat cate!ories of companies are specifically exempted from the application of %AG/E ,0ay (@@;-.