UNIT IINTRODUCTION

Economic decisions in every society must be based upon the information available at the time the decision is made. If the decisions are to be consistent with the intention of the decision makers, the information used in the decision process must be reliable. Unreliable information can cause inefficient use of resources to the decision makers. As a means of overcoming the problem of unreliable information, the decision-maker must develop a method of assuring him that the information is sufficiently reliable for these decisions.

A common way to obtain such reliable information is to have some type of verification (audit) performed by independent person. The audited information is then used in the decision making process on the assumption that it is reasonably complete, accurate and unbiased.

Q. EXPLAIN THE ORIGIN OF AUDITING. The term audit is derived from the Latin word “audire” which literally means “to hear”. Originally the

accounting parties were required to attend before the auditor who heard their accounts. Auditing as it exists today can be associated with the introduction of large scale production following the industrial revolution during the 18th century. This revolution led to a great increase in the volume of trading operations which also required substantial capital investment. Individual business houses were not in a position to provide necessary finance because of their limited financial and credit resources. Further, the discovery of steam power, development in the means of transport and communications, the expansion of banking facilities and mechanical inventions also made it inevitable for businessmen to adopt some other forms of business organizations and management.

MEANING OF AUDITQ. WHAT DO YOU MEAN BY AUDITING?

An audit is a systematic and independent examination of books of account, statutory records, documents and vouchers of an organization to ascertain how far the financial statements as well as non-financial discloser present a true and fair view of the concern. It also attempts to ensure that the books of accounts are properly maintained by the concern as required by law.

DEFINITION OF AUDIT

Q. DEFINE “AUDIT”.1. According to Lawrence R Dicksee “An audit is an examination of accounting records undertaken with a

view to establishing whether they correctly and completely reflect the transactions to which they purport to relate”.

2. According to A W Hanson “an audit is an examination of such records to establish their reliability of statements drawn from them.

FEATURES OF AUDITINGQ. WHAT ARE THE FEATURES OF AUDITING? Auditing is a systematic and scientific examination of the books of accounts of a business Audit is undertaken by an independent person or body of persons who are duly qualified for the job Audit is a verification of the results shown by the profit and loss account and the state of affairs as shown

by the balance sheet Audit is a critical review of the system of accounting and internal control Audit is done with the help of vouchers, documents, information and explanations received from the

authorities. The auditor has to satisfy himself with the authenticity of the financial statements and report that they

exhibit a true and fair view of the state of affairs of the concern. The auditor has to inspect, compare, check, review, scrutinize the vouchers supporting the transactions

and examine correspondence, minute books of share holders, directors, Memorandum of Association and Articles of Association etc., in order to establish correctness of the books of accounts.

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NATURE OF AUDITINGQ. WHAT IS THE NATURE OF AUDITING? An audit is a systematic examination of books accounts documents an voucher of a business with a view

to determine the accuracy and reliability of accounting statements. Auditing is analytical critical and investigative. An auditor is required to direct efforts towards proving and establishing the authenticity of the

transactions by vouching all the relevant documentary evidence at his disposal. Auditing does not mean the preparation of accounts. Auditing to verify the valuation of assets and liabilities.

FUNCTIONS OF AUDITINGQ. WHAT ARE THE FUNCTIONS OF AUDITING? Reviewing systems and procedures of business. Examine documentary evidence to establish the accuracy of recorded transaction. Reviewing the system of accounting and internal control. To verify the valuation of assets and liabilities. To examine the mathematical accuracy of accounting statements. To verify the distinction between capital and revenue items.

Q. DISCUSS THE OBJECTS OF AUDIT.OBJECTS OF AN AUDIT

I. Main objective II. Secondary objective III. Specific object

Expression of expert opinion Detection and prevention of

Errors Frauds

Clerical errors Error of principle Compensating error Error of duplication

Embezzlement of cash misappropriation of goods fraudulent manipulation

Errors of omission Errors of commission

Partial omission complete ommission Main objective

1. Expression of expert opinion: The main objective of an audit is to express opinion on financial statement. These financial statements are submitted to the auditor for his checking and comments. The auditor checks them in a careful manner with utmost diligence and professional competence.

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2. The auditor’s opinion enhances the credibility of financial statement by providing high, but not absolute assurance.

3. The auditors provide a moderate level of assurance that information is subject to review, and this expressed in the form of negative assurance.

Secondary objectiveDetection and prevention of errors:

Errors are generally innocent but sometimes errors which might appear at first sight as innocent are ultimately found to be due to fraudulent manipulation and therefore an auditor must pay particular attention to every error. The following are the types of errors1. Clerical errors: These errors are committed in posting totaling and balancing. Such errors may be divided in to

Errors of omission: error of omission is one where a transaction has not been recorded in the books of account either wholly or partially. In the former case it will not be easy to detect the error and it will not affect the trial balance.

Errors of commission: when a transaction has been recorded but has been wrongly entered in the books of original entry in the ledger, error of commission is said to have made. The underlying idea may be to mis-appropriate cash in league with the seller of the goods; therefore vouching should be done very carefully.

2. Errors of principleThis kind of mistakes occurs due to improper application of principle of double entry system. Such errors

arise when the entries are not recorded according to the fundamental principles of accounting.3. Compensating errors or off setting errors

A compensating error is one which is counter balanced by any other errors. An over casting of an account may be counter balanced by the under casting of another account to the same extent. Eg. If Anbu account was debited for Rs.10000 but was debited for Rs.1000.4. Errors of duplication

These errors arise when an entry in a book of original entry has been made twice and has also posted twice.

SCOPE OF AUDITQ. EXPLAIN THE SCOPE OF AUDIT?

The increased complexity of modern trade and commerce has greatly widened the scope of auditors operations and calls for a higher degree of skill and experience.

The change of objectives from the detection of frauds to determination of fairness of financial statements.

The responsibility of the auditor for the income statement as well as balance sheet. Increased responsibility of the auditor to third parties such as Government agencies, stock exchanges

and investing public numbering lakhs of people. The change of auditing methods from detailed examination of individual transaction to use of sampling

techniques. Recognition of the need to evaluate the system of internal control as a guide to the direction and amount

of testing and sampling to be performed. The development of new auditing procedures applicable to electronic data processing systems and used

of computers as an audit tool.DIFFERENCE BETWEEN AUDITING AND ACCOUNTING

Q. DISTINGUISH BETWEEN AUDITING AND ACCOUNTING. Basis of difference Accountancy Auditing

Scope Accountancy refers to the preparation of final accounts and its interpretation

Auditing refers to examination and checking of these accounting records.

Nature It is primarily constructive and concerned with current recording of business facts.

It is analytical in nature and essentially retrospective.

ObjectsThe main objective of account is to ascertain the trading result of a business concern during a financial year.

The objective of auditing is to certify the correctness and justification of the financial statements prepared by the accountant.

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Qualification An accountant need not be a chartered account.

An auditor must be a charted accountant.

CommencementWhen book keeping records are completed they become avoidable for the beginning of work of accountancy.

The work of auditing starts only when the work of accountancy has been completed.

Knowledge An accountant need not to be expert in the work of auditing.

An auditor must have the thorough knowledge of principles of accountancy otherwise he cannot perform his job satisfactorily.

Duration Accounting work is undertaken throughout the year.

Auditing is generally done at the end of financial year.

Status An account is permanent employee of the business concern.

An auditor is not a permanent employee of the concern. He may be changed from year to year.

ReportAn accountant is not required to submit report to the proprietor of the concern when the accounting work is over.

An auditor is required to submit the report to the proprietor after the completion of his audit work.

BOOK KEEPING VS AUDITINGQ: DIFFERENTIATE BOOK KEEPING AND AUDITING.

Book Keeping AuditingBook keeping is concerned with recording business transaction Auditing is concerned with examination of accounts

It is a routine work. This is a difficult task.This does by a clerk or junior accountant. This is done by an auditorThere is no prescribed qualification for a book keeper. This is prescribed qualification for an auditor

This is done throughout the year. This is done at the end of the year.It has nothing to do with detection of errors. The main essence is detection of errors and fraud.

Q: EXPLAIN IN DETAIL THE TYPES OR KINDS OR CLASSIFICATION OF AUDIT.TYPES OR KINDS OR CLASSIFICATION OF AUDIT

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Based on organizational structure

Based on conduct of audit

1. Statutory audit.2. Private audit.3. Government audit.4. Internal audit.

1. Continuous audit.2. Periodical audit.3. Balance sheet audit.4. Complete audit.5. Partial audit.6. Interim Audit7. Detailed Audit8. Propriety audit.9. Performance audit.10. Cost audit.11. Management audit.

A. Classification according to organizational structure of businessDifferent types of audit on this basis may be classified into the following heads.

1. Statutory AuditThose companies which are created and controlled by Central or state legislature are require compulsory

audit, such audit is called “Statutory Audit”. The person who examines the books of these organizations is called “Statutory Auditor”.In India the audit of the following institutions has been made compulsory.

a. Joint stock companies, registered under the companies Act 1956.b. Banking companies regulated under banking companies (Regulation) act of 1949.c. Insurance companies governed by Insurance act 1938.d. Co-operative societies registered under the co-operative societies Act 1912. e. Public and charitable trusts registered under various religious and endowment acts.f. Public corporations formed under special Acts.

2. Private AuditThe private institutions also get their accounts audited by some qualified auditors. Such an audit is not

required by statute. Hence it is called private audit. These bodies have their own interest. So that their accounts a. May be subject to a close scrutiny to be made by a professional accountant. There may be following

three types of such institutions. b. Audit of the accounts of sole traders.c. Audit of the accounts of partnership firms.d. Audit of the accounts of other individual and institutions.

3. Government AuditGovernment audit is applicable to the government departments and departmental undertakings. It is

divided into several branches like Defense, Railways, and Postal and telegraphs audit.4. Internal Audit

Internal audit is a continuous and systematic process of examining and reporting the operations and records of a concern by it’s the operations and record of a concern by its employees selected specially for this purpose. It is one of the functions of management. It performs the functions of both the protective controls and the operational controls.

B. Classification according to practical point of viewFrom practical point of view, we may classify audit into the following clauses.

1. Continuous Audit It implies a detailed examination of all the transactions by the auditor continuous by throughout the year.

At the end of financial period the auditor checks the financial accounts continuous audit is also called running audit or detailed audit. Such audit is of immense help to the bigger concerns.2. Annual (or) Periodical (or) Final (or) Completed Audit

Annual (or) Periodical audit is done at the close of the financial (or) trading period when final accounts are prepared. In such a case, the auditor visits his client only once in a year and checks the accounts in one visit till he is not in a position to cover the accounts pertaining to the whole of the period. 3. Balance sheet audit

Balance sheet audit consists mainly of the verification of each of the items in the balance sheet. Naturally the verification of each item in the balance sheet leads to complete examination of the different items of expenditures and their allocation into capital and revenue. This type of audit may prove effective in big companies having a good internal control system and internal audit department controlled by qualified accountants.4. Complete Audit

Complete audit means an audit in which all the transactions recorded in the books of accounts are audited thoroughly. In this system a detailed checking is done. In complete audit, no entry source, total, balance etc., is left unchecked, but complete audit is neither practicable nor feasible.5. Partial Audit

When audit is conducted on some of the records and books of a part or whole of the period, it is known as partial audit. It may relate to some part of the work for some or whole of the trading period. Partial audit is not practicable again.

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6. Interim Audit Interim Audit implies carrying out of audit work at any time during the year or in the middle of

financial year in order to find out the interim profit and loss of the concern. In case of interim audit accounting records up to a certain date only are checked. An example of interim audit is that the directors of a company may desire to declare interim dividends or bonus when first half year is over. It is thus conducted between the two periodical audits.7. Detailed audit

It is a bit different from complete audit. When in complete audit all the books and records are completely checked detailed audit involves detailed and through scrutiny, but not complete. Detailed work is thorough, of course but not complete in the strict sense of the term. Therefore detailed audit is some what limited. Detailed checking may be done through applying test checking.8. Property Audit

The propriety audit is confined to examine the validity of appropriations or is concerned with verifying that there is no leakages of revenue and wastage of funds knowingly or unknowingly is disregard of any legal requirements or financial (or) economic consideration while the performance audit is a procedure for analyzing the profits and losses, of economic activities carried on by the business enterprises, examining the relationship between production and sales and discovering the avenues for maximizing profits.9. Cost Audit

It implies through checking of cost accounting records of a company. Cost audit is the verification of the correctness of cost accounts. In cost audit the cost auditor is mainly concerned with the audit of cost accounts thoroughly.10. Management Audit

Management audit implies thorough examination of all aspects of management concerning a business. In management audit the auditor goes through the planning, organization, co-ordination and control of the concern and management audit. It is an audit to examine, review and appraise the various policies and actions of management of the basis of objective standards.11. Performance Audit

Performance audit is a procedure for analyzing the profit and loss of economic activities carried on by the business enterprises examining the relationship between production and sales and discovering the avenues for maximizing profit.

CONTINUOUS AUDIT VS PERIODICAL AUDITQ: DIFFERENTIATE CONTINUOUS AUDIT AND PERIODICAL AUDIT.

Continuous Audit Periodical AuditThe auditor’s staff visits and checks the accounts frequently.

The auditors staff visits the business only once in a year after the accounts are closed.

The client’s staff becomes more efficient and regular.

It may not be so because client’s staff knows that audit work will commence only after the close of financial year.

Continuous audit comes to an end with close of accounting period Periodical audit commences after the accounts are closed.

Immediately after the transaction is recorded, audit staff checks and verifies it.

Audit staff checks and verifies the transaction after it is recorded.

It is very expensive It is economical

CONTINUOUS AUDIT VS BALANCE SHEET AUDITQ: DISTINGUISH CONTINUOUS AUDIT AND BALANCE SHEET AUDIT.

Continuous audit Balance Sheet auditIn continuous audit, the auditor or his staff is constantly engaged in checking the account during the whole period.

In balance sheet, audit the auditor attends only at the end of financial period.

Detailed and extensive checking of accounts is done. The work is not done in so much detail.

This is done in case of big business concerns This type of audit is recommended for small business concern.

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It involves more expenses. It is comparatively cheap.It creates more check upon the clients’ staff. The moral check upon the clients staff is comparatively lesserIt is used in England, In India continuous audit is largely used in banks, railways etc. Balance sheet audit is more popular in America.

CONTINUOUS AUDIT VS INTERIM AUDITQ: DIFFERENTIATE CONTINUOUS AUDIT & INTERIM AUDIT.

Basis Continuous Audit Interim audit

ObjectThe object of continuous audit is to provide audited final accounts just after the close of a accounting year

It has a limited purpose it is to audit entire figures of sales expenses and profit

Verification Verification is done through out one year

Verification of assets and liabilities done in interim audit also verified the same at final audit

Statements It is not necessary to prepare final statements periodically The final statements are prepared periodically

Trial Balance It is not prepared It is specifically preparedPeriod It covers the whole accounting year It differs upon the situations.

COMPANY AUDIT VS PARTNERSHIP FIRMS AUDITQ: DIFFERENTIATE COMPANY AUDIT VS PARTNERSHIP FIRMS AUDIT.

Company audit Partnership Firms auditThe audit of company has been made compulsory by Indian act, 1956. The audit of firm has not been made compulsory.

The appointment of auditor is made by the shareholders in general according to the provisions of the act and according to the decision of court

The appointment of auditor is made by an agreement between the partners

The audit work is carried on according to the provision of companies act , decision of court.

The audit work is carried on according to the instructions of employer and partnership deed.

The auditor must be a charted accountant. The auditor needs not to posses any professional qualification.

It is necessary to give full knowledge about the memorandum and articles of the company to the auditors

It is not necessary to present the partnership deed before the auditor.

The auditor has to report to the members of company The auditor has to report to the partners of the firm.

The liability of the auditor becomes double one other under common law and the other under companies act

The auditor is liable only for negligence and not for misfeasance.

CONTINUOUS AUDIT VS INTERNAL AUDITQ: DIFFERENTIATE CONTINUOUS AUDIT & INTERNAL AUDIT.

Continuous audit Internal auditThe object is to present the correct and fair financial statements of the concern to the shareholders.

The object is to fulfill the needs of management.

It involves a detailed examination of all the transactions at regular intervals. It is carried on continuously throughout the year.

It is an independent examination work. It is a integral part of existing internal control system in the concern.

Continuous audit is done by an independent and professional auditor. Internal auditor is the employees of the concern itself.

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The auditors must be a charted accountant. The auditors need not to posses the professional qualification.

The auditors are responsible to shareholders. The auditor is responsible to managerAuditor report is submitted at the end of the financial year. There is no question of submitting the report.

ADVANTAGES OF AUDITINGQ. DISCUSS ADVANTAGES OF AUDITING.

I. For the owners of business: Greater reliability on the financial statements Improvement in the efficiency with consequential increase in the overall profitability In case of a proprietary concern, audited statement of accounts provide a proof that all business

transactions have been duly accounted for and there are no errors or fraud. In case of a partnership firm it serves as an evidence of proper management of the affairs of

business. Such accounts are also of great help in settlement of accounts in case of admission, retirement or death of partner.

In a join stock company, the shareholders rely on the audited statements of accounts to satisfy themselves that the affairs of the company are being run in an efficient manner and there is no miss utilization of shareholders funds.

In case of co-operative societies, trusts etc, it serves as an evidence that the interest of the beneficiaries and members are being properly looked after.

II. Advantages to the management Easy dealing with third parties like banks, creditors, financial institutions and insurance companies

due to credibility of the financial statements which are audited. In ensure compliance with legal requirements.

Efficient use of resources through identification of inefficiencies leading to remedial measures. It acts as a moral check on the employees improves management control It creates greater confidence of owners in managements integrity

III. Advantages to employees, investors and creditors It provides a reliable base for taking investment, credit and other decisions It safeguards the interest of the employees and workers because audited accounts are useful for

settling trade disputes. Ex. Hike in wages or to get higher bonus. Long term and short term creditors can rely on audited accounts while taking decisions to grant credit

to business concern IV. For Government

For determination of liability under sales tax, income tax etc. tax authorities can rely upon the audited statements of accounts

Audited statement of accounts can serve the purpose for taking policy decisions like price fixation, grant of subsidies, reduction of tax rates etc.

Audited accounts can be produced in the court to provide an evidence V. For others

Audited accounts can be used by insurance companies to settle the claims arising on account of loss by fire

In case of amalgamation and absorption the purchasing company can calculate procedure consideration on the basis of audited accounts.

LIMITATIONS OF AUDITINGQ. DISCUSS THE LIMITATIONS OF AUDITING.1. Postmortem of accounts

Auditing is a post-mortem examination of accounts. Auditing begins where accountancy ends which means auditor is no where around when the accounts are prepared and finalized. Therefore, it may not be possible for him to discover manipulations or fraud in the books of accounts at the preparatory stage.2. Audit may not provide complete picture

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Some times the auditor has to depend on explanations, clarifications and information from staff and client. Authenticity of such information is always open to question, if the personnel so providing it have themselves been a party to the manipulation of books of accounts. As a result, the audited statements may not reveal the correct or complete picture.

3. Qualitative aspects ignored.Auditing as a practical subject mainly deals with procedures and tecxhniques of checking, ticking,

totaling, vouching etc. As a result several aspects such as business ethics managerial efficiency and effectiveness are ignored. In such circumstance, it can hardly be expected to do justice to its objects.4. Inadequate external evidence

Auditor has to seek opinion of experts on certain matters on which he may not have expert’s knowledge. For example, the valuer of the assets might go wrong in valuing an asset might go wrong in valuing as asset. In such a case, even audited accounts may lack authenticity.5. Formation of faulty jugement

The auditor’s judgement in relation to correctness and fairness of the propositions in the books of accounts is based on evaluation and critical review of the evidence collected by him through appropriate audit techniques. However, sometimes his personal opinion might could his sense of judgement so that his report not supported by relevant material evidence.

MEANING OF AUDITORQ: WHO IS AN AUDITOR?

The person doing the audit and who is ultimately responsible for the results of the audit is called Auditor. Auditor multiplies his hand through employing the assistants for doing the work. Still, he alone is responsible for what he does and others do for him.

QUALITIES OF AN AUDITORQ: EXPLAIN THE QUALITIES OF AN AUDITOR. Besides professional or statutory qualification on auditor must possess certain general qualities

Knowledge of accountancy: An auditor should know completely and thoroughly the principles of accountancy and book keeping as he is required basically to check and verify the accounts kept under different systems of book-keeping in different business.

Knowledge of commercial laws: The auditor should have considerable knowledge or the companies act and offer commercial laws related to the functioning of the company. It undertakings is governed by special statute, its knowledge will be necessary.

Tactfulness: Incase where some technical information has not been disclosed the auditor should tactfully extract that information from his clients so that he is in a position to criticize and present the true facts before those to whom he is responsible.

Honest: The auditor should possess high moral standards. In the words of Lord Justice Lindley “An auditor must be honest-that is he must not certify what he does not believe to be true and he must take reasonable care and skill before he believes that what he certifies is true.

Impartiality: An auditor should be impartial and must not be influenced by others in the discharge of his responsibilities. He must have the courage to carry out his duties most cheerfully and conscientiously.

Patience: An auditor should carry out his work patiently and in any cause he should not sign any document, in a hurry, without any evidences to that effect or on an express or implied promise to provide evidences in meantime.

Vigilance: The auditor must be vigilant as his function is to detect the errors and frauds of others. He would not be able to perform these duties properly unless he remains vigilant and alert.

Communication: An auditor should be able to communicate effectively both orally and in writing, particularly in the matter of report writing. He should be able to convey his message clearly, concisely, and precisely.

Responsibility: Public confidence in the auditing profession comes from high standards of performance and a high sense of responsibility to the public interest. In both action and behavior the auditor should display a great sense of responsibility.

UNIT II8

MEANING OF INTERNAL CONTROLQ. WHAT DO YOU MEAN BY INTERNAL CONTROL?

Internal control means the whole system of control established by the management to ensure the efficient and economic functioning of the organization and it incorporates, administrative, accounting and financial controls.

DEFINITION OF INTERNAL CONTROLQ. DEFINE INTERNAL CONTROL.

Spicer & Peglar defines the system of internal control as “Internal control is best regarded as the whole system of controls, financial and otherwise, established by the management in the conduct of a business including internal check, internal audit and other forms of control”.

OBJECTIVES OF INTERNAL CONTROLQ. WHAT ARE THE OBJECTIVES OF INTERNAL CONTROL?

According to SAP – 6, issued by the Institute of Chartered Accountants of India, Internal Control accomplishes the following objectives:

To ensure that transactions are executed in accordance with management’s general or specific authorization.

To ensure that all transactions are promptly recorded with correct amount in the appropriate accounts. To ensure that the transactions are properly classified and valued. To ensure that the recorded assets are compared with the existing assets at regular intervals.

TYPES OR FORMS OF INTERNAL CONTROLQ. EXPLAIN THE VARIOUS TYPES (OR) FORMS OF INTERNAL CONTROL?

The definition of internal control given by the American Institute of Certified Public Accountants (AICPA) mentioned earlier, indicates that internal control goes beyond the accounting functions of the organization and incorporates both accounting and administrative controls1. Accounting Controls

Accounting control comprises the following Budgeting control Standard costing Internal check Internal audit Bank reconciliation Self balancing ledgers etc.

2. Administrative ControlsAdministrative control comprises the following Time studies Motion studies Quality control Performance appraisal Statistical analysis etc.

FEATURES OF INTERNAL CONTROLQ. WHAT ARE THE FEATURES OF INTERNAL CONTROL?

A clean plan of the organization establishing the line of authority and responsibility and proper division of work.

A well organized and adequate accounting structure with well laid down rules, procedures and policies. Men of ability and experience to execute the work well. Proper system of reporting and communication from lower level management to top management.

ADVANTAGES OF INTERNAL CONTROLQ. WHAT ARE THE ADVANTAGES OF INTERNAL CONTROL?

The following advantages of internal control system are Minimize occurrence frauds and errors or any other irregularity if not eliminates completely. Safeguards assets against any misuse. Promotes operational efficiency and prevents wastages Judges operating efficiency and highlights weaknesses Assures a high degree of accuracy.

LIMITATIONS OF INTERNAL CONTROL

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Q. WHAT ARE THE LIMITATIONS OF INTERNAL CONTROL? Internal control can offer only reasonable assurance that management objectives are reached. This is

because of certain inherent limitations laid down as under: A control must be cost effective. The cost of the control procedure cannot be loss due to fraud or error. Most of the controls are directed to anticipate usual type of transactions and not of unusual type.

Therefore transactions of unusual nature may not fall within the purview of internal control. The employee of the collusion with others in the business unit or with third parties may find out

circumstances of controls. The effectiveness of the system is always affected due misunderstanding of instructions. So much to the

human weaknesses tone down the effectiveness of internal control system. The effectiveness of controls largely depends on the persons who implement them. If the persons

responsible for exercising controls abuse the responsibility of the control system may not have any impact on the normal working of the business.

The changing circumstances in business environment may cause inadequate in procedural conduct of business and thereby compliance with procedures may became difficult or deteriorate.

SCOPE/AREA FOR INTERNAL CONTROLQ. EXPLAIN THE SCOPE/AREA FOR INTERNAL CONTROL. The scope of internal control extends beyond the accounting controls and includes all operational controls as

Quality control Budgeting control Work standards Periodic reporting Internal check and Internal audit.

METHODS / TECHNIQUES FOR EVALUATION OF INTERNAL CONTROL SYSTEMQ. WHAT ARE THE METHODS / TECHNIQUES FOR EVALUATION OF INTERNAL CONTROL SYSTEM?1. Oral Approach: Oral discussion is held to identify strengths and weaknesses.2. Memorandum Approach: Full notes are taken during discussions governing evaluation of internal controls. Analysis of weaknesses is undertaken and suggestions are offered through management letter for improvement.3. Internal Control Questionnaire (ICQ): An ICQ consists of questions in respect of each element of business. Answers are obtained as ‘yes’ or ‘no’ ‘not applicable’. Remarks column is used for raising questions and/or identifying weaknesses of the existing internal control system. The questionnaire is filled in by the auditor and to be answered by the officers of the company, he should interview them for this propose. 4. Flow Charts: Flow charts are a graphic representation of a system in use. It depicts the various operations control measures and steps included in a system through graphic symbols.

INTERNAL CHECKMEANING OF INTERNAL CHECK

Q. WHAT IS INTERNAL CHECK?Internal check means arrangement of accounting system in such a way that the work performed by one

person is automatically checked by another person, the object being prevention an early detection of errors and frauds and to ensure accuracy.

DEFINITION OF INTERNAL CHECKQ. DEFINE INTERNAL CHECK.

In the words of De Paula: an internal check means practically a continuous internal audit carried on by the staff itself, by means of which the work of each individuals is independently checked by other members of the staff.

OBJECTIVES OF INTERNAL CHECKQ. WHAT ARE THE OBJECTIVES OF INTERNAL CHECK?

To exercise moral pressure over staff. To ensure that the accounting system produces reliable and adequate information. To provide protection to the resources of the business against fraud, carelessness and inefficiency. To distribute the work in such a manner that no business transaction is left unrecorded.

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To allocate duties and responsibilities of each clerk in such way that he may be held responsible for particular fraud or error.

To minimize the chances of errors, frauds or irregularities in the business. To improve overall efficiency of the staff by allocating duties on the basis of principles of division work.

FEATURES OF GOOD INTERNAL CHECK SYSTEMQ. WHAT ARE FEATURES OF INTERNAL CHECK SYSTEM?

The features of a good internal check system are mentioned below: Fixed Responsibility:

Responsibility of each individual must be properly defined and fixed. There should be a schedule of duties of every employee.

Division of Work:There should be a proper division of responsibilities on the members of the staff.

Standard forms:There should be standard ruling and arrangement of forms and accounting records with numbering etc.

Appointment of educated and trained persons:The persons to be appointed should be educated and trained. If the appointment persons are trained they

can be made efficient through training. Appointment of honest persons:

The persons to be appointed should be honest should not be appointed on the basis of approach can nature.

Rotation of employees:Where employees are in large number, there should be internal transfer of the members of staff from

time to time from one department to another. Separation of accounting and control:

No person should be able to establish accountability over his own operations. Safeguard:

An adequate safeguard should prescribe to key unused receipt, check books, files, bills etc., to avoid their misuse.

Flexible:It should be flexible so that it may be changed according to the changing requirements of the concern.

Proper use of assets:Proper use of assets be ensured and all unauthorized use should be prevented.

Filling System:There should be proper filing system to file all the letters, documents, vouchers etc.,

Reviews:The system of internal check should be reviewed from time to time so that the improvements may be

introduced.MERITS OF INTERNAL CHECK

Q. EXPLAIN THE MERITS OF INTERNAL CHECK? The main advantages or merits of internal check are listed below:

1. Moral influence on employeesSystem of internal check puts moral check on members of staff and enables them to learn honesty,

hard work and straight forwardness.2. Less possibility of frauds

There is a less possibility of frauds under the system of internal check because errors and frauds can be detected at an early stage.

3. Increase in efficiencyThe system of internal check ensures greater efficiency and speed because the arrangement of internal

check is based on division of labour.4. Auditing made easy

The system of internal check facilitates the work of auditor to a great extent by enabling him to rely on test checking.

5. Final accounts can be preparedIn internal check system profit and loss account and balance sheet is prepared without any loss of time.

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6. Test checking possibilityIf the auditor finds the system of internal check satisfactory then by taking into mind its defects or

weak points he can take the help of test checking.

DEMERITS OF INTERNAL CHECKQ. EXPLAIN THE DEMERITS OF INTERNAL CHECK?

The defects or weak points of the system of internal check are listed below:1. Expensive

The system of internal check is more expensive and time consuming.2. Slackness in the work

This is also a serious defect of the system of internal check. The auditor may show slackness in the work.

3. Not suitable for small concern The system of internal check is not suitable for small concern as it may be uneconomical in small concern.

4. Grouping among employees:If the employees of the concern join hands they may keep the employer in dark and may cause

many irregularities defying any detection thereof. This groupism amongst the employees may not be healthy.

POSITION OF AN AUDITOR IN RELATION TO INTERNAL CHECK PROCEDUREQ. EXPLAIN THE POSITION OF AN AUDITOR IN RELATION TO INTERNAL CHECK.

The position of an auditor in relation to internal check can be made clear from the following points:1. Duties

No auditor can bind the business concern to adopt the system of internal check. He should consider carefully the system in force in the concern. For this he has todo following work. To receive a written statement from the concern regarding the system of internal check. He must make sure of its effectiveness and not rely blindly on test checking. He should find out its defects and weak points if any which may result into errors or frauds.2. Dependence

The extent to which an auditor may rely upon the system of internal check would depend upon the effectiveness of the operation of the system and the size of the business concern. He should follow the guidelines given as under. If through his careful analysis of the sustem the auditor is not satisfied then he may depend upon the test checking of the transactions. The auditor may restrict the routine work to certain periods only which ne may select by way of tests. If the slightest doubt arises, he should extend the scope of his checking and check all the entries as for as possible. The auditor should not carry on test checking of cash transactions even if he finds that strong internal check system prevails.3. Liability

An efficient system of internal check reduces the work of the auditor but does not reduce his liability.In real since the final liability is of the auditor.He cannot rid of the liability that the system of internal check is faulty.If the auditor finds that the system in force is not efficient then he should not depend upon test checking the transactions.4. Suggestions

If the auditor finds that the system in force is not efficient then he can give suggestions to avoid the defects and weak points. In case his suggestions are not needed to and implemented he should make it clear that he would not be responsible for any discrepancy on that account.

MEANING OF INTERNAL AUDITInternal audit is a continuous and systematic process of examining and reporting the operations and

records of a concern by it’s the operations and record of a concern by its employees selected specially for this purpose. It is one of the functions of management. It performs the functions of both the protective controls and the operational controls.

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INTERNAL CHECK Vs INTERNAL AUDITQ. DISCUSS THE DISTINCTION BETWEEN INTERNAL CHECK AND INTERNAL AUDIT.

S.no BASIS INTERNAL CHECK INTERNAL AUDIT

1. Object The object of internal check is to prevent errors and frauds.

The object of internal audit is to detect errors and frauds.

2. Nature of work

In case of internal check the work of recording and checking of entries is carried on simultaneously with the help of judicious allocation of duties amongst the members of staff.

In case of internal audit only checking of the recorded entries is made.

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

Internal audit starts after the records have already been made in books of accounts.

4. Scope of Work

The scope of internal check is very limited The scope of the internal audit is comparatively broad.

5. Discovery In case of internal check error or fraud if any is discovered during the course of work.

In case of internal audit error or fraud if any is discovered after completion of work.

AUDIT NOTE BOOKQ. WHAT IS MEANT BY AUDIT NOTE BOOK?

The audit note book is maintained by the audit clerk. He keeps therein a record of his observations during the course of any audit work as also the points to be discussed with his senior clerk or the auditor. It is also a written record of the queries made by him and the replies thereto.

CONTENTS OF AUDIT NOTE BOOKQ: LIST OUT THE CONTENTS OF AN AUDIT NOTE BOOK. Contents of audit note book: An audit note book should contain the following points.

A list of the books of accounts in use. All the technical terms and matter used in the business. A record of all missing vouchers, invoices etc duplicates of which have to be obtained. The names of the principle officers, their duties and responsibilities. A compute record of exact nature of the work done. Notes about all errors and frauds discovered. The matters arising during the course of audit. The points which require further classification (or) exploration. Totals and balances of certain books of account, bank Reconciliation statement. The points for which Queries are made Extracts from all correspondence entered into with the bankers, debtors or creditors etc. Extracts from the minutes and contracts. The system of accounts and internal check in operation. A Copy of audit programme. Date of commencement of audit Date of computation of audit Provisions of the memorandum of association and Articles of association affecting the audit of accounts.

MERITS/ ADVANTAGES OF AUDIT NOTE BOOKQ. WHAT ARE THE MERITS/ ADVANTAGES OF AUDIT NOTE BOOK? The main merits of an audit note book are as under:

It records all the significant information affecting the audit. It ensures uniformity and assists in knowing the extent of work completed at a particular point of time. It serves as a source of information about the audit work and the points which deserve special attention. It facilitates smooth conduct of audit. It ensures that the audit Programme has been followed sincerely.

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Certain modifications are also possible in audit Programme in case audit staff faces certain practical difficulties in following the audit Programme.

It helps the auditor in judging the efficiency of his staff. It may also help the auditor to prove that he has not acted negligently

DEMERITS/ DISADVANTAGES OF AUDIT NOTE BOOKQ. WHAT ARE THE DEMERITS/ DISADVANTAGES OF AUDIT NOTE BOOK?

There are, however certain disadvantages of audit note book, which are given belowa. It develops a fault finding attitude in the minds of the staff of audit.b. It places too much reliance on the staff of the client for its preparation.c. If an audit note book is prepared negligently, the client can use it as an evidence of negligence in the

courts of law.d. Very often it creates misunderstanding between the staff of the client and the staff of audit.

AUDIT WORKING PAPERS - MEANINGQ. WHAT DO YOU MEAN BY AUDIT WORKING PAPERS?

Audit working papers refer to all documents prepared or gathered by the auditor, relating to primarily to set of accounts being audited and some basic information of continuing importance affecting the company or the audit. Working papers are the connecting link between the client’s records and the audited accounts.

AUDIT WORKING PAPERS - DEFINITIONQ. DEFINE AUDIT WORKING PAPERS. According to the Institute of Chartered Accountants of India, Working papers must include audit

Programme, queries, explanation given for the queries, schedules of important items like depreciation, inventories, confirmation from third parties, certificates issued by the management, banks etc.

According to A.W.Johnson “Audit working papers are the written private materials, which an auditor prepares for each audit. They describe the accounting information which he received from his client the methods of examinations used, his conclusions and the financial statements”.

FEATURES OF AUDIT WORKING PAPERSQ. WHAT ARE THE FEATURES OF AUDIT WORKING PAPERS? 1. It should state a clear audit objective, usually in terms of an audit assertion.2. It should fully state the year/period end, so that the working paper is not confused with documentation

belonging to a different year/period.3. It should state the full extent of the test.4. This will enable the preparer and any subsequent reviewers, to determine the sufficiency of the audit

evidence provided by the working paper.5. The working paper should clearly and objectively state the results of the test, without bias and based on the

facts documented.6. It should be signed by the person who prepares it so that queries can be directed to the appropriate person.

TYPES OF WORKING PAPERSQ. DESCRIBE THE VARIOUS TYPES OF WORKING PAPERS.Working papers may normally be divided between the following two file.

a. Current fileb. Permanent file.

Contents of current fileA current file contains information primarily related to the set of accounts under audit during the current year. Following are some of the examples of audit working papers to be placed in a current file.

Correspondence relating to acceptance of annual appointment. Evidence of the planning process of the audit and audit Programme. Record of nature, timing and extent of audit procedures carried out, results thereof. Analysis of transactions and balances. Copies of communication with other auditors, experts and third parties. Copies of letters or notes on audit matters communicated to the client.

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Letters of representation or confirmation received from the client. The working trial balance, bank reconciliation statement.

Therefore a current file document with all such information required for a single period audit. Contents of Permanent fileA permanent audit file normally includes:

Information concerning the legal and organizational structure of the entity such as Memorandum and Articles of Association.

Extracts or copies of important legal documents, agreements and minutes. A record of study of internal and accounting control of the entity. Copies of management letters issued to auditors. Copies of the communication with the retiring auditors. Analysis of significant ratios and trends. Notes regarding significant and accounting policies A short description of the type of business carried on and the places of business. Updates of the current year which will be of continuing importance to succeeding audits.

PURPOSE OF AUDIT WORKING PAPERSQ: WHAT ARE THE PURPOSE / OBJECTIVES OF AUDIT WORKING PAPERS?

The following are the important objects/purpose of working papers; It’s providing an important link between original transactions and the financial statements. It helps to review and revision of internal control. To identifying planning, organizing, controlling and review of audit work. It provides the principal support for the report of the auditor. It is helps in appropriate division of work among the audit staff. It’s use as permanent record. It assist in planning and performance of the audit work.

CONTENTS OF WORKING PAPERS:Q: EXPLAIN THE CONTENTS OF AUDIT WORKING PAPERS? Contents of Working Papers:

The terms and conditions of appointment of the auditor. The nature and complexity of the business of the client. Audit programme and Audit Note book. Copies of the documents which the auditor has taken. The schedules of debtors and creditors, fixed assets, investments. The certificate for the stock in trade and its valuation. Copies of the correspondence concerning the audit work. Particulars of depreciation and Investments. Copies of the previous audit reports. Copies of the resolutions passed in the meetings of shareholders and directors. Certificate from the management that all the outstanding assets and liabilities have come under the

accounts. Details of the questions made during the course of audit and their explanations given. Other necessary

papers required under the set rules for the conduct of the audit work.

VOUCHING - MEANINGQ.WHAT IS MEANT BY VOUCHING?

Vouching is the very essence of auditing. It is considered as backbone of auditing. Vouching includes the Examination of the business transactions with its supporting documentary evidence. The checking of which enables the auditor to satisfy himself that the transactions is in order that it has been correctly allocated and entered in the book.

VOUCHING - DEFINITIONQ.DEFINE VOUCHING.

Vouching consists of comparing entries in the books of account with documentary evidence in support thereof. -Lawrance R. Dicksee

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By vouching is meant “The verification of the accuracy and authenticity of transactions as recorded in the books of Account”. -B. Bore

OBJECTS OF VOUCHINGQ.WHAT ARE THE OBJECTS OF VOUCHING?

The main objects of vouching are as follows:1. To verify all transactions recorded in the books of accounts are supported by documentary evidence.2. To see that no fraud or error has been committed while recording the transactions.3. No transaction has been recorded which does not related to business.4. Every transaction recorded has been adequately authenticated by responsible person.5. The transaction recorded under proper date.6. Distinction has been made between capital and revenue items.7. Accuracy has been observed while totaling, carrying forward and recording and amount in the account.

VOUCHER –MEANINGQ.WHAT IS MEANT BY VOUCHER?

A voucher means any kind of documentary evidence that stands in support of a transaction. A voucher may be cash bill, a counterfoil of the receipt book, an invoice, a copy of the order book, a budget note, and a sold note, an extract of a contract from a minute’s book or even a letter.

Q: DEFINE VOUCHER. According to Ronald A. Irish: “A voucher may be a receipt, an invoice, an agreement, a written

requisition slip or in short, any suitable written evidence which confirms a written transaction”.

According to Joseph Lancaster: “A voucher may be defining as any documentary evidence by which the accuracy of book entries may be substantiated”.

TYPES OF VOUCHERQ. WHAT ARE THE DIFFERENT TYPES OF VOUCHER?

All the vouchers can be classified into two broad categories from the point of view of their nature. Primary Voucher Collateral voucher

Primary Voucher:It is an original voucher, which is produced in support of a transaction such as purchase order original

prices, goods received note etc. Collateral Voucher:

It is a subsidiary voucher which is produced in support of transactions in the absence of an original voucher such as carbon copies of purchase order etc., some of the Examples of the various types of vouchers to be produced to the auditor for checking business transactions are as under.

Cash Receipt: Carbon copies of the receipts issued cash memo, correspondence etc.

Cash Paid: Original receipts of the payees supported by relevant documents. Example: Invoices, wages Book, Contracts, Correspondence, etc,Purchases: Copies of the purchases order original invoice goods received notes, correspondence.Sales: Order received carbon copies of the invoices copies of goods out slips, correspondence etc,Purchase Return: Credit notes received, copies of the goods send out slips, correspondence.Sales Return: Debit notes received, Goods received notes and correspondence etc,Journal Entries: Previous year balance sheet and other available relevant documentary evidence.

FEATURES OF GOOD VOUCHERQ.WHAT ARE THE FEATURES OF GOOD VOUCHER? The voucher must be written in the name of the client or the business.The voucher should be properly filled. The voucher must be duly authorized.

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The voucher should bear the signature of payee.The voucher should be true from any apparent error.The voucher over Rs. 5000/- should bear a several stamp worth Rs. 1/- as per the Indian Stamp act.Voucher used previously must not be used for another transaction.Any change made in the voucher must bear the signature of a responsible official.

PROCEDURES OF VOUCHINGQ. EXPLAIN THE PROCEDURES OF VOUCHING. The following are the points to be noted while vouching;

Auditor must verify the authenticity of transactions, accuracy of amounts and classification of account. Auditor should see that vouchers are numbered serially, stamped, dated and certified by a reasonable

official. If any voucher is doubtful, the auditor should proceed cautiously and use special ticks for such

vouchers. For missing vouchers he should ask for explanation from the concern official. Auditor should examine that all expenses pertain to the business. He should keep in mind that proper distinction is made between capital and revenue items. He may refer the resolutions of the board of directors or share holders for certain transactions. Auditor shall not resort to test checking unless a satisfactory internal control system exists in the

organization. As far as possible vouching must be completed in one continuous sitting. Alteration in the vouchers must be supported by the concerned officer’s initials. Auditor should use specific ticks for vouching cash payments, receipts, purchases, sales etc.

IMPORTANCE OF VOUCHINGQ. STATE THE IMPORTANCE OF VOUCHING.

Vouching has a larger and vital aspect. It is an examination and verification of the accuracy and authenticity of transactions as recorded in the books of account and a voucher is a documentary proof supporting the transaction. It is the vouching on the basis of which an auditor satisfied himself that. The documentary and other evidence of sufficient validity are available in order. A competent official has duly authorized it. It has been wholly and exclusively related to the business and It effect has been properly recorded in the book of conformity with accepted principles of accountancy.

VOUCHING IS THE BACKBONE OF AUDITINGQ.EXPLAIN THE IMPORTANCE/ ESSENCE OF VOUCHING (OR) VOUCHING IS THE BACKBONE OF AUDITING. Verification of Accuracy:

Vouching is useful to verify the accuracy of the amount recorded thus, by verifying the accuracy of the transactions. Vouching enables an auditor to accomplish his objects. Detection of Errors:

Voucher is useful to detect various kinds of errors. The auditor will find it easier to detect errors of various kinds during the normal course of vouching. Ascertaining Fairness of Transactions:

Vouching is much useful in ascertaining the fairness of all the transactions. It enables the auditor to know the genuineness of transactions have actually taken place and whether or not the transactions are related to the business. Detection of fraud:

It is much useful in the detection of various kinds of fraud. It vouching is done with care and caution; the auditor can very easily detect all kinds of fraud, even if they are committed cleverly. Verification of assets and liabilities :

Vouching is very much useful in verifying the assets and liabilities it enables the auditor to certify whether or not the balance sheet exhibits a true and fair view as to the existence of all the assets and liabilities. Easier Further Scrutiny:

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Vouching is a sort of a preliminary work. What is done properly, it enables the auditor to carry further scrutiny with ease.

Certifying the state of affairs:An auditor has to certify whether or not profit & loss A/c and the Balance sheet exhibit a true & fair

view of the state of affairs of the business.Thus vouching fulfills the object of auditing that is why it is remarked that “vouching is the essence of

Auditing”. And “Vouching is the back bone of Auditing”. The work of vouching is very hard. In real sense, vouching is not only the back bone or essence of auditing but also is its soul.

VOUCHING OF CASH BOOK – MEANINGQ.WHAT IS MEANT BY VOUCHING OF CASH BOOK?

Vouching is a potential tool in the hands of auditors to ascertain accuracy of various transactions entered in the books of accounts. The act establishing the accuracy and authenticity of entries in the cash books of accounts is called vouching of cash book.

OBJECTIVES OF VOUCHING OF CASH TRANSACTIONSQ. LIST OUT THE OBJECTIVES OF VOUCHING OF CASH TRANSACTIONS. The following are the objectives of vouching of cash transactions. To ensure that all receipts are accounted for. To know that all receipts and payments have been properly entered in the cash book. To ensure that no fraudulent payments have been made. To ensure that payment has been made to the right person. To ensure that the payment made are true payments. To verify the cash in hand and at bank.

CASH BOOK - DEBIT SIDEQ. DISCUSS IN DETAIL THE PROCEDURE FOR VOUCHING OF CASH TRANSACTIONS (OR) EXPLAIN THE PROCEDURE FOR VOUCHING OF DEBIT SIDE OF CASH BOOK 1. Opening Balance:        This should be compared with the balance shown in the audited balance sheet of the previous year. This is done to see that the actual balance has been brought down.2. Cash Sales:        There are greater chances of fraud under this head. The salesman may sell goods and may not make an entry in the cash book and thus misappropriate the money. The following system should be adopted to avoid fraud. The salesman should neither deliver the goods to the customers not receive cash for the goods sold. He should prepare four copies of memo of the goods sold of which two copies are handed over to a customer; salesman will send one copy along with goods to the delivery clerk. In the mean time customer will make payment to cashier, who will stamp a copy of memo. Customer can get the goods from delivery clerk over a copy of memo.

At the end of the day, the salesman, the cashier, and the delivery clerk prepare the summaries, all of which must tally. Auditor should check summaries and cash book to detect any error or fraud.

In some business houses cash memos are issued against goods sold on credit. The reason advanced is that this system ensures prompt payment. The auditor should compare the dates on the cash memos and the cash book. If cash discount has been allowed on sales, he should see that a uniform policy and rate of discount has been followed.Vouchers –Duplicate Cash Memo, Salesman’s Abstracts, and Cashier Summaries.3. Receipts from Debtors:

Cash received from debtors is to be verified with counter foils of receipts issued to them. The counter foils from the basic documentary evidence. There are possibilities to show less cash than actual receipts, concealment of receipts and issue of receipts from unused counter foils. Hence the auditor has to examine the internal check system with regard to sales, system of credit control. The auditor should ascertain the basis for settling credit limits and the terms and the persons authorized to sanction credit.

While Vouching Receipts from Debtors the Auditor should take the Following Points into Consideration:

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The auditor should vouch the counter foil receipts with entries in the cash book. He should check the debtor’s ledger intelligently to find out any outstanding debts. As far as desirable the auditor should correspond with the debtors and ascertain correct position. The auditor should pay special attention to the discounts allowed, allowances and bad debts. Any discrepancy revealed should be thoroughly enquired into.Vouchers – Counterfoils, Correspondence etc.4. Interests and Dividends:Points to be taken into consideration by the Auditor: He should check the cash book, interest account and personal account. He should check the investment ledger usually maintained in the business concern. He should examine that all the interests and dividends have been received at due dates and they have been duly accounted for In case the rates of interests and dividends are fixed, he should calculate and check them. If the collection of interest or dividend is made through the bank, the pass book should be checked. The auditors should examine the advance and accrued interest very carefully.Vouchers - For Interest- Pass Book, Agreement, and Schedule Counterfoils; For Dividends – Counterfoils, Dividend Warrants Pass Book.

5. Bills Receivable: The receipts for bills receivable can be in two ways:

Receipts from Bills Discounted: The bills receivable, which have been discounted and have not matured at the date of the Balance Sheet. The cash so received should be properly entered in Cash Book. The amount deducted for discount on such bills should be separately debited in the Discount Account. Receipts from Bills Matured: The cash receipt for the bills available in respect of which the amount has been received on maturity dates should be checked by comparing the Bills Receivable Book with the cashbook and the Pass Book.

The auditor should take the following points into account while vouching Bills Receivable: He should compare Bills Receivable Book with Cash Book and Pass Book to verify that the amount has been

received on due date. The auditor must make enquires about the bills which have matured but the amount has not been received for

them. The auditor should see that the records have been properly made in the books related to discounts, dishonor

or retirement of bill.Vouchers - Bills Receivable Book, Cash Book and Pass Book.6. Rent Receivables:

The auditor should consider the following points while Vouching Rent Receivables: In case the client has a large number of properties given out on rent, the auditor should ask his client to prepare Rent Register or maintain Rent Rolls in which the account of every tenant is maintainedThe auditor should examine the Lease Agreements with the tenants to note the rent receivable the due date and provision for repairs or other allowances.The auditor should examine the counter foils of rent receipts with the Cash Book.He should enquire into the arrears of rent, if any. Rent received through the collecting agents shall be vouched with statements or summaries prepared by the collecting agents. If rent is long outstanding, the explanations should be sought for to find out whether that is genuine.

Vouchers-Lease deeds and Agreement, Rent Rolls, Accounts received from the agents, Counter foils, Correspondence etc. 7. Commission Received: While Vouching Commission received the auditor should consider the following points:

He should check the commission account with the accounts of the parties from whom commission had been received. He should examine the agreements with the parties for the rate of commission. He should examine the counter foils of the receipt with the amount in the Cash Book. He should make the calculations to check the accuracy of the amount.

Vouchers- Agreements with the parties, Counter foils of receipts etc.8. Sale of Investments:

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1) The auditor should examine the Broker’s Sold Notes to vouch the proceeds from the sale of investment. 2) If they have been sold through the bank, examine the bank invoices.3) If investments have been sold out cum – dividend, the auditor should see that the proceeds have been properly apportioned between revenue and capital receipts.Vouchers- Broker’s sold note, Bank Advice.9. Insurance Claims:

The auditor should examine the insurance policies carefully to ascertain the terms of claims. He should also check the claims register. He should examine the insurance money received from an insurance company against the claim of the firm

the help of correspondence.Vouchers-Accounts, Correspondence.10. Subscription Received:

The auditor should check the subscription received with the counterfoils or carbon copies of the receipts issued to the members.

He should compare a reasonable number of entries with the register of subscribers or members. Care should be taken to see subscription due but outstanding and the same should be brought into

account.Vouchers- Register of subscriptions, Counter foils.11. Share capital:

The vouching of share capital, the auditor should consider the following points: For partnership firms, it should be seen that the amount shared by each partner is according to the

partnership deed. He should carry out audit of shares issued for cash taking the important points into considerations. He should adopt the special procedures regarding audit of shares issued for consideration other than

cash. He should note where a company issued shares at a premium. He should note where a company issued shares at a discount. He should verify the forfeiture of shares. He should verify the reissue of the forfeited shares. He should verify the reduction of share capital. He should examine the provisions with regard to payment of the interest on calls paid in advance have

been duly complied. He should ascertain the total amount of calls in arrears. He should examine that the share warrants have been issued in accordance with the provisions of

company's act 1956. He should see that the proper note has been given in the balance sheet under the head share capital with

regard to various terms and conditions for the redemptions of preference shares.Voucher - partnership deed, memorandum of association, articles of association.

12. Receipts from Hire Purchase:While vouching receipts from hire purchase the following points would be cared for:

The hire purchase agreement should be examined in detail to ascertain the duration of the agreement, the amount of installments and the total number of installments payable by the close of the period the accounts of which are under audit.

The auditor has to keep in mind that the installment includes interest. The auditor has to keep in mind that the whole amount of an installment is not credited to sales account and

it has been includes properly apportioned between sales and interest. Vouchers - Hire Purchase Agreement, Counterfoils of Receipts.13. Proceeds from sale of Fixed Assets:Whenever fixed assets, such as land, building, machinery, furniture etc. are sold correspondence is made with the parties who are willing to purchase them. Usually fixed assets are sold through a broker or an auctioneer. 1) He should vouch fixed assets sales with correspondence, other assets account, and sales contract, minute of Board of Directors or other evidence available.2) If sold through auction, the auctioneer’s account should be examined by the auditor.Vouchers - Auctioneer’s Note or Broker’s Sold Note, Sale Deed, Correspondence.14. Royalty Received:

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Royalty received can be examined from the following: Terms and condition for payment of royalty. Correspondence with the lessee. Calculation of royalty. Counterfoils of receipt issued.15. Miscellaneous Receipts: Receipts other than specifically dealt with the above, should be vouched with the help of related documents,

agreements or correspondence. The auditor should try to insist on the receipts in the form of cheques and drafts. However in selling and

distributing units, it is not feasible in those cases, the auditor may insist on the counter signatures of the receipts by a senior officer.

CASH BOOK - CREDIT SIDE Q.EXPLAIN THE PROCEDURE FOR VOUCHING OF CREDIT SIDE OF CASH BOOK.

After having dealt the debit side of cash book the auditor being satisfied moves towards credit side of the cash book. The auditor should vouch the payment (Credit) side of the cash book very cautiously. He should pay special attention to the following points: The payments are concerning the transactions relating to the business. The payments are relating to the period under audit. If all payments are authorized. The payments have been made duly received by the payee alone. The correct records have been made in cash book.

1) Opening Balance:Cash book may have credit balance in the bank column .This balance can be verified from the previous

year’s balance sheet.2) Cash Purchases: The auditor should consider the following points while Vouching Cash Purchases: The auditor should see that goods paid for have actually been received. He should examine the entries in the Cash Book with the help of Cash Memos or receipted invoices issued

by suppliers and also the Goods Inward Book or Stock Ledger. For cash purchases, he has especially to examine the genuineness of purchases, receipts of goods and also

the relevant vouchers. It is to be seen that only net amount (i.e., purchase minus trade discount) has to be carried to the books of

account. Vouchers – Cash Memos, Goods Inward Book.3) Payment to Creditors for Goods Purchase: He should see that purchases are duly authorized and vouch them with cash memos. He should see that the invoices are duly checked. For vouching the payments to creditors for credit purchase, the receipts from creditors acknowledging the

amounts received by them should be checked by the auditor.Vouchers- Statement of Accounts, Receipts.4) Salaries: He should vouch salaries with salary book. He should examine that it has been duly signed by each employee and countersigned by the responsible officer. He should examine the Board’s Minute Book for the salaries of Secretary, Manager or other Senior Officer. The Employee’s State Insurance Register should be tallied for salaries and contribution.Vouchers –Salary Book, Agreements, Appointment Letters, Minutes, Counter foils of Cheques.

5) Wages:Auditors Duty Regarding Wages:He has to depend upon the system of internal check for wages to a great extent. If he is not satisfied with the method adopted he must suggest the concern to follow the correct method. He must check the wages sheets which include entries from piece work cards, time - work cards, and

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records of casual labor, overtime payments, advance payments, or fines if imposed. He should examine that wages sheets are duly initialled by those who prepare them and countersigned by the officer. He should also tally the totals with cash book. He should check the total amount of wages payable with the amount of cheque drawn to see that more money has not been withdrawn that was needed. He should check the names of some of the workers in the wage sheets with the job cards and the gatekeepers and the foreman’s registered to see that no dummy workers are included. He should pay a surprise visit on the day of payment of wages to see that they are paid according to the method suggested. Wages sheets of the previous months should be compared with the current month and if there is any increase of the number of workers enquiry must be made. The total wages of each department should be compared with the original estimate made by the costing department. Leave register should be examined to find out whether leave was granted with or without salary. Compare the signatures of the workers of two or three periods to examine their genuineness. Vouchers- Wage Records, Job Cards Wage Sheets etc.6) Agent’s Commission The auditor should examine that the commission is calculated on the basis of agreement. Calculations should be made and the receipt given by the agent should be examined and compared with cash book. He should see the records of commission if it is based on percentage of sales.7) Traveling Allowance He should see the rules and regulations regarding the payment of travelling allowance. He should examine vouchers which should be countersigned by a responsible officer. He should examine the vouchers for travelling expenses. He should check that these expenses are connected with the business alone and have not been paid in advance.Vouchers-Bills, Receipts.8) Insurance Premium In case of a new policy, the cover note or the receipt from the insurance company and the policy itself should be examined. In case of a renewal, the renewal receipt for the premium should be examined. Where there is a large number of policies the auditor should ask for a list of policies, which contains the various details viz., the amount of policy and premium, date of payment of premium, date of maturity etc.,9) Bills payable Returned bills duly cancelled should be examined. Reference may be made to the bank passbook and bills payable book.Vouchers- Bank Pass Book, Bills Payable Book, Receipts, Bills Payable Returned. 10) Partner’s drawings:He should also examine the Partner’s Drawing Account to find out the correctness of entries made.He should see that it is duly initialed by the partners.The auditor should study the partnership deed to ascertain the rules of drawings by partners.Vouchers-Memorandum Drawing Book, Partner’s Drawing Book, Partnership Deed.11) Capital ExpenditureFree hold or leasehold property and buildings, plant and machinery (capital expenditure). The agreement for the purpose of property, lease deed, conveyance and title deeds should be examined. If the property has been purchased through a broker, his statement of account should be examined. He should see that the Board of Directors has sanctioned the purchase. The auditor should see that the property has been duly registered under the transfer of property act. The auditor should also see that the title of transfer has been duly verified by a solicitor.Expenses incurred in acquiring the fixed asset should be capitalized.12) Interest on LoanThe auditor should know the terms of loan and the rate of interest by studying the loan agreement. He should see that the actual rate is not different from the rate given in the agreement.

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In case of debenture interest, the debenture interest book should be examined.The pass book and interest register should be checked if the interest is paid through the bank.Vouchers- Agreement, Counterfoils, Receipts.13) Rent paid

Auditor should verify the payment of rent from the agreement.The rent voucher should be supported by rent receipt from the landlord. It should be seen that payment of rent is sanctioned by responsible officer.

14) Postage: The auditor should compare the postage book with the cash book and petty cash book. He should count the stamp in hand and compare it with the balance shown by the books. He should see that the postal expenses have been incurred for the business and not for private purposes.

15) Payment under Hire Purchase and Instalments: Auditor should vouch such payments with the periodical statements received from the hire trader and

vouchers for the payment of instalment. He should also examine the agreement entered into.Vouchers-Agreements, Receipts.16) Director’s Fees

Directors receive fees for attending board of directors meetings.The auditor should examine the articles of association to ascertain the provisions relating to payment of

directors fees.Examine the Directors Attendance register. If a director has not taken or forgone his fee, the minute book should be referred by the auditor so that no misappropriation is done.

Vouchers-Minute Book, Attendance Register, Articles of Association, Resolution of Shareholders.

17) Dividends The payments of dividends can be examined with the help of dividend warrants returned. If the payment made through the bank, dividend warrants and pass book may be compared. The amount of unclaimed dividend should tally with balance given in the pass book on his account.Vouchers-Dividend Warrants Pass Book etc.

18) Remuneration to Directors and Managing Directors:The directors are not entitled to any remuneration as a matter of right unless provided by the Articles of

the company or by a resolution. The amount of remuneration is however limited to 1to 3 percent depending on whether or not the company has a MD or a whole time director .The auditor should see that legal provisions have been duly applied with. Vouchers-Special Resolution, Minute Book.

19) Payment of Taxes: To vouch the payments of taxes, the auditor should make reference to the copy of the assessment order, assessment form, notice of demand and the receipted challan.

20) Petty cash:The auditor should check the receipt of money by the petty cashier with the cash book and also compare

the dates.He should check the totals of the columns of the petty cash book.He should check some of the items with the vouchers which are available.He should see that the totals of different columns have been correctly posted to the ledger.He should compare the postage expenses with postage books.The auditor should be cautious about the validity of voucher presented to him.The auditor should examine that the petty cash book has been maintained on imprest system properly.The auditor should examine cross-cash and balances of petty cash book.He should also check the balance of petty cash in hand.He may apply test checking in examining the petty cash vouchers at random since there may be

innumerable small transactions.

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VOUCHING OF TRADING TRANSACTIONSQ. DISCUSS IN DETAIL THE PROCEDURE FOR TRADING TRANSACTIONS.

Here, the auditor is concerned with the checking of the Purchases Book and Sales Book in order to prevent misappropriation of goods.I. Purchase Book or Bought Day Book:

This book is used for recording the credit purchases of the business only. First of all, an auditor should satisfy with the internal check system in operation with regard to purchases. If the system of internal check is efficient and effective, the auditor can conveniently proceed with the vouching of purchases book in the following manner:1. He should check the invoices and compare them with entries in the day book. When examining an invoice, special attention should be paid to the following points:

The name of the creditor agrees with the entry in the day book. The invoices are made cut in the name of the auditor's client and appear to be of a nature relating to

the business carried on. Each invoice relating to goods has a memorandum, signed by the gate keeper acknowledging receipt

of the goods attached to it. Alternatively, it may bear a reference to a goods inward book. The auditor should examine these order to see that the goods stated in the invoice have actually been received.

The date agrees with that in the day book and falls within the period under audit. The trade discount has been deducted from the amount of the invoice, then only net amount has been

entered. Any invoice charged to capital is a proper capital charge and is debited to the correct account. In case the staff member's accounts are passed through the day book, they are charged to their

personal accounts.2. At the end of the financial period, the auditor should compare the goods inward book and the stock sheets with the purchases book in order to ensure that all goods taken into stock have been entered in the purchases book. In case there is no goods inward book, he should check the suppliers advice notes received with the goods as it is possible that towards the close of the financial year, goods have been received and included in that closing stock but not recorded in the purchases books which will inflate profits. 3. The auditor should ask his clients to send notice to every supplier requesting him to furnish a statement showing the balance due on the balance sheet date. Then he should examine these statements and compare them with the ledger accounts. If they agree, it will mean that no invoices with regard to these accounts have been omitted.4. The auditor should see that no invoice has been entered twice in the books as fraud may be committed by such a practice. In order to prevent it, he must compare invoices and the goods inward book in few cases as test checking.5. As invoice may be post dated to provide a fictitious period of credit to the purchaser the auditor must see that entries are made in the purchases book only if the goods have been actually received during the financial year under audit.6. In case of duplicate invoices, the auditor should satisfy himself that they were obtained in respect of only these invoices which have been actually lost.

7. He should check totals, sub-totals, carry-forwards, calculations in the purchase books and postings from the purchases book to the ledger accounts.

II. Purchases Returns BookSometimes goods purchased are rejected or returned to the supplier or seller for various reasons. In this

connection the auditor should satisfy himself with the efficiency of internal check system and if satisfied should proceed in the following manner.1. He should compare the credit notes sent by the creditors with the entries in the purchases returns book and the goods outward book.2. He should see that proper deduction has been made on account of goods returned before the payment is made. In case the payment has already been made, he should ensure that full credit has been received subsequently.

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3. He should pay particular attention to the heavy returns made at the close of the year and in the beginning of the year as the entries might have been passed to adjust fictitions purchases of the previous months.

4. He should check castings and postings of the purchases returns book to the ledger accounts.

III. Sales Book (Credit Sales)The vouching of the sales book is a much more difficult task then that of the purchase book because the

only documentary evidence available is in the form of duplicates or invoices which are not completely reliable. Therefore the auditor has to be very careful in this regard. Firstly, he should examine the system of internal check in this respect and if satisfied with the system, proceed as follow:1. He should compare the various particulars like the name, date, amount etc. on the copy of the invoice with those given in the sales book.2. In case some distinction is made in granting trade discount to two different customers, he should enquire into the reasons for the same.3. The sales book should be vouched with the help of the orders received book and the goods outward book to ensure that no sales have been omitted from recording.4. Where goods have been supplied on `approval' or `goods on sale or return' basis, he should see that they are not treated as sales till the letter of acceptance has been received. At the same time he should ensure that the goods with customers are included in the stock. 5. The auditor should specially examine the sales relating the sales relating to the periods in the beginning or at the close of the financial year in order to ensure that no manipulation has been made in accounts. He may check such sales with the goods outward book.6. He should see that capital sales have not been treated as revenue sales.7. He should check the castings of the sales book and the posting to the ledger accounts.8. He should set that the goods sent on consignment are not included in the figure of sales. They shall be treated as sales only when they have been actually sold by the consignee and the `Account Sale' is received by the consignor. Till then, such goods are to be treated as stock with the agent. So he should check such entries with the consignment note, account sale, vouchers for the expenses and cash-book.

Sales under Hire Purchase AgreementsSuch sales can be recorded in the account books under two methods. One is to credit the sales account

with the total cash selling price in the year of sale and to treat the buyer as debtor for the installments not yet due at the date of the balance sheet. The other is to credit the sales account with each installment payable under the contract as and when it becomes due. When the first method is followed the auditor should see that a provision for unrealised profits is made at the date of the balance-sheet and credit is taken in each year only for such interest as has actually accrued during the accounting period. In case the second method is adopted, the auditor should see that the amount of the unpaid installments less unearned profit included therein, is credited to the trading account and shown in the balance sheet as stock-on-hire.

Packages and EmptiesThere are some cases in which customers are supplied with packages like bags, cans and jar etc. which

they have to return to the suppliers or dealers. The auditor shall see that an effective system should exist to record such packages and empties. Generally a memorandum system is adopted under which the customer is debited with the cost of such empties. The cost of empties is not included in the sales. They are entered in the sales return book under a separate column for this and also in the empties returns inward book by the gatekeeper. So the auditor must examine these books.

At the date of the balance sheet a list of empties `not returned' by the customer should be prepared and the value of such empties should be recorded in separate book to be known as "Empties and Packages on hand" at cost price less depreciation. So the auditor should ensure a proper valuation of empties for the purpose of balance sheet and see that correct depreciation has been provided for those packages and empties which are still in the hands of the customers.IV. Bills Receivable BookEntries for bills receivable are passed in this book. Auditor's duty in regard to different types of bills is as follows:

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In case of bills matured for which payments have been received, the receipt of money may be checked by reference to the cash book or bank pass book as the case may be.

For bills discounted, the cash book and the pass book entries should be checked. There may be bills in-hand which are not matured. If such bills are with the client,, personal

verification should be done by the auditor. If they are deposited with the bank, the auditor should check the certificate to that effect obtained from the bank.

In case of bills dishonoured, he should see that the proper entries have been passed in the financial books. He should also check the castings of the bills receivable book and their postings to the ledger accounts. The liability for bills discounted should be properly shown on the liability side of the balance sheet.

V. Bills Payable BookThe auditor's duty in connection with bills accepted and entered in this book is as follows :

In case of those bills for which payment has been made by the client on maturity, the auditor should vouch them with the entries in the cash book or bank pass book and the returned bills.

For those bills which have not yet mature, he should vouch them with the help of counterfoils or copies of such bills, bills payable book and if necessary, the statements of account submitted by creditors.

He should also examine the castings of this book and their postings into theledger accounts.

VI. Journal Journal is used to record all extra ordinary transactions for which there are no special books of original entry. The entries appearing in the Journal will be such as all opening entries, say, for the acquisition of various assets, the issue and allotment of shares etc., closing entries which are passed" for closing and transfering balance from the nominal accounts in the Profit and Loss account; adjusting entries such as provision for outstandings, depreciation and bad debts etc, and miscellaneous items like writing off profits or losses on the sale of assets. In order to vouch the journal the auditor should take the following steps :

In order to vouch opening entries, the auditor should examine them with reference to last year's audited balance sheet. In case of new business he should verify them with reference to minutes of the board's meetings, documents of title, purchase agreement, correspondence with the vendors, receipts issued by the payee, etc. For vouching closing entries, he should see that balances were correctly arrived at and they have been carried to proper accounts. In case of adjusting entries the auditor should check all the available evidence, for instance, bad and doubtful debts can be inspected with the help of accounts contained in the sales ledger. He should check the postings to the respective ledger accounts to as certain that they are in order.

VII. Bought Ledger or Purchase LedgerThis ledger contains accounts relating to creditors. The auditor should take the following steps:

He should check the opening balances of different accounts with the audited balance sheet of the previous year.

He should examine all supporting books like purchases book, goods inwards book, cash book, discount register, goods outward book etc.

If the self- balancing system is in use, he should ask his client for a schedule of creditors and total of the schedule should be tallied with the creditor's ledger adjustment account.

The auditor should examine all the creditors statements and with their help, the purchase ledger balances should be checked.

He should see that the balances in the purchases ledger whether debit or credit are shown on the proper side of the balance sheet.

VIII. Sales Ledger or Debtors LedgerThis contains accounts relating to debtors. The following points should be noted while vouching sales ledger:

The auditor should check the opening balances with the audited balance-sheet of the previous year. He should examine supporting book like bills receivable book, cash-book, goods out ward book,

sales returns book etc.

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Where self-balancing system is in use, the total of the balance as per the schedule of debtors should be verified with the total of the balance shown in the debtors ledger adjustment account.

He should test check postings to this ledger from various books of first entry. He should give special attention to credit postings, as any attempt to conceal defalcations will more usually take the form of fictious credit entries.

He should also check the castings and balances with the list of debtors. If there is any credit balance in the sales ledger, he should see that it is shown on the liabilities side of the balance sheet along with sundry creditors.

While examining the accounts the auditor should ascertain the composition of each balance. In particular he should note whether it represents specific items of goods or is an accumulated balance. In the latter case, he should ensure that it does not represent doubtful for bad debt.

He should call for a list of bad and doubtful debts and verify them thoroughly as there is quite possibility of the figure being understated and misappropriated.

VOUCHING OF IMPERSONAL LEDGER Impersonal ledgers are also called General Ledgers or Nominal Ledgers. They are of two types such as Nominal Accounts and Real accounts. Nominal accounts are related to Trading and Profit and Loss Accounts whereas real accounts record assets. If these accounts are not correct, they will affect the Profit & Loss Account and Balance Sheet. Therefore, the auditor should vouch the items appearing in the impersonal ledgers thoroughly so that the chances of manipulation by fictitious entries of expenses can be eliminated.

Q. DISCUSS IN DETAIL THE AUDIT PROCEDURE FOR VOUCHING OF IMPERSONAL LEDGER.

GENERAL PROCEDURE:1. The postings of cash transactions to the Impersonal Ledger should be carefully checked.2. The Journal should be carefully vouched to ensure that each entry is supported by sufficient evidence.3. The auditor should carefully check the totals of the various other books of original entry and the postings thereof to the Impersonal Ledger.4. Sometimes direct entries are passed from one account to another in the Impersonal Ledger. In such a case the auditor should vouch them in the manner in which he examines those items, which pass through the Journal.5. He should check very carefully the adjustments, which are usually done at the end of the year when the final accounts are prepared. Such adjustments include outstanding assets and liabilities, depreciation, etc. As these adjustments pass through the Journal, their postings to the Impersonal Ledger should be checked. Special attention should be paid to these adjustments because they ultimately affect the position reflected by the final accounts.6. The total of the subsidiary books should be checked.7. The balances in the Impersonal Ledger should be checked and verified with the Trial Balance.I. OUTSTANDING ASSETS

Outstanding assets refer to the assets, which remain outstanding at the date of the balance sheet. There are certain expenditure the nature of which is that out of the sum spent on that a portion pertains to the next business period. Example of such expenses are 1. Prepaid expenses such as insurance prepaid, rent paid in advance, tax paid in advance, etc., 2. Accured incomes such as interest due but not received, dividend due not received, dividend due not received and 3. Deffered revenue expenditure.1. Prepaid expenses:

Prepaid expenses are those expenses, which actually pertain to the next financial year but have been paid this year. If the whole of the amount is charged to the profit and loss account of the current year, it will be unduly burdened and the profit or loss thus arrived at will not be correct. Hence that part of the expenditure which relates to the next financial year will have to be shown separately and should be deducted from the total expenditure.

The auditor should examine the nominal accounts, receipts and demand notes and ensure that proper adjustments have been made in the books for the unexpired period.2. Accrued incomes:

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There are certain items of income, which ought to have been received at the date of balance sheet but have not actually been received. Such incomes are called accrued income. In order to arrive at the current profit or loss, such items of income must be accounted for in the Profit and Loss Account.

The auditor should go through the records very carefully and see that accrued income, which actually relates to the current year, has been brought into account. The auditor should check the adjusting entries passed for this purpose at the date of balance sheet and also scrutinize that they appear on the asset said of the Balance Sheet.

3. Deffered revenue expenditure:Deferred revenue expenditure is one, which is incurred so as to have financial benefit for many

accounting years. It is a non-recurring expenditure. The entire amount as such should not be charged to the Profit and Loss Account of the year in which it is incurred because it gives financial benefits for many years. The expenditure will have to be carried forward and spread over a number of years. Otherwise it will bring an undue and extra burden on the current year’s Profit and Loss Account.

II. OUTSTANDING LIABILITIESAt the close of the year, there may be some outstanding liabilities ofr expenses which must bring into

accounts to arrive at the correct profits. If any of these items is no included in the Profit and Loss Account of the current year, the profit arrived at will be overstated. Therefore, the auditor should see that all such liabilities are brought into account before the current year’s profit is arrived at.

The auditor should scrutinize the nominal accounts like wages, salaries, rent, rates, taxes, interest, discount etc., in order to verify that all expenses accrued up to the date of the balance sheet have been duly accounted for. He should compare the total expenditure with the previous year and if there is an appreciable difference, he should enquire into the matter. The outstanding liabilities can be brought under two heads as shown below

1. Unearned income:Unearned income refers to income, which might have been received during the current year though a

part or the whole of it is not applicable to the current year will be earned during the following year. An unearned income, which is not applicable to the year under audit, should not be credited to the Profit and Loss Account of the current period it should be shown as a liability in the Balance Sheet.

The auditor should examine the vouchers and ascertain the amount which is to be credited to the Profit and Loss Account of the current year and the amount which is to be carried forward and will be earned during the subsequent period.

2. Unpaid Expenses:Unpaid expenses are those expenses that are incurred during the current year but for which payment has

not been made in the year under audit but will be made in the next year. In case of unpaid expenses, Profit and Loss Account should be debited with the amount and credited with the unpaid expenses and should be shown in the liability side of the Balance Sheet.

The auditor should examine vouchers, receipts, invoices, demand notes etc., with a view to ascertain whether the expenses ought to have been debited to the current year’s Profit and Loss Account and that no payment has been made.

III. CONTINGENT LIABILITIES:A contingent liability is one, which is no an actual liability but will become a liability on the happening

of an event in future. Simply stated contingent liability is not an actual liability but will become a liability on the happening of an event in future.

The auditor should see that the requirements of the Companies Act regarding the contingent liability are complied with in the Balance Sheet on the liability side.

IV. CONTINGENT ASSETS:The contingent assets include those assets, which may arise on the happening of an uncertain event.

Usually, they are not shown at the foot of the balance sheet on the assets side. The following are the examples of contingent assets:1. Uncalled share capital of the company

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2. Claim from the acceptor of a bills receivable3. A claim for the refund of sales tax, octroi etc.,Even though it is logical that as contingent liabilities are shown in the balance sheet, the contingent assets also should be shown. Otherwise it does not disclose in the Balance Sheet.V. CAPITAL EXPENDITURE

Capital expenditure is one, which is incurred in the acquisition of assets of permanent nature, which are meant for the continual use in the business for the purpose of earning revenue. Generally the following items are chargeable to capital expenditure: Cost of acquiring a fixed asset. Cost of installing plant and machinery, equipment etc. Cost of additions and extension to existing assets. Cost of structural improvements in case of existing assets. Expenditure incurred for the reduction in the cost of production or administration or selling and

distribution. Developmental expenditure.VI. REVENUE EXPENDITURE: All the expenditure incurred in the conduct and running of the business is called revenue expenditure. Besides, all expenses incurred in connection with repairs, renewals etc also fall under this category. Generally the following expenditure are treated as revenue expenses: Expenses incurred in the day-to-day conduct and running of the business such as rent, wages, postage,

salaries, interest, insurance and advertising etc. Expenses incurred for maintaining fixed assets in proper working condition such as repairs, renewals

and replacement of parts of machines. Cost of goods that are purchased for consumption or resale like raw materials, stores etc. Loss arising out of sale of fixed assets i.e loss on sale of machinery. Depreciation charged on fixed assets. Annual renewal fees paid for the renewal of licence, patents, etc. Interest on borrowings.Auditor’s Duties Regarding Capital Expenditure and Revenue Expenditure The auditor should familiarize himself with the nature of the business. This will enable him to know the

nature of the expenditure and decide accordingly. He should get all the relevant data and documents related to the acquisition, repairs, additions etc of the

assets. He should obtain the vouchers of such expenses. In case of controversial items, he should have discussion with the concerned official of the company

before he forms any opinion. He should ensure that the principles of accountancy have been observed accurately in classifying the

expenditure as capital or revenue.

VERIFICATION AND VALUATION OF ASSETS AND LIABILITIES

MEANING OF VERIFICATIONQ: WHAT DO YOU MEAN BY VERIFICATION?

Verification means the procedures normally carried out at the year end, to confirm the ownerships, valuation and existence of items at the balance sheet date. It also involves confirming that presentation in the financial statement is in accordance with legislations. The examinations of the books of account with a view to ascertaining their arithmetical accuracy is not enough. The auditor must verify that the various items appearing in the balance sheet are in the possession of the concern.

Q: DEFINE VERIFICATION OF ASSETS. According to Spicer and pagler “Verification of assets implies an enquiry into the value, ownership

and title, existence and possession and the presence of any charge on the assets.”In the words of J. R. Battli boi, “The auditor must satisfy himself that assets really existed at the date of

the balance sheet and were free from any charge and that they have been properly valued. In verifying the

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liabilities, he has to see that all liabilities have been inserted at their proper figures and that no liability has been omitted.

Q: DEFINE VERIFICATION OF LIABILITIES. Verification of liabilities is the proof of accuracy of the person who are liable in the company.

Verification of liabilities is also as important as verification of assets. If the liabilities are overstated or understated the balance sheet shall not represent a true and fair view of state of affairs of the company. Similarly the profit and loss account will be incorrect.

OBJECTIVES OF VERIFICATION OF ASSETS AND LIABILITIESQ: WHAT ARE THE OBJECTS OF VERIFICATION OF ASSETS AND LIABILITIES? The following are the main objects of verification and valuation of asset and liabilities.

The auditor has to certify whether the balance sheet shows a true ad fair financial position and for this he has to verify the assets and liabilities.

To certify the ownership and title of the assets appearing in the balance sheet. To ascertain the existence of the particular assets appear in the balance sheet. To verify the fact whether assets are free from charge or not. To detect the frauds and irregularities, if any, in the books of accounts of the concern. To ensure the arithmetical accuracy of the books of accounts To verify the ownership and possession of the assets.

VALUATIONMEANING OF VALUATION

Q. WHAT DO YOU MEANT BY VALUATION? Valuation implies critical examination and the testing of determined values of assets by the auditor

based on generally accepted accounting principles and conventions. The accuracy of the balance sheet and profit and loss account depend upon the correct valuation of the assets and liabilities.

DEFINITION OF VALUATIONQ: DEFINE VALUATION.

According to Lancaster “The valuation of the asset is, therefore an attempt to ensure the equitable distribution of the original outlay on the period of assets usefulness”.

Q: EXPLAIN THE METHODS OF VALUATION. Cost price: it is the price paid for acquisition of an asset. As the matter of practice, the expenses

incurred in the purchase of asset and its installation are included in the cost price of the asset. Replacement value: it is the price at which a particular asset can be replaced. Market value: if an asset has a market, a value which it will bring when sold in the market is called

market value. Realizable value: It means estimated selling price in the ordinary course of business less predictable

cost of completion and disposal. Break up or scrap value: it is the price which an asset might be expected to realize if sold as scrap,

being unserviceable.

VERIFICATION VS VALUATIONQ: DIFFERENTIATE VERIFICATION AND VALUATION.

S.No Basis of difference VERIFICATION VALUATION1. Scope It implies the process by which the

auditor satisfies the accuracy of the It implies critical examination and the testing of determined values of

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assets and liabilities appearing in the balance sheet by the inspection of documentary evidence available.

assets by the auditor based on generally accepted conventions and accounting principles.

2. Responsibility It is done by the auditor himself or by his any senior assistant.

It is made by the managers of the concern.

3. Advice The auditor does himself the work of verification of assets

The auditor may seek assistance and opinion of the technical personnel if necessary for ascertaining the value of any particular asset.

4. Basis of evidence It is based on physical inspection as well as documentary evidence.

For valuation very few direct evidence are available. The auditor has to depend upon the estimates of managers to a large extent.

5. Guarantee The auditor is entirely responsible for the verification of assets.

For the accuracy of valuation of assets, the auditor does not give any guarantee.

6. Implication Verification has a broader implication and in fact it includes valuation.

Valuation is a part of verification

Q. DISCUSS IN DETAIL THE VERIFICATION AND VALUATION OF DIFFERENT ASSETS. OR AS AN AUDITOR HOW WILL YOU VERIFY THE VARIOUS KINDS OF ASSETS?

Verification is made on the basis of evidence such as the title deeds, receipts of payments made etc.In valuation an auditor has to depend upon the certificate of the owners / directors.

Assets

Intangible Fixed Floating Fictitious assets assets assets assets

I. INTANGIBLE ASSETS(i) Goodwill Goodwill is the value of reputation of the firm. It enables the firm to earn more than the normal rate of profit. Goodwill has no physical existence as much. It does not diminish in value with use. It has the potentiality of self growth. The value of Goodwill varies with the earning capacity of business. Goodwill should appear as an asset in the balance sheet only when

It has been purchased (or) The company has revalued whole of its assets and has raised a Goodwill account in the books (or) In case of partnership, when a new partner is admitted or an old partner retires or dies, it becomes

necessary to bring goodwill or revalue it in the books of account or When the company has succeeded in establishing a special reputation in the market because of its

increasing sales and profits.Verification Where Goodwill has been purchased along with a running business, the same should be verified from the agreement with the vendor showing the price paid for it. But when the amount is not specifically fixed, goodwill is the amount paid for the purchase of the business over the net assets taken over. It should be verified that the Goodwill has been recorded in the books of account only when some consideration in money or its equal has been paid for. In case of partnership firm the partnership deed should be duly verified by the auditor. He may also verify the changes made in the Goodwill account from time to time on the basis of provisions made in the partnership deed.Valuation

Goodwill should be valued at cost less amounts written off. It is no part of an auditor’s duty to comment upon the price paid for Goodwill even though he considers it to be excessive. Sound financial policies require that the amount of goodwill should be gradually written off over a reasonable period of time.

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(ii) Patents A patent is an official document, which secures to an investor exclusive right for years to make, use or sell his invention.Verification

The life of each patent is always fixed. The auditor can find out the list of all patents from agreements or licences.

The auditor should call for a list of patents in existence and examine the particulars of such patents with reference to their register number, date etc.

The auditor has to find out the renewal fee paid and verify the same with the receipts for payment. It is better if he inspects the patents personally.

The patent right may be acquired either by purchase (or) through research. If patents are the outcome of the research carried out by the business the expenditure incurred on research should be capitalized as such.

The auditor has to ascertain that the patents which have expired either in their legal term of validity or in their working life have been written off.

ValuationPatents must be valued at cost less depreciation. There may be 3 causes of depreciation viz.

Lapse of time Obsolescense and The patented article going out of fashion

The patents should be written off in a period of 16 years after which the right automatically lapses unless the term is extended where patents have been obtained in the name of some employee of the firm, auditor must see that it is properly assigned in favour of firm.(iii). Copy right A copy right is the exclusive legal right to produce or reproduce some kind of literary work. It is the legal protection provided to an author by which the publication of his work by other is prohibited. The period of copyright is for the life of the author and fifty years after his death.VerificationWhile verifying copyrights, the auditor should note the following points.

The auditor should examine the agreement between the author and the publisher. If there are many copy rights with a business the auditor should call for a schedules thereof from the

client and verify them for this schedule.Valuation Generally the value of the copyright is not stable because copyrights lose their value by passage of time. If the sale of the publication is very low or nil the copyright should be written off. In the balance sheet copyright must be shown at cost less amounts written off from time to time.(iv). Trade Marks “A trade mark is a distinctive mark attached to goods offered for sale in the market so as to distinguish the same from similar goods and to identify them with a particular trader”.Verification

Trade marks can be verified by examining the assignment deed duly endorsed by the office of the Register of Trade Marks. Trade Marks can be acquired like copy rights. In case they have been purchased from others, the auditor should vouch the expenditure incurred in connection with their acquisition.

The renewal payment receipts must also be vouched. Auditor should carefully note that proper distinction is made between the capital and revenue expenditure. Any expenditure incurred in the acquisition of the trade mark should be treated as a capital expenditure, while the renewal charges should be treated as revenue expenditure.

Valuation The valuation method is the most suitable method of valuation of trade marks. It should be seen that

trade marks are properly valued and shown in the balance sheet.

II. FIXED ASSETS(i) Land and Buildings

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Almost all the business or industrial undertakings own land & building as common premises. For verification and valuation purposes, auditor should distinguish between the freehold property and the lease hold property.a. Free hold Land and BuildingsVerification

The auditor should examine the title deeds to ensure that they are in the name of the client. The title deeds should cover all the land and buildings shown in the basic of account.Mortgaged Property

The auditor should obtain a certificate from the mortgages or their solicitor to the effect that the title deeds are in their possession.Auditor’s responsibility

The auditor should obtain a certificate from the client’s legal advisor confirming the validity of the title of the client to the property.Valuation of freehold land

It is generally shown at cost which includes the purchase price, broker’s commission, registration fees, legal charges etc. if market or realizable value is taken as the basis for valuation of freehold land, the same should be clearly disclosed in the balance sheet.Valuation of Buildings

Buildings should always be valued at cost less depreciation at a reasonable rate. Depreciation should be provided even where the buildings have not been used during the year.

For Building under ConstructionIf the building is under construction auditor should verify its debit balance with the help of the

architect’s certificates as well as the contractor’s receipts for the amount paid. To be on the safe side, auditor should obtain a certificate from a responsible official to that effect.b. Lease hold property

When the Land or building is acquired by a business concern for a fixed duration on lease, the property is said to be leasehold. Auditor should see that separate accounts are maintained for freehold and lease hold properties.Verification

Auditor should take the following steps to verify the leasehold property. He should inspect the lease agreement to find out value and duration. The auditor should see that the lease agreement is registered with the Registrar and certificate testifying to the validity of the same has been secured from the client’s legal advisor. Auditor should see that the terms and conditions of the lease are property complied with. In such a case, the auditor should make full enquiries to ensure that the property is still continuing with the concern. He should also examine the last receipt of the payment of rent. In case the property is sub-let, the auditor should examine the agreement with sub-lesser.

ValuationLeasehold Land & Buildings are to be valued at cost less depreciation which should be sufficient to

write it off completely during the period of the lease.(ii) Plant and Machinery

These should be verified by personal inspection and with reference to the original documents which served as the basis for the entries, such as purchase orders, vendor’s invoices, contracts, requisitions, construction reports etc. plant register which is generally maintained by big concerns to keep a detailed record of plant and machinery such as the following should be carefully inspected.

Name and description of machine. Number of machinery. Location of plant. From whom purchased. Date of installation. Purchase price. Cost of installation and other items of expenditure to be capitalized. Estimated life. Rate and the method of depreciation.

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Amount of depreciation provision. Repair information, such as date, cost and nature and Other information concerning the plants and machinery.

Verification The auditor should follow the following procedure for the verification of plant & machinery.

Existence: The auditor should see some of the main plants by visiting the factory and he should tally them with the plant register.

Ownership: The auditor should see the copy of purchase contract, invoice, receipts and purchase order. Valuation: Any addition made in (or) any deduction made from it during the year should be carefully

examined and the auditor should see that such deductions or additions are proper. Plant Register: The auditor should inspect the four details of the machinery by tallying with plant

register. Pledge: If the concern has taken some loan by way of pledging the plant and machinery then the auditor

should inspect the conditions of loan, amount, rate of interest etc. Certificate: If the machinery is manufactured by the client then the auditor should obtain a certificate

from the concerned auditor for cost verification. Profit On Sale: If any plant (or) machinery is sold out during the year then the profit (or) loss on the

sale of machinery shown in the profit and loss account should be carefully verified.

(iii). Furniture, Fixtures, Fittings and office equipment Furniture is a movable asset and can easily be removed from one place to another. e.g. Chair, table

desks etc. Fixture is an asset so affixed to land or to a building as to become in fact a part thereof e.g. science

laboratories in a college, furniture to which the scientific apparatus is attached is usually kept as fixed to the ground.

Fittings are fitted on the walls. E.g. electric fittings on walls. Office equipment means office appliances e.g. typewriters, accounting machines, computers and

other similar items.Verification

The auditor should take the following points into consideration while making verification of furniture and fittings.

He should verify furniture & fittings with the help of various invoices held in support thereof. Any more items of furniture purchased during the period should be physically examined. He should also check the amount of depreciation charged. It should be noted that any expense incurred in relation to the purchase of these items should be

capitalized. He should see that the net figure of furniture after depreciation is shown in the balance sheet. Auditor should examine furniture stock register thoroughly to check each items of expenditure

purchased, rate of depreciation, present value shown in the balance sheet.Valuation

The assets are valued at cost less depreciation at a reasonable rate. The auditor should enquire into the methods of charging depreciation because the amount of depreciation will depend upon the use of assets.

(iv). Motor VehiclesMotor vehicles account is to be separately maintained. If the number of motor vehicles is very large, a

separate register as plant Register can be maintained.Verification

While making verification of motor vehicles, the auditor should consider the following points. The auditor should check up the book value of motor vehicles from the balance sheet and see if a

separate account is maintained for this asset. In case company keeps a large number of motor vehicles, a separate register for this purpose may be

maintained on the lines of plant Register maintained for plant and machinery. Such a record would be of great use to the auditor.

He should examine the registration books, licences etc of each motor vehicle maintained. The auditor should check the name of the owner of the vehicles and see if it is in the name of his client. He should also check the rate of depreciation on vehicles and their milage run.

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The auditor should see the insurance premium receipts of vehicles, road tax receipts etc. He should see that all expenses on repairs are duly charged to revenue account and net to their costs.

ValuationValuations are to be valued at cost less depreciation. The auditor should verify the adequacy of the

depreciation. It is a common practice for motor vehicles to be written off over the mileage they are expected to run.

III. FLOATING ASSETS / CURRENT ASSETS(i). Cash in hand.

The auditor should visit the business premises of his client at the close of the financial period and actually count all the balances of cash and compare them with the balances as shown.

If it is not possible for him to pay a visit on the closing date of the year, he should pay a visit on a subsequent day and verify the cash balance upto that date.

Alternatively he may ask his client to deposit the whole of the cash in hand on the closing day into the Banks. By doing so the entire cash will be counted automatically.

In case of the outstation branches, he should obtain certificates from the respective branch managers in respect of cash balances with these branches at the end of the year.

In case, the cash balance kept in the business comparatively more than that of the previous years, he should ascertain the reasons for keeping such large cash balances and inform the facts to the management.

(ii). Cash at BankIn verifying the bank balance, the auditor should take the following steps. Comparison of the balances as shown in the cash book and the pass book

The auditor should compare the balances as shown in the pass book with the balance as shown in the cash book. Preparation of Bank Reconciliation Statement

Many types of frauds can be detected with the help of Bank Reconciliation Statement. Obtaining a letter of confirmation from the bank.

It is possible that fictitious pass book may be presented to the auditor. In such a suspicious situation, he should obtain a letter of confirmation or a certificate directly from the bank. In absence of this he can check accounts himself in the bank ledger. Separate Certificates for different accounts should be obtained

Auditor should obtain separate certificates for fixed deposit account, current account, savings bank a/c from the bank. In case there are accounts with more than one bank, the auditor should verify them individually.

(iii). Bills Receivable Bills Receivable denotes a broad category of formal documents of indebtedness including promissory notes and acceptance receivable.Steps taken by the auditor to verify the bills receivables The auditor should examine the Bills receivable book and prepare a schedule of all those bill receivables

which have not matured before the date of the preparation of the balance sheet. The auditor should vouch the cash received as shown in the cash book. For the bills discounted after the

date of balance sheet but before the date of audit cash received should be vouched with the entry passed in the cash book and bills receivable book.

The auditor should see that a note for the contingent liability is mentioned at the foot of the balance sheet. The auditor should also see that a proper provision has been made in this regard.

If bills have been deposited with banks either for safe custody or for security of a loan, they should be verified on the basis of certificates obtained from the banks.

Bills which were dishonoured before the date of the balance sheet and not renewed should not be shown as bills receivable, but should be included in the sundry debtors.

If the bills have been retired before the date of the balance sheet, the proceeds thereof should be checked by reference to the cash book.

(iv). Sundry Debtors

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According to the companies act, 1956 the book debts of a company should be shown as under. Debts considered good in respect of which the company is fully secured Debts considered good for which the company holds no security other than the debtor’s personal

security. Debts considered doubtful (or) bad.

The following procedure should be adopted to verify the book debts. The auditor should ascertain whether there is a good internal check system regarding credit sales. He should ensure that the sales, collection, discount etc have been properly recorded in the book. He should enquire about cut-off procedure adopted by his client. He should check the postings into the sales ledger and see that the trade discounts allowed have been

adjusted. He should obtain a certified schedule of all debts and compare it with the ledger accounts. He should see that the debtors balance do not include the value of goods sent on ‘Sale or return’ or

‘Consignment’ basis. The installments due on goods sold under ‘Hire purchase system’ should be treated as book debts. He should see that the good debts shown in the balance sheet are recoverable and are shown at their

realizable value. He should see that proper provision has been made for doubtful debts, discount etc. Debts written off as bad should be vouched by reference to the Director’s minute book. He should contact debtors directly through correspondence to verify the balance due from them. Debts due by the officers of the company should be stated separately. Lastly, he should see that the debtors have been shown properly in the balance sheet and as required by

the companies act.(v). Stock in tradeVerification of stock The verification of stock requires lot of care and caution on the part of the auditor. So as far as possible he should be present at the time of taking stock, if it is not practicable, he should proceed on the following liner to prove that he has exercised reasonable care and skill while verifying the stock in trade.

He should enquire about the efficiency of internal check system in operation regarding stock in trade. He should examine the method of stock taking to find out the loopholes. He should obtain a copy of the programme of stock taking and the instructions issued for the same to

verify that the work has been carried out properly. He should also obtain a copy of the physical counting sheet to test check same of the major items of stock. It should also be seen whether proper control is exercised over the receipt and issue of stock. The totals and balances of stock sheets should be thoroughly checked. The principles and basis followed in the valuation of stock should be examined to ensure that they are

those followed in previous years. The value of different items stock should be examined with the help of valuation sheets invoices etc. It should be seen that the valuation of stock is done on the basis of cost price or market price whichever is

less. The Goods inward register should be examined and it should be seen that the goods received on the

closing day (or) earlier have been included in the stock. It should be verified that the stock with customers on sale (or) return basis or with agents or in transit have

also been included in the stock. The cut off arrangements should be checked by using the details of stock movements immediately before

and after the closing date. Finally the auditor should see that the stock in trade has been disclosed in the balance sheet according to

the requirements of the companies act.

Valuation of stockThe stock should be valued correctly. Otherwise the value will be inflated (or) deflated. The stock is a

current asset and is meant for resale. Therefore it should be valued at cost price (or) market price which ever is less.Computation of cost price

The following methods are usually adopted to find out the cost.

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Unit cost method Average cost method First in first out method Last in first out method Standard cost method Adjusted selling price method

Computation of market priceAny one of the following method is adopted to find out the market price. Replacement cost Net realizable value

Verification of different kinds of goods in stocksa. Raw materials

The auditor should obtain a list, regarding the stock of raw materials showing details of items, quantity and value certified by the storekeeper and the factory manager.

He should compare the total of such list with the ledger account. In case where there is a system for minimum, maximum and ordering level of stock, he should enquire

that such system has been properly implemented. He should compare the percentage of conversion, loss from input to output with that of the previous year

to find out the material difference if any. He should ascertain whether the stock includes any unserviceable or damaged raw materials. If so, he

should see whether proper provision has been made for such loss. He should compare the value of raw materials of the current year with that of the previous year if there is

any material difference, the reasons should be enquired intob. Semi manufactured goods

In order to verify the semi manufactured goods, the auditor should obtain a list of stock of such goods showing the details of items, quantity and value certified by the factory manager.

He should check the monthly progress report of production which contains the quantity of raw materials issued for production, goods produced, opening and closing semi manufactured goods.

He should verify the closing quantity of semi finished goods with the use of counting sheets. He should scrutinize the records of the subsequent year to ascertain that such goods are completed

subsequently.c. Finished stock

The auditor should obtain a list of stock of finished goods certified by the storekeeper and the factory manager and check it with the stock ledger.

He should check the entries for the receipt of finished goods with the production reports. The dispatch of finished stock should be checked with the stock ledger and copy of the challans. He should compare the book balance of finished stock with the counting sheets. He should check the valuation of finished stock by referring the cost sheet, reconciliation statement

between cost and financial records if such stock is valued at cost price. If it is valued at market price, the market quotation should be checked.

(vi)InvestmentsIt includes government securities, shares, debentures etc where the number of investments is

considerable, the auditor should ask for a schedule of investments held by the client. Such a schedule of investments should include information about Name of the securities, Date of their purchase, Nominal value, Cost price and Market price..

VerificationThe auditor should verify the details of the schedule of investments by applying certain test. The

securities themselves may be consulted or the broker’s notes may be examined for checking the cost etc. He should verify the amount of interest or dividends accrued on investments.Valuation

If investments are to be held as a fixed asset, there are to be valued at a cost which includes brokerage and stamp duty paid in regard there to. But if the investments are to be held as a current asset these should be valued at cost or market price whichever is clear.

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(vii) LoansLoans may have been advanced in any of the following types. Now we discuss the duties of an auditor

in connection with all these types of loans.

(a) Loans against the security of land He should enquire the rights of the lenders and borrower to grant or to receive loans res. He should examine the loan account and documents relating to the security If the land has been mortgaged, he should examine the mortgage deed to find out the date and

genuineness of the mortgage. If possible he should get the amount of the loan confirmed by the borrower.

(b) Loans against the security of stocks and shares He should get a list of stocks and shares held as security. If possible, he should inspect the same. He should enquire whether the shares are fully paid or partly paid. The partly paid shares should not be

accepted as security. He should enquire the value of the stock and shares and the amount of loan. There should be sufficient

margin between the two.

(c) Loans against the security of goods The auditor should examine the godown keeper’s receipt if the goods are in the godown. If they are at

docks or warehouse, the dock warrant or the warehouse receipt should be examined. If the loan has been advanced against goods in transit the railway receipts or bills of lading should be

examined.(d) Loans against the security of Insurance policy

The auditor should check the date on which the premium of the policy becomes due and should inspect the last receipt of the premium paid to find out whether the policy is active or not.

If the premium has been paid by his client to prevent the policy from lapsing, the auditor should see that amount has been debited to loan account.

The auditor should ascertain the surrender value of the policy by writing to the insurance company. He should see that the loan advanced should not be more than the surrender value.

Finally the auditor should see that the notice of assignment of the policy has been given to the insurance company.

(e) Loan against the personal security of Borrowed He should enquire about the financial position of the surety Promissory note should be examined paying attention to the date of maturity and terms of the loan.

IV FICTITIOUS ASSETS(i). Preliminary Expenses: It is the amount spent on the creation and of location of the company. Since it is of a capital nature, it is shown in the balance sheet. This asset should be written off as early as possible. The auditor should verify that the balance of preliminary expenses which has not been written off, is shown in the balance sheet under the heading “Miscellaneous Expenditure”.

(ii.) Discount on Issue of Shares / debentures: Discount on issue of shares / debentures should be shown separately under the heading “discount on issue of shares or debentures”. Being fictitious assets it should be written off as early as possible. The auditor should verify that the balance of ‘Discount on issue of shares (or) debentures” which has not been written off, is shown in the balance sheet.

VERIFICATION AND VALUATION OF LIABILITIESQ. EXPLAIN THE PROCEDURE FOR VERIFICATION AND VALUATION OF LIABILITIES

It is important as the verification of assets. If liabilities are not properly verified and valued, the balance sheet will not reveal a true and fair view of the state of affairs of a business concern.

Objectives of verification of liabilities: The objectives of the auditor in verifying liabilities are as under. The liabilities actually exist. The credit balance appearing in the books of accounts are really liabilities.

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Liabilities not recorded by accident are brought into books. The liabilities are properly valued. The liabilities are properly classified and disclosed. The liabilities are incurred in the course of legitimate business transactions. The liabilities are incurred under the approval of an appropriate authority.

Now we discuss the verification of various liabilities

(i). CapitalThe auditor should note the following points while verifying capitalI. If it is the first year of the existence of the company

The auditor should examine the memorandum of Association and the articles of association of the company.

The auditor should examine the cash book, pass book, director’s minute book to ascertain the number of shares, the various classes of shares, the amount received thereon and the amount due from the shareholders.

The auditor should examine the contract between the vendors and the company, if some shares have been allotted to the vendors.

II. If it is not the first year of a company The share capital of the company would be the same as in the previous year unless there is some alteration

or addition by fresh issue or otherwise, the auditor should see the relevant sections. For the reduction of share capital the auditor should see the provisions of the companies Act.

III. To verify the capital in a partnership firm The auditor should see the partnership deed The auditor should also check the cash book and the pass book The auditor should see that it has been properly recorded in the books of account.

(ii). Sundry CreditorsWhile verifying sundry creditors the auditor should note the following points: The auditor should vouch the purchases book and purchases returns book with the help of invoices, credit

notes etc and examine the posting into the ledger. The auditor should obtain a schedule of all creditors and he should compare and check schedule with

purchase ledger. He should inspect the goods inward book to ensure that goods purchased have actually been received. The auditor may verify the cash payments made to the creditors subsequent to the balance sheet date also

to find out any discrepancy The auditor should examine the purchase invoices pertaining to a few weeks at the close of financial

period The auditor should compare the percentages of gross profit earned with that of the previous year to trace

the omission of invoices if any The auditor should examine the outstanding bills payable in the bills payable book at the date of balance

sheet.

(iii). Bills payableThe auditor should note the following points while verifying bills payable The bills payable book and the bills payable account should be referred to by the auditor The bills paid should be vouched with the entries passed in cash book. The outstanding bills on the date of balance sheet may be verified by comparing the balance on the bills

payable account and the bills not shown in the bills payable book. The auditor should specially see that bills paid during the date of balance sheet and the date of his audit

have been duly written in the books. The returned bills should be taken as evidence for the payment made for the matured bills. The auditor may ask for confirmation from drawers of the bills and thus verify the unpaid bills amount.

(iv). Loans

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The auditor should take the following points into consideration while verifying loans. The auditor should verify the loans with the help of agreements entered into or the correspondence with

the vendors. If loans or the overdrafts have been taken from a bank, the agreements with the bank and a certificate to

the effect should be obtained and examined. He should see that the interest due on loans has been either paid to date recorded as unpaid in the books of

account. The auditor should also check the Register of mortgages maintained by the company. The auditor should also see that charges have been registered with the Registrar.

(v). Contingent LiabilitiesThe auditor should note the following points while verifying contingent liabilities He should verify the contingent liabilities very carefully. He should examine the Director’s minutes book, correspondence made with the legal advisers and the

information obtained from the officials. The auditor should insist for making a provision in case it is expected that some of the contingent

liabilities are to turn into actual liabilities resulting into a loss to the client. The auditor should obtain a certificate from any responsible official to the effect that such expected

contingent liabilities have been brought into books of account It is to be remembered that the requirement of the Indian companies Act, 1956 with regard to the

contingent liability should be complied with in the balance sheet on liabilities side.

(vi). DebenturesWhile verifying debentures, the auditor should check the following points. The auditor should examine company’s memorandum of association and the articles of association to

acquire the knowledge of powers of the company. The debentures should not be issued beyond these powers to borrow money.

He should examine the debenture trust deed. He may obtain a certificate from debenture holders, if necessary. If the debentures are issued at a premium or at a discount, the auditor should check the entries passed in

the books of accounts. The auditor should see the arrangement made for the redemption of debentures. If a debenture redemption fund is created, the auditor should examine the articles of association.

(vii). Bank overdraftWhile verifying the overdraft the auditor should consider following steps He should examine the company’s memorandum and Articles of Association or the partnership deed in the

case of partnership firm and ensue that the overdraft facility has been made use of with the powers given in these documents

The auditor should see the authority for contracting the overdraft and it should be ascertained from Board’s resolution or resolution of partners

The agreement for overdraft with the bank should also be inspected. It is to be seen whether the overdraft is a clean one or it is against hypothecation or pledged assets of the company.

The auditor should see the register of charges to ascertain the assets given as security against the overdraft. Such a charge ought to have been registered by the company with the register of companies.

The auditor should verify the rate of interest and other terms of interest payment from the agreement. The amount of overdraft should be verified from the books of accounts and compared with the pass book. If the overdraft is against the hypothecation of assets like stock, a certificate from the bank should be

obtained in this regard. It should be seen that the value of security on the date of balance sheet was neither lower nor higher that

what was agreed with the bank. If there is some change which is possible in a hypothecation or pledge or stock the amount of the overdraft should be adjusted accordingly.

Lastly, the auditor should see that the overdraft is properly shown under secured loans and the nature of security for overdraft has been properly disclosed in the balance sheet.

(viii). Taxation liability40

The auditor should satisfy himself that there is adequate provision for taxes He should obtain a schedule showing computation of total income, chargeable profit, profit and loss

account and details of nominal accounts. Then he should check the schedule with reference to the income tax act to determine the tax payable for the current year.

He should vouch the advance payment of tax with the receipt for the payment made. He should compare the overall taxation liability with the provision for the taxes entered in the books of

account and see that the excess or deficit provision has been adjusted in the accounts. He should examine the certificates issued by the tax consultant if engaged by the company Lastly he should see that the current year’s provision for taxes has been shown separately in the profit &

loss account.

(ix). Reserve funds: The auditor should see that the reserve fund is properly stated in the balance sheet and represented by

earmarked investments.

(x). Provident fund dues: He must ascertain the prescribed time limit within which deposit of provident fund dues with the

appropriate authority has to be made and see if the client confirms to this requirement. In case of irregularity in making the deposit, the auditor should ascertain the extent (or) arrears of provident fund dues.

(xi). Amount Received in advance: The auditor should obtain a schedule of incomes received in advance and ensure that these are fully

disclosed in the balance sheet.

(xii). Reserve for Bad and doubtful debtsThe verification of reserves for bad and doubtful debts should be done as follows The auditor should obtain a certificate from some responsible officers of the business and then check the

amount received from bad and doubtful debts. The schedule of debtors should be compared with the balances of ledger accounts to ascertain the possible

amount of bad and doubtful debts. The adequacy of such a reserve has specially to be checked. The auditor should examine the nature, the

circumstances of a particular business and the necessary rules in practice in this connection.

VOUCHING Vs VERIFICATION.Q: DISCUSS THE DIFFERENCE BETWEEN VOUCHING AND VERIFICATION.

S.No Basis of difference

Vouching Verification

1. Nature It examines the entries relating to the transactions recorded in the books of account.

It examines the assets and liabilities appearing in the balance sheet of the concern.

2. Basis It is based only on the documentary examination.

It is based on physical inspection as well as documentary examination.

3. Time It is done for the transactions of whole year.

It is done at the end of the year when the balance sheet of the concern is prepared.

4. Utility Vouching indicates that a particular asset must be possessed by the concern.

Verification certifies the existence of assets and liabilities at the balance sheet date.

5. Scope It does not primarily concern with valuation.

Verification includes valuation in its scope.

6. Personnel It is done by juniors like audit clerk. It is done by the auditor himself or by his assistant.

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Q. EXPLAIN THE AUDITOR’S POSITION REGARDING THE VALUATION AND VERIFICATION OF ASSETS & LIABILITIES.

An auditor is not a valuer and he cannot be expected to act as such. Actually the proprietors or responsible officials of the concern who have a practical knowledge of such assets makes valuations.

An auditor’s duty is confined to testing the valuations as far as he can and in this way satisfying him with the position shown to be correct.

The auditor should test the accuracy of the values put by the officers of the business. In any case, he cannot guarantee the accuracy of the valuation.

An auditor is no doubt concerned with values set against the assets, because ultimately he is to certify that final accounts reveal a true and fair view of the state of affairs of the concern.

An auditor should exercise reasonable care and skill, analyse all the figures critically, inquire into the basis of valuation from the technical experts, and satisfy himself that the different assets shown in the balance sheet are properly valued in accordance with the generally accepted conventions and accounting principles.

If he is satisfied with the method of valuation of the assets, he is free from his liability.

DEPRECIATIONQ. WHAT DO YOU MEAN BY DEPRECIATION?

The term depreciation has been derived from a latin word “Depretium”, which means decrease in the value of fixed assets. The assets decrease in this way due to natural wear and tear of efflux of time. It refers to the gradual diminution, loss or shrinkage in the utility value of an asset on account of wear and tear in use, efflux of time or obsolescence.

Depreciation is an expense in each of the accounting periods in which the asset provides service to the enterprise. It is an expense just like the expenses incurred on rent, salaries, fire insurance premium and carriage.

Q. DEFINE DEPRECIATION.According to AS 6, “Depreciation is a measure of the wearing out, consumption or other loss of value

of a depreciable asset arising from use, efflux of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined.

METHODS OF DEPRECIATIONQ. EXPLAIN IN DETAIL THE DIFFERENT METHODS OF PROVIDING DEPRECIATION. I. Straight line method

This method is also known as straight line method or fixed period method on original cost. The amount depreciation charged during the period of life of the assets is constant. The depreciable cost is evenly distributed over the productive life of the asset.

Original cost – Estimated scrap valueAmount of depreciation = -------------------------------------------------

Estimated life of the assetAdvantages: Simple method. Asset is completely written off. Equal distribution to P&L account.

Disadvantages: No provision for replacement. Unscientific method.

II. Diminishing balance method: The depreciation is charged on the reduced balance of the assets and not on the original cost. i.e the

amount of depreciation charged for the same asset will be reduced year by tear.Advantages: Easy to understand. Business conditions and seasonal fluctuations are considered.

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Depreciation is charged on the basis of its actual cost.Disadvantages: Value of asset is never brought down by it. This method is not accepted by income tax authorities.

III. Annuity method: This method takes in to consideration the interest on the money invested in acquiring an asset is as an

investment and interest is charged on the opening balance of the assets standing at the beginning of the year. The interest is debited to asset and credit will be given to interest account which in turn will be transferred to P&L account. The asset is credited every year with a fixed amount of depreciation. The amount of depreciation is calculated from the ready annuity tables and amount will be different according to the rates of interest and life of the asset.Advantages: It does not ignore interest on capital investment. Most exact and scientific form.

Disadvantages: Interest is based on an arbitrary rate. Not suitable for small value assets. Complicated and inconvenient to calculate.

IV. Depreciation fund or sinking fund method: Under this method the amount of depreciation is calculated with reference to sinking fund tables. It is

debited to depreciation account and credited to sinking fund account. At the end of the year the depreciation is charged to profit & loss account. This amount is invested in outside securities in order to earn compound interest on the investment. This process continues in all the years of the life of the asset. In the last year the investments are sold and whatever the amount that is realized from the sale of securities is utilized for the replacement of the asset.V. Insurance policy method: Under this method policy is taken for the amount of the asset to be replaced. At the end of the policy period a definite amount is received from insurance company which is used for purchasing new asset. Premium is paid every year and this premium is equal to the amount of depreciation of each year. In the beginning of each year premium is paid.VI. Revaluation method:

Under this method the asset is revalued at the end of the accounting year and this value is compared with the value of the asset at the beginning of the year. The difference is treated as depreciation if the closing value of the asset is lesser than opening value.VII. Depletion method:

In the case of concerns owning wasting assets such as mines, quarries etc depreciation is charged under this method. The rate of depreciation for each year is worked out as so much per tone. Depreciation per tonne is obtained by dividing the cost of mining by the total quantity of mineral expected to be exploited.

AUDITOR’S DUTIES WITH REGARDS TO DEPRECIATIONQ: EXPLAIN THE AUDITOR’S DUTIES WITH REGARDS TO DEPRECIATION.

The auditor’s duty in case of depreciation is summarized below: It is the duty of the auditor to ensure that depreciation is provided adequately and the depreciation

charged is properly disclosed in the profit and loss account and the balance sheet. If the auditor is not satisfied on the above, he should report the same.

The auditor should see whether relevant principles of accountancy have been followed in making provision for depreciation.

He should see whether the officers of the business have sincerely and honestly made provision for depreciation.

He should check whether the principles followed from year to year for providing depreciation are more or less the same.

The auditor should examine as to whether the capital employed in the assets is being kept intact. He should see whether the business traditions and rules have been fully considered.

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He should see whether the provisions of companies act as regards depreciation have been duly complied with.

He should see whether all the disclosures as required by AS 6 and the companies act have been duly made in the financial statements.

But if he finds that: The depreciation has not been dealt with honestly by the management. Competent persons have not been employed, and if employed they have not carefully examined the

issue. The provision for depreciation is not adequate. The principles of accountancy have not been followed by the management in making the charge for

depreciation. The disclosures as required by AS 6 as well as the Companies Act have not been made.The auditor should draw the attention of the owners of the business towards the issue and mention the fact

in his report. If there is any change in the method of providing for depreciation, it must be disclosed in the Profit and Loss Account along with its effect on the Profit and Loss for the year.

RESERVES AND PROVISIONSQ. WHAT IS MEANT BY RESERVES AND PROVISIONS?Meaning of Reserves:

Generally the term reserve means that something has been kept apart for future use for emergency. But from the accountancy point of view, “reserve” means that part of the profits which is set aside for any know or unknown contingency, liability, diminution in the values of asset, ect. Meaning of Provisions:

If some loss is anticipated but its exact amount cannot be ascertained, a provision is made. Such provisions may be made either to provide for losses, which may arise on the realization of certain assets, or on accruing liabilities. The exact amount cannot readily be made known for the present in cases such as provision for bad debts, provision for discount, provision for taxation, ect.

DEFINITION OF PROVISIONS AND RESERVES Q. DEFINE PROVISIONS AND RESERVES Definition of reserves:

The term ‘Reserve’ has been defined in Part III of Schedule VI to the Companies act, 1956 as not including “any amount written off or retained by way of providing depreciation, renewals or diminution in the value of assets or retained by way of providing for any known liability”.

Definition of Provisions:According to Part III, Schedule IV of the companies act, 1956, Provision means “Any amount written

off or retained by way of providing depreciation, renewals or diminution in the value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy”.

DIFFERENCE BETWEEN RESERVES AND PROVISIONSQ. DIFFERENCE BETWEEN RESERVES AND PROVISIONS. S.No Reserves Provisions

1 It is created by debiting Profit and loss Appropriation account.

It is made by debiting profit and loss account.

2 It is the result of financial policy of a concern. It is the result of genuine requirements of a business.

3 Reserve is a sum set aside for an unknown liability.

Provision is kept for a known liability.

4 It is shown on the liability side of the balance sheet.

It is usually shown as deduction from the assets concerned.

5 It is in the form of accumulated profit. It is usually in the form of accumulated liability.

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General reserve Capital reserves Specific reserves Secret reserves Reserve fund Sinking fund

6. The amount of a reserve depends upon the policy and discretion of the management.

The amount of a provision cannot be ascertained accurately at the date of the Balance Sheet, though the liability is know.

CLASSIFICATION OF RESERVESQ. WHAT ARE THE DIFFERENT TYPES OF RESERVES AND AUDITORS DUTIES INRESPECT OF THIS.

Reserves

1. General reserveA general reserve is a reserve, which is created by appropriation of profits. It is created without any specific or particular purpose. The aim of creating a general reserve is to provide additional working capital or to strengthen the cash resources of the business, out of profits of the company, from Profit and Loss Appropriation Account. They may be utilized for meeting any unknown liability. It is also called “Free Reserve”.

Objects of Creating General reserves1. Strengthening the liquid resources of a business.2. Making available additional working capital for the firm3. Meeting any known liability, contingency or similar other commitment.4. Equalizing the rate of dividend in the year in which profits are inadequate.5. Concealing actual profits in the year in which profits are excessive so as to use them to

maintain dividend rate in those year in which profits are inadequate.Auditor’s Duty

The auditor should ensure that the general reserve is created for the best interest of business. He should see that company’s Articles of Association provide for the creation of general reserve. He should see that the general reserve is created out of profit, which is real as shown in the balance

sheet. Where any part of general reserve is utilized for the payment of dividend, he should ensure that the

amount drawn for the purpose is separately shown. Where the general reserve is invested in outside securities, it’s the duty of the auditor to see that such

investments are shown on the asset side of the Balance Sheet.

2. Capital ReserveThe term capital reserve does not include any amount regards as free for distribution through the profit and loss account. A capital reserve is generally created out of profits or gains of a capital nature which include the following:

Profit on reissue of forfeited shares. Profit on sale of fixed assets. Premium on issue of shares or debentures. Profit prior to incorporation. Profit on revaluation of assets and liabilities Profit on redemption of debentures.

Auditor’s Duty The auditor should see that a capital reserve is created out of capital profit only. He should ensure that capital reserve is utilized for meeting losses of capital nature. In case capital reserve is used for distribution among the share holders by way of dividend, he should

examine the rules given in the articles of association and law.

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The auditor should see whether it is shown separately in the balance sheet and distinguished from the revenue or general reserve.

He should verify whether it is invested outside securities or retained in the business.

3. Specific reserve:A specific reserve is one which is created for some specific purpose by debiting profit and loss

appropriation account. Normally it is available for the purpose for which has been created. Some of the examples of specific reserves are as below:

Dividend equalization reserve. Investment fluctuatation reserve Debenture redemption reserve Plant and machinery replacement such as sinking fund reserve or depreciation fund reserve.

Objects of Creating Specific reserve:Generally the specific reserve is created with the following objectives:

To meet out outstanding liabilities for expenses due. To write off loss arising out of deprecation or diminution in assets such as deprecation reserve. To meet specific contingency such as provision for bad and doubtful debts, provision for discount, and

provision for fluctuatation in the investment.

Auditor’s duty:In case of specific reserve the auditor should follow the following procedure:

Auditor should verify the objective with which provisions have been made. He should see that the provision made is adequate to meet the objective. If the provision made is not adequate he should ask the management to do the needful to increase it

otherwise he should disclose the same in his audit report. He should see whether the provisions are properly shown on the liability side of the balance sheet. In case specific reserve holds any there purpose other than the one for which it is created the auditor

should see that the board has authorized it properly.

SECRET RESERVES4. Secret reservesMeaning of Secret reserves:

The term secret reserve refers to a reserve the existence of which does not appear on the face of the balance sheet. This is also called “hidden reserve” or “internal reserve”. Such a reserve is not disclosed on the balance sheet. It can be said that there is a surplus of asset over liabilities and that surplus is not disclosed or shown by the balance sheet.

Mostly all banks and finance companies create secret reserves with a view to equalize dividends or to provide a fund out of which heavy losses can be met, without disclosing the fact to the shareholders and the general public. The effect of secrete reserve is to maintain the confidence of the customers and creditors by giving the impression of stability to a prosperous but fluctuating business to check speculation in its share and avoid disclosing information to company.

Definition of Secret reservesAs per the provisions of the companies act a joint stock company is prohibited to create secret reserve

but in the case of financial companies like the banking companies, insurance companies and electricity supply companies have the provisions to create secret reserve. These companies are exempted from the provision of schedule VI to the companies act.

Method of creation Secret reserve: Secret reserves may be created in the following ways: Provisiding excess depreciation on fixed assets such as plant, machinery, land & building, furniture and

fixtures, etc. Writing down an asset completely. Understating goodwill

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Providing excessively for bad and double full debts. Overvaluing liabilities. Including of fictitious liabilities. Showing contingent liabilities as real liabilities. Charging capital expenditure to revenue or crediting revenue receipts to an asset account.

Objects of creating secret reserve: Maintaining a strong financial position Improving the solvency position of the entity. Meeting sudden future financial losses. Facing competitions Confusing the rivals regarding profitability Providing additional working capital. Maintaining a stable dividend payment. Hiding a portion of profit. Enabling the directors to tide over unfavorable time Helping the management not to distribute the hide portion of profit, which is retained in the business in

the form of secret reserve to the shareholders in the interest of the business.

Auditor’s duty:While verifying the secret reserve, the auditor should keep the following points in mind.

He should enquire and find out what is the necessity of creating a secret reserve. He should study thoroughly the Articles of Association ad examine the legality or otherwise of creating

a secret reserve. He should try to collect as much information as possible about the creation of secret reserve. He should

satisfy himself about the method and the procedure of creating such a reserve. Sometimes the managements create secret reserves by means of overvaluing liabilities or undervaluing

assets. In such cases, the auditor should discuss the issue with the management and go deep into the policy and practices behind it.

Unless it is felt absolutely necessary to create a secret reserve, he should not accept the creation of a secret reserve as valid and if he feels so he should ask the management to prepare the revised annual accounts.

5. Reserve FundThe word “Fund” in relation to any reserve can be used only where such a reserve is specifically

represented by earmarked investments. In other words, the expression “Reserve Fund” is used only when there are earmarked investments for it, otherwise it is called only “General Reserve”.

A reserve fund cannot exist, side by side, with the debit balance on Profit and Loss Account. Thus, if there is a debit balance in the Profit and Loss Account it must be shown as a deduction from the Reserve Fund or General Reserve under the heading Reserves and surplus on the liabilities side of the Balance Sheet.Auditor’s duty:In case of reserve fund the auditor should adopt the following procedure to verify it:

The auditor should see that a reserve fund is shown separately on the liability side of the balance sheet. He should see that fund is created for meeting the earmarked purpose. He should see that the amount of reserve fund is invested in easily realizable securities. He should ascertain that the amount invested in outside securities is not less than the amount of reserve

fund.6. Sinking FundA sinking fund is a fund, which is created with a specific purpose such as

To redeem or repay a long term liability such as debenture, long term loans, etc. To replace a wasting asset, such as a mine. To replace an asset of depreciable nature such a plant and machinery, land & buildings ect. To renew a lease.

In case of sinking fund, every year a fixed sum of money is set aside for a definite period, which is invested at compound interest, so that at the end of the period the annual amounts, with interest accumulation, will be sufficient to repay the outstanding loan.

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Auditor’s duty:In case of sinking fund, the auditor should keep the following points in mind Auditor should see that a sinking fund is created as per the provisions of the Articles of Association. He should b familiar with the terms and conditions regarding the creation of a sinking fund and see that

they have been duly complied with. He should check the charge made to profit towards the sinking fund account. He should ensure that the amount of sinking fund is properly invested in easily marketable securities. He should see that the interest on investment is received and accounted in the books of accounts as per

the investment deed. He should verify that the investment against sinking fund is clearly shown separately in the Balance

Sheet. He should see whether the sinking fund investments are sold on the due date and also the profit or loss

made on realization of investment is transferred to the Sinking Fund Accounts only and not to Profit and Loss Account

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UNIT IVAUDIT OF JOINT STOCK COMPANIES

MEANINGIn case of sole trading concerns and partnership firms, the ownership and control lies with the same

person or persons. Buy in case of a joint stock company, the ownership lies with the directors. The monetary stake of the directors is also very negligible when compared with bulk of the share capital contributed by other shareholders. The money of the public should be kept safer and their interests to be protected. At the same time the day-to-day administration of the company should not be hampered. Therefore the company legislation has envi9saged a compulsory audit for companies. The auditor undertakes this task on behalf of the shareholders, he is endowed with a number of powers, which the owners of all business undertakings shall generally have.

QUALIFICATION AND DISQUALIFICATION OF AN AUDITOR Q: LIST OUT THE QUALIFICATION AND DISQUALIFICATION OF AN AUDITOR.Qualification of an Auditor:

Sec G226 (1) and (2) of the Companies Act, 1956, provides that the auditor must possess the following qualifications

A person shall not be qualified for appointment as auditor of a company unless he is a chartered accountant within the meaning of the chartered accountants act 1949.

A person who holds a certificate under the Restricted Auditors Certificates (Part B stated Rules, 1956 is also allowed to act as an auditor of a company.

DISQUALIFICATIONS OF AN AUDITORAccording to Section 226 (3) of the companies act, none of the following persons shall be qualified for

appointment as an auditor of a company A body corporate. An officer or an employee of the company. A person who is a partner or employee or an officer of the company. A person who is indebted to the company for amount exceeding Rs.1000 or who has given any

guarantee or provided any security concerning indebtedness. A director or member of a private company. A shareholder, secretary or treasurer of the company. A person disqualified for appointment as an auditor of any body corporate.

VARIOUS MODES OF APPOINTMENT OF COMPANY AUDITORQ: DISCUSS THE VARIOUS PROVISIONS REGARDING THE APPOINTMENT OF AN AUDITOR. The provisions regarding appointment of company auditor are as follows

I) Appointment by Board of Directors: First auditor: The first auditor of a company shall be appointed by the board of directors within a

month of registration of the company and he shall hold office till the conclusion of the 1 st Annual general meeting.

Casual Vacancy: The board of directors is also empowered to fill any casual vacancy in the office of an auditor except one which is caused by prior registration. He shall hold office till the conclusion of next annual general meeting.

II) Appointment in General Meeting: First auditor: In case the board of directors fails to appoint the auditor, the company shall appoint the

first auditor in its general meeting Annual appointment: Every company appoints at each general meeting an auditor to hold office from

the conclusion of that meeting until the conclusion of the next general meeting. Intimation to auditor: The Company shall intimate every auditor so appointed within 7 days of the

appointment Intimation to registrar: An auditor so appointed shall within 30 days of the receipt from the company

of the intimation of his appointment, inform the registrar in writing that he has accepted (or) refused the appointment.

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III) Appointment by Central Government Non Government Company: Where at annual general meeting no auditor is appointed or reappointed,

the central government may appoint a person to fill the vacancy. The company shall, within 7 days give notice of that fact to the central government.

Government Company: Section 619 of the companies Act provides for the appointment of auditors for the government companies. The auditor of such companies can be appointed or reappointed by the central government on the advice of the controller and auditor general of India.

IV) Appointment of Auditor by Special Resolution Section 224 A of the Companies Act, 1956 provides that in the case of company in which not less than 25% of the subscribed share capital is held whether single or in any combination by:

A public financial institution or a government company or central government or any state government (or)

By financial or other institution established by any provincial or state Act in which a state government holds not less than 51% of the subscribed share capital (or)

A nationalized bank (or) an insurance company carrying on general insurance business the appointment or reappointment at each annual general meeting of an auditor shall be made by a special resolution.

Compulsory Reappointment:At any annual general meeting the retiring auditor, by whatever authority (Board of directors, General

meeting, (or) central government) appointed shall be reappointed unless: He is not qualified for reappointment He has given a notice in writing of his unwillingness to be reappointed. A resolution has been passed that he shall not be appointed or that somebody else be appointed in his

place. A notice is given of an intended resolution to appoint someone else and the resolution cannot be

proceeded with on account of death, incapacity or disqualification of the proposed auditor.

V) Casual Vacancies Any casual vacancy in the office of an auditor, except one caused by prior resignation, may be filled by

the board but the remaining auditor (or) auditors may continue to act. When a vacancy has been caused by the resignation of the auditor, it shall be filled only by the general

meeting. An auditor appointed to fill a casual vacancy shall hold office till the conclusion of the next annual

general meeting.VI) Appointment of Branch Auditor

The audit of the accounts of the branches of the company may be audited by the company statutory auditor.

The company may decide to have the accounts of the branches audited by a person other than the company auditor. In such a case the appointment may be made by shareholders in a general meeting.

The Board of directors can appoint the branch auditor if the company has authorized the board of directors to appoint the branch auditors by a resolution passed in general meeting. While appointing the branch auditor, the board of directors must consult the company statutory auditor.

RIGHTS & POWERS OF AN AUDITOR:Q: DISCUSS IN DETAIL THE VARIOUS RIGHTS AND POWERS OF AN AUDITORS. An auditor to perform his duties must have certain powers without which it may not be possible for him to perform his duties honestly and thereby, he might be held liable for a loss which the company might suffer. In the case of the auditor of an individual or a firm, the question does not arise as the powers and duties of such an auditor depend upon the agreement which is entered into between him and the private individual or the firm.

Right of access to books of accounts: The auditor of a company has a right of access, at all times, to the books and accounts and

vouchers of the company, whether kept at the head office of the company or elsewhere and also to the returns submitted by the branch offices to the head office. The term books include not only those,

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which pertain, to account but also all the statutory statistical costing books and all documentary evidences.

Right to call for information and explanation: The auditor has a right to call for such information and explanation from the officers of the

company as he may think necessary for the performance of his duties as auditor.

Right to receive notice and attend General Meeting: The auditor has right to receive all notices and other communications, relating to any general

meeting of the company, in the same way in which any member of the company is entitled to have them sent to him. He has also a right to attend any general meeting and to be heard there, to any part of the business, which concerns him as auditor.

Right to report to Member: The auditor has a right, as well as duty, to make a report to the member on the accounts

examined by him and to state whether in his opinion and to the best of his information required by the companies act in the manner as required, and whether the financial statements give a true and fair picture of the state of affairs of the business of the company and as to the results of its operations.

Right to visit Branch: According to sec 228, the auditor has a right to visit the branch officer of the company if any, if

the accounts if the accounts of the company branch have not been audited by a duly qualified auditor. He shall be entitled to visit the branch office if he deems it necessary to do so for the performance of his duties as an auditor.

Right to sign audit report etc.: Only the person appointed as auditor of the company or where a firm is so appointed, only a

partner of the firm practicing in India, may sign the auditor’s report or sign (or) authenticate any other document of the company require by law to be signed or authenticated by the auditor.

Right to have legal and technical advice: Whether the auditor needs expert advice in respect of any legal or technical matter for the proper

discharge of his duties, he may seek it at the expense of the company, for which the payment will be a permissible extra expenditure.

Right to receive remuneration: The auditor has the right to receive remuneration for auditing the accounts of the company,

though such right accrues only after he has completed the work. In her best-altered Burleigh Vs Ingram clerk Ltd., (1990), it was half that the auditor could exercise lien on certain books for his remuneration, but this case law is not applicable to India.

Right to indemnify: He has a right to be indemnified out of the assets of the company against any liability incurred

by him in depending himself against civil and criminal proceeding by the company provided he has won the case.

Right to correct mistakes: The auditor has a right to correct anything being spoken or done, relating to the accounts in the

general meeting.

Right to make representation: Auditor has the right to make a representation in writing and also to be hearted in the General

Meeting when he is asked to vacate his office. Right of lien:

The term lien means the right to retain or remove the books, vouchers etc, and the question arises whether the auditor has a right to lien on the books of account. Which he has audited the auditor has a right of lien when he has worked on the books of accounts as an accountant. He has no such right when he has worked as an auditor.

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DUTIES OF AN AUDITORQ: What are all the Various Duties of an Auditor?

The various duties of a company auditor imposed upon him by the companies act as follows1. Duty to submit report It is an important duty of an auditor. Section 227 (2) and (3) provides that the auditor shall make a report, to the members of the company, on the accounts examined by him. The report so submitted shall contain the following:

Whether in his opinion, the profit & loss account referred to in his report shows a true and fair view of the profit (or) loss.

Whether, in his opinion the balance sheet referred to in his report is properly drawn up so as to show a ‘true and fair’ view of the state of affairs of the business

Whether the auditor has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit.

Whether in his opinion, proper books of accounts as required by law have been kept by the company so far as appears from his examination of these books.

Whether the report-on the account of any branch office auditor under section 228 by a person other than the company’s auditors has been forwarded to him and how he had dealt with the same in preparing the auditor’s report.

Whether the company’s balance sheet and profit & loss account dealt with by the report are in agreement with the books of account and returns.

2. Auditor’s duties to enquire into the affairsWithout prejudice to the provision of section 227 (1A) the company auditor shall enquire

Whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interest of the company or its members

Whether transactions of the company which are represented merely by book entries are not prejudicial to the interest of the company

Whether the company is not an investment company within the meaning of sec 372 of banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they are purchased by the company.

Whether loans and advances made by the company have been shown as deposits. Whether personal expenses have been charged to revenue accounts.

3. Other statutory duties Under section 56(1), the prospectus issued by the existing company shall contain a report from the

auditor of the company regarding. Profit and losses. Assets and liabilities of the company and its subsidiary. Rates of dividends paid by the company for each of the 5 financial years preceding the issue of

prospectus. It is auditor’s duty to submit his report. The auditor has to certify the statutory report as correct according to sec 229 of the act. The auditor has to sign the report under sec 229 of the act. Section 240 of the act imposes a duty on the auditor in the event of investigation of the affairs of a

company as to give to the inspector all help in correction with the investigation When a company goes into its voluntary winding up and a declaration of solvency is made by its

directors under sec 488 (1). Such a declaration is to be accompanied by the report of the auditors of the company under sec 488(2). It is the duty of the auditors to make such a report.

LIABILITIES OF A COMPANY AUDITORQ: What are the Liabilities of a Company Auditor? Explain.The nature of liabilities of professional accountants can be discussed under the following headings.

Civil liability for negligence and misfeasance Criminal liability Liability arising from professional

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I) CIVIL LIABILITYa. Liability for negligence: Negligence is a branch of the “duty to take care”. In all those employments where peculiar skill is requisite, if one offers his services, he is understood as holding himself out to the public as possessing the degree of skill commonly possessed by others in the same employment. However to make the auditor liable, a cause – effect relationship between his negligence in performance of the audit and loss to the client must be established. However in order to make the professional accountant liable to third parties, each of the following four points must be conclusively established viz.

That his statement was untrue in fact. That he knew (i.e. believed) that it was untrue or was recklessly and consciously ignorant as to whether

it was true or not. That the statement was made with the intention that the person (seeking damages) should cut on it and That the person did act in reliance on it and has actually suffered a loss.

An auditor’s liability for negligence will arise when it is proved:(a) That he was in fact negligent in performing his duties as auditor and(b) That the client, to whom he owed duty of care, has indeed suffered a loss owing to such negligence.

b. Liability for misfeasance: Misfeasance may be defined as “improper performance of a lawful act or the doing of a lawful act in an unlawful manner”. It implies breach of trust (or) duty. In the course of winding up of a company it appears that any director or officer (including the auditor) of the company

Has misapplied (or) retained, or become liable or accountable for any money (or) property of the company: or

Has been guilty of any misfeasance or breach of trust in relation to the company. Then such director (or) officer (or) auditor may be held liable to repay (or) restore the money or property, together with interest or to contribute such sum to the assets of the company by way of compensation as the court thinks just. Sec. 633 grants relief to directors, officers and auditors of the company against liability in respect of negligence, default, breach of duty, misfeasance or breach of trust. But for getting any relief there under it must be proved by the person concern

That he has acted honestly That he has acted reasonably and That having regard to all the circumstances of the case, he ought fairly to be excused.

II) CRIMINAL LIABILITYLiability under the companies act(i) Misstatement in prospectus: Where a prospectus issued by a company includes any untrue statement, every person (including the auditor) who has authorized the issue of the prospectus, shall be punishable with an imprisonment for a term which may extend to two years or with fine which may extend to Rs.50,000 or with both. The liability can be escaped if the person concerned proves either that the statement was immaterial or that he had reasonable grounds to believe and did indeed so believe up to the time of the issue of the prospectus, that the statement was true.(ii) Non – Compliance by auditor with sec. 227 and 229: If the auditor does not comply with the requirements of Sec.227 and 229 as to making of his report, or signing or authentication of any document and if such default on his part is willful, he shall be punishable with fine which may extend to Rs.10.000.(iii) Failure to assist investigation (Sec.240): Where the central government appoints an inspector to investigate the affairs of the company, it is the duty of the auditor.

To preserve and to produce to the inspector all books and papers relating to the company or any other body corporate and

Otherwise to give the inspector all assistance in connection with the investigation which they are able to give. Failure to do so shall be punishable with imprisonment for a term which may extend to six

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months or with time up to Rs.20, 000 or with both. For persistent default a further fine Rs.2, 000 per day shall also be charged.

(iv) Failure to assist prosecution of guilty officers (Sec.242): If from the report of the inspector appointed to investigate the affairs of the company, it appears to the central government that any officer has been guilty of any offence for which he is criminally liable, and if accordingly it prosecutes the said officer, it shall be the duty of all officers, including auditor of the company, to give the central government all assistance in connection with such prosecution failure to do so would be the same as to contempt of court and be punishable accordingly.(v) Failure to return property, books (or) papers (Sec.477): After the appointment of a provisional liquidator, or making of a winding up order the court may at any time summon before it any officer (including auditor) of the company who is known or suspected to be in possession of any property, books (or) papers of the company. Failure to appear before the court without any lawful impediment may invite the punishment of arrest.(vi) Public examination by court (Sec.478): Upon receipt of a report by the official liquidator containing his opinion that a fraud has been committed by any officer of the company, the court may direct that such officer of the company, and the court may direct that such officer shall appear before the court for public examination. Notes of such examination may be used in evidence against such officer.PENALTY FOR FALSIFICATION OF BOOK

If with an intent to defraud or deceive any person, any officer (including auditor) of a company which is being wound upa. Destroys, mutilates, alters, falsifies or secrets or its privy to the destruction, mutilation, alteration,

falsification or secreting of any books, papers or securities (or)b. Makes or is privy to the making of any false or fraudulent entry in any register, book of account or

document belonging to the company, he shall be punishable with imprisonment for a term which may extend to 7 years and shall also be liable to fine.

PROSECUTION OF AUDITORIf in course of winding up, it appears to the court that any officer (including auditor) of the company has

been guilty of any offence in relation to the company, it may direct prosecution of such officer by the liquidator or that the matter be referred to the Registrar.PENALTY FOR DELIBERATE ACT OF COMMISSION OR OMISSION

If any officer (including auditor) of a company deliberately makes a statement in any return, report, certificate, balance sheet and prospectus etc, which in false in any material respect, or deliberately omits any material fact, he shall be punishable with imprisonment for a term which may extend to 2 years and shall also be liable to fire.LIABILITY UNDER THE INDIAN PENAL CODEIssuing or signing false certificate (Sec.197): If any person issues or signs any certificate required validity to be given or signed or relating to any fact of which such certificate is by law admissible in evidence knowing or believing that such certificate is false in any material point, he shall be punishable in the same manner as if he gave false evidenceFalsification of books, papers etc (Sec 477-A): The auditor is similarly liable to be punished for deliberate and fraudulent falsification of any book, paper, writing, valuable security or account, which belongs to or is in the possession of his employer.Liability under income – tax act:

Liability of a professional accountant under the Income Tax Act has been presented under sec.278, sec.288, and Rule 12A of the income tax Rules.i. A betting or including the filing of false account statement etc (Sec.278):

Any person who is guilty of abetting or inducing another person to file a false account, statement or declaration is punishable with rigorous imprisonment for a minimum period of 3 months and a maximum of 3 years with fine.

ii. Conviction of an offence as to tax proceeding etc.,: If a person has been convicted of an offence connected with any income tax proceeding or if a penalty

[other than under sec.271 (1) (i) or (ii)] has been imposed on him under the income tax act he will be disqualified from representing an assessee.

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iii. False information in return [Rule 12A]: If a chartered accountant in his capacity as an authorized representative prepares the return to be filed by

the assessee, he is required to furnish to the assessing officer the particulars of accounts, statements and other documents supplied to him by the assessee for the preparation of the return. If such report construed as a “statement” within the meaning of sec.297 of the Income Tax Act, contains any information which is false and which the chartered accountant either knows or believes to be false (or) untrue, he would be liable to rigorous imprisonment which may extend to 7 days and fine.

III) LIABILITY FOR PROFESSIONAL MISCONDUCT:Professional misconduct is defined as including any act (or) omission specified in the first and the second

schedule to the charted accountants act as also any other misconduct. The liability for this will be removal of the name of the accountant from the register of members for five years (or) more.

SHARE CAPITALMEANING OF SHARE CAPITAL Q: WHAT IS THE MEAN BY SHARE CAPITAL?

The term share capital means the amount of money invested in a business. It includes not only the money invested at the time of inception of business concerns irrespective of their nature, size or constitution and so without adequate capital no business can survive. The failure of many business concerns is only due to the lack of sufficient capital.

AUDIT OF ISSUE OF SHARE CAPITAL/ AUDIT PROCEDURE OF SHARE CAPITALQ: EXPLAIN THE AUDIT OF ISSUE OF SHARE CAPITAL/PROCEDURE OF SHARE CAPITAL.The duties of the auditor can be enumerated as follows :1. IF IT IS THE FIRST YEAR OF EXISTENCE OF THE COMPANY.

He should examine the Memorandum of Association and Articles of Association. He should check the Cash Book, Pass Book, Director‘s Minute Book to find out the number of shares,

the various classes of shares, the amount received thereon and the amount due from the shareholders. If some shares have been allotted to the vendors, he should examine the agreement between the vendors

and the company. In case shares are issued at a premium he should ensure that the premium on issue should be credited to

a separate account. Allotment and call money should be verified. He should check the forfeiture and reissue of shares, if any He should ensure that all the relevant provisions of the Companies Act are complied with.

2. IF IT IS NOT THE FIRST YEAR OF THE COMPANY The share capital would be the same as in the previous year unless there are some alterations or addition

by way of fresh issue or otherwise. He should ensure that the relevant legal provision are fulfilled. Similarly for reduction of share capital,

he should see the provisions of the Act as specified in Sec. 100. In case bonus shares are issued, the auditor should check whether the permission from concerned

authorities is taken, whether proper resolution is passed and whether the capitalization entries are correctly passed.

In case rights shares are issued the auditor should check the bank book, bank statements. He should ensure that the required resolutions are passed and that the permission of the concerned authorities is taken, with particular reference to Sec. 81.

Q: DESCRIBE BRIEFLY THE AUDIT PROCEDURE OF SHARE CAPITAL.The procedure to be followed while conducting the audit of share capital can be discussed under two

heads as shown below: Audit of issue of shares for cash Audit of shares issued for consideration other than cash

I. AUDIT OF ISSUE OF SHARES FOR CASHThe companies Act and SEBI guidelines have laid down detailed legal provisions for various stages in issue of shares for cash. These stages are:

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a) Application Stage: At application stage, application sent by the investors and vouch the entries made in the Application and Allotment Book with these applications.Audit of Application Money Received

Auditor should examine the resolution of board of directors and that of members approving the terms of issue of shares.

The auditor should examine original applicators for shares and check the entries in the application and allotment book with the help of these applications.

The auditor should check the entries in the application register and cross check with cash book and pass book for application money received.

He should also verify letter of regret issued to unsuccessful applicant along with refund of application money and cross verify cash book for the same.

He should verify the amount of over subscription and pro-rate allotment, as to what is done with excess application money received.

He should see that application money is not less than 5% of the face value.b) Allotment Stage: Here allotment of shares is done, allotment letters are issued to successful applicants and allotment money is called for and received. Letters of regret are issued along with refund cheque to unsuccessful applicants.Audit of Allotment of Shares

The auditor should ensure that above legal requirements laid down by companies Act 1956 and other requirements of Articles of Association have been complied with.

The auditor should examine the resolution of the board of directors relating to allotment of shares. He should see the copies of letter of allotment and letter of regret. Auditor should sample check the entries in application and allotment book and verify the same with

cash book for allotment money received. He should check if money received on allotment has been transferred to share capital. He should check the posting in the register of the amount received on allotment with the allotment book. The auditor should also check relevant journal entries for excess amount received on application is

properly adjusted on allotment.c) Calls: Calls are made and amount due is received.Audit of Calls on shares

Auditor should examine the resolution passed by the board as to making the calls from the minutes book.

Auditor should check the entries in the call book from the copies of the call letters, cash receipts and bank statement.

For calls in arrears, he should ensure that the amount is correctly calculated with reference to any excess (if any) received during allotment or application.

For calls in advance, the auditor should examine if the amount is properly adjusted to calls. The articles should allow the company to receive calls in advance.

Auditor should also examine that interest on calls in advance is calculated with reference Articles or table A.

Auditor should examine the calculation of interest or calls in arrears. Auditor should also examine the amount with Bank Statement.

II. AUDIT OF SHARES ISSUED FOR CONSIDERATION OTHER THAN CASHCompany may issue shares for consideration other than cash. Such shares may be issued by the

company towards payment of purchase consideration or towards payment of purchase of fixed assets, to promoters towards preliminary expenses incurred by them for bringing the company into legal existence to underwrite as underwriters commission.Audit procedure to be adopted for the issue of shares for consideration other than cash:

The auditor should examine the prospectors for details of shares issued to promoters, its number and class and also for shares issued to underwriters as underwriting commission.

The auditor should examine the contracts with vendors, underwriters, promoters for the shares issued. The auditor should ascertain whether the consideration against which the shares are issued has been received in full. It helps to determine the terms and the nature of issue.

The auditor should examine the resolution of the board of directors relating to the allotment of shares.

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The auditor should verify complain with section 75 (I) (b) of the Companies Act. The auditor should examine that proper journal entry is passed for share issued for consideration other

than cash. He should also examine the posting and disclosure in Balance Sheet.

SHARES ISSUED AT PREMIUM MeaningSection 78 of companies Act, 1956, deals with issue of securities at a premium. Any amount, over and above the nominal value of shares received in cash or otherwise shall be credited to a separate account called as “Security Premium Account.”Audit procedure to be followed for shares issued at premium:

The auditor should examine the prospectus for the rate of premium at which shares are issued. The auditor should examine the Articles of Association to see whether they permit the issue of shares at

a premium. The auditor should examine the minutes of meetings of Board of directors and also verify the rate of

premium. The auditor should examine the legal provisions regarding the issue of shares at premium. The auditor should examine that security premium is shown repeatedly on liability side of the Balance

Sheet under the head “Reserve and Surplus.”ISSUE OF SHARES AT DISCOUNTMeaningWhen the shares are issued at a price less than the face value it is said to be issued at discount.ConditionsAccording to section 79, a company can issue shares at discount only if the following conditions are fulfilled:

Issue of shares at discount should be authorized by resolution passed by the company in a general meeting and sanctioned by Company Law Board.

The resolution should specify the maximum rate of discount at which the shares are to be issued. The rate of discount cannot exceed 10% unless the Central Government is of the opinion that a higher percentage of discount should be allowed in special circumstances.

At least one year must have elapsed since the date on which company was entitled to commerce business and the issue of shares at discount.

Share should be of the class of shares which are issued earlier and that issue was not at discount.Audit procedure for Issue of Shares at Discount

The auditor should examine the prospectors for issue of shares at a discount. The prospectus must contain the particulars of discount on issue of shares.

The auditor should examine that all legal provisions of section 79 are fulfilled. The auditor should examine that the resolution is passed at general meeting of the shareholders and the

sanction is received from the Company Law Board. The auditor should examine the Articles of Association to find out whether the company is authorized to

issue shares at a discount.

CALLS RECEIVED IN ADVANCEMeaningA company, if authorized by its Articles of Association,accepts from its members the whole or a part of the amount remaining unpaid on any shares held by him, although call on such amount is not made. However such an amount so received can not be treated as part of the capital for the purpose of any voting rights. Also according to section 93, the company may, if so authorized by its Articles, pay dividend on calls in advance.Audit procedure regarding calls in advance

The auditor should examine the Articles of Association to see if it authorizes the acceptance of calls in advance. He should also see whether interest is payable on calls received in advance.

The auditor should also examine the prospectus for any information on calls in advance. The auditor should examine the cash book for the amount received on calls in advance. The auditor should obtain a list of all the members from whom calls in advance are received. The auditor should verify that calls in advance are correctly credited to calls in advance and are not

credited to share capital A/c.

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CALLS IN ARREARSMeaningAn unpaid amount on calls is known as “Calls in Arrears.”Audit Procedure for calls in arrears:

The auditor should examine the Articles Association for any interest chargeable on such arrears. If the Articles are silent or interest on calls on arrears then provisions in Table ’A’ are applicable. According to Table ‘A’ interest on calls in arrears should not exceed 5%.

The auditor should verify the amount of calls in arrear from statements and Cash Book for receipt of allotment and call money.

The auditor should obtain a list of member director from whom calls are in arrears. The auditor should verify the journal entries of allotment and calls during which calls are in arrears. The

amount should be crossed verified with cash book. The auditor should examine that calls in arrears are properly shown on the liability side of Balance

Sheet under the head, ‘share capital’. It should be deducted from the called up capital.

SHARE TRANSFER AUDITMEANING

Q: WHAT IS MEANT BY SHARE TRANSFER?The companies act regards the share in a company as a movable property and empowers every

shareholder to transfer his share in the manner provided in the articles. The basic object of establishing public companies is to make the shares freely transferable.

OBJECTIVES OF SHARE TRANSFER AUDITQ: WHAT ARE THE OBJECTIVES OF SHARE TRANSFER AUDIT?

The main objectives of the share transfer audit are as below: Checking or preventing clerical errors. Preventing the improper issue of duplicate share certificates or certified transfers. Enabling the dealing of securities in stock exchanges as per the stock exchange rules and regulation.

AUDIT PROCEDURE INCONNECTION WITH SHARE TRANSFERQ: EXPLAIN THE AUDIT PROCEDURE REGARDING SHARE TRANSFER. AUDIT OF SHARE TRANSFERShares are transferred from one person to another and such transfer is to be notified through the company.

The auditor should examine the AOA and find out the procedure for transfer of shares. The transfer form should be scrutinized in respect of the following: It should be complete, properly signed, dated in the prescribed format, properly stamped, and presented

to the company in time. The details of the transfer form should be checked with the entries in the share Register.

Before approval of Transfer The transfer fees must be deposited in a scheduled bank. The auditor should check that. The auditor should ensure that notice is sent to the transferor and no objection is received from them. In case of transfer of partly paid up shares notice should be sent to the transferee and there is no

objection received within two weeks from the date of service of notice.Approval of transfer

The auditor should examine the minute book of director’s meeting and see that the transfer has been sanctioned.

If the transfer is to a limited company, the auditor should examine the A/A and see that the company is allowed to invest in the shares.

The auditor should check that the transferee has not incurred any disqualification to become a member. In case the share certificate is not available the letter of indemnity should be examined.

AUDIT REPORT

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MEANINGQ: WHAT IS MEANT BY AUDIT REPORT?

Auditor’s report is the expert’s opinion expressed by the auditor as to the fairness of financial statements. The audit report is the end product of every audit. It is the medium through which an auditor expresses his opinion on the financial statements. Audit report is an important part of audit process since it summarizes the results of the examination work conducted by the auditor.

DEFINITION OF AUDIT REPORTQ: DEFINE AUDIT REPORT.

“The report is only an opinion on whether the information presented is correct and free from material misstatements, whereas all other determinations are left for the user to decide”.

CONTENTS OF AUDIT REPORTQ: EXPLAIN THE CONTENTS OF AUDIT REPORT. (i) Title: An auditor report must have appropriate title, such as “Auditor’s Report”. It is helpful for the reader to identify the auditor’s report. It is easy to distinguish it from other reports. The management can issue any report about the business performance. The title to the report is essential. (ii) Addressee: The addressee may be shareholder or board of director of a company. The auditor can audit financial statements of any business unit as per agreement. The report should be appropriately addressed as required by engagement letter and legal requirements. The report is usually addresses to the shareholders or the board of directors. (iii) Identification: The audit report should identify the financial statement that have audited. The financial statement may include trading profit and loss accounts, balance sheet and statement of changes in financial position and sources and application of cash flow statement. The report should include the name of the entity. Moreover the data and period covered by the financial statement are also stated in it. (iv) Reference to Auditing Standards: The audit report should indicate the auditing standard or practice followed in conducting the audit. The international auditing guidelines need assurance that the audit has been conducted as per set standards. (v) Opinion: The auditor’s report should clearly state the auditor’s opinion on the presentation in the financial statement of the entity’s financial position and the result of its operations. The statement give a true and fair view is an auditor’s opinion. This opinion is usually based on national standard or international accounting standards. (vi) Signature: The audit report should be signed in the name of the audit firm, the personal name of the auditor or both as appropriate. (vii) Auditor’s Address:

The address of auditor is stated in the audit report. The name of city is stated in the report for information of the readers. (viii) Date of Report: The auditor’s report shall be dated not earlier than the date on which the auditor has obtained sufficient appropriate audit evidence and date on which accounts are approved by the management.

TYPES OF AUDIT REPORTQ: EXPALIN THE TYPES OF AUDIT REPORT.The Auditors opinion may be of the following types:

Unqualified opinion Adverse opinion Qualified opinion and Disclaimer of opinion

Unqualified Opinion Where auditor does not have any reservation, objection regarding the information under audit, then he

issues an unqualified opinion. This opinion signifies that the auditor accepts the accounting treatment given to the various transactions and the profit and loss account shows the true and fair view of the transaction entered by the organization during the period and the balance sheet shows the true and fair view of the state of affairs of the organization at that point of time. It is also known as “Clean report”.

Adverse or Negative Opinion

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Where as a result of the examination of the books of accounts, the auditor concludes that he does not agree with the true and fair view of financial statements under audit, he express adverse opinion or negative opinion. The adverse opinion is appropriate in circumstances where the auditor has reservation on matters such as the accounting policies selected and their application, adequacy of disclosures made and where the auditor considers that the impact of reservation or qualification is so material and pervasive that the financial statements as a whole do not give a true and fair view. Where auditor expresses an adverse opinion, he should also state in his report the reason for the same, so that the readers can assess their significance and effect.

Qualified Opinion In a situation where neither the unqualified, nor adverse opinion is appropriate the auditor gives the

qualified opinion. Where auditor expresses a qualified opinion, he should also state in his report the reason for the same, so that the readers can assess their significance and effect. The words “Subject to” are written to show qualification. If the qualification are quantifiable (measurable) then the auditor has to quantify it. And if these are not quantifiable, Auditor has to clearly state that quantification is not possible.

A qualified report is made on one or more of the following reasons: Dissatisfaction of the auditor or the accounts presented to the auditor. Failure of profit and loss account and balance sheet to exhibit a true an fair view of state of company’s

affairs. Inability / failure / undesirability of management to effect the desired and required changes.

Disclaimer of Opinion The above three are the opinions which the auditor expresses but the disclaimer of opinion is a situation

when auditor is not in a position to give his opinion. Where there is a situation where auditor is not in a position to collect sufficient appropriate audit evidence which enables him to draw his conclusion then it is proper for the auditor to disclaim an opinion due to lack of sufficient appropriate audit evidence. Where auditor expresses a disclamer of opinion, he should also state in his report the reason for the same, so that the readers can assess their significance and effect.

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UNIT VINVESTIGATION

Q: WHAT IS MEANT BY INVESTIGATION?Investigation involves inquiry into facts behind the books and accounts into the technical, financial and

economic position of the business. Investigation is a critical examination of the books and accounts with a specific objective.

Q: DEFINE INVESTIGATION.“The term investigation implies an examination of the accounts of a business for some special purpose.” -

Spicer and Pegler“Investigation involves inquiry into facts behind the books and accounts into the technical, financial and economic position of the business or organization” – Taylor and Perry

DIFFERENCE BETWEEN INVESTIGATION AND AUDITING

Q. DIFFERENTIATE INVESTIGATION AND AUDITING.Investigation implies an enquiry in to the accounts and records of a business concern. In most of the

cases the purpose of such inquiry is to ascertain the true financial position of the business concern or its normal profit earning capacity or the extend of frauds, if any or to inquire about the suspected mismanagement etc.

Basis Investigation Audit

Object

Investigation is done for some specific purpose according to the necessity of the situation.

The object of audit of accounts is to ascertain whether the balance sheet of the concern shows the true and fair view of the state of affairs of the concern or not.

NatureInvestigation is a thorough investigation of books of account for a particular year.

In case of audit, it is usually carried out in the form of test checking.

PeriodInvestigation of books of records and records may cover three to seven years.

Audit of books of accountants is for six months or for a full year.

Carried onInvestigation is usually carried on when the books of accounts are already subjected to regular audit.

It is not so with regard to audit except in the case of special audit of a joint stock company under section 233A of companies Act, 1956.

QualificationIt is not necessary that an investigator must be a chartered accountant.

Auditing can be conducted by a practicing chartered accountant.

Utility The results of investigation are beneficial only to the client.

The reports of auditing are widely used.

Adjustment

In investigation, it may become necessary to make certain adjustments in the annual accounts already prepared.

This is not so required in case of audit.

AppointerInvestigation may be carried out on behalf of proprietor or on behalf of the third parties also.

Audit is carried out on behalf of the proprietor of the business concern.

Report

The investigation report is prepared according to the necessity of situation.

The audit report is prepared according to the Act.

CompulsoryThe investigation of books of accounts and records is not legally compulsory

Audit is compulsory incase of joint stock companies.

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OBJECTIVES OF INVESTIGATIONQ: EXPALIN THE OBJECTIVES OF INVESTIGATION.Following are some of the particular for which investigations are conducted:

Investigation on behalf of an individual or a promoter of a joint-stock company which wishes to purchase a private running business in order to ascertain the financial position and the earning capacity of the concern proposed to be taken over.

Investigation on behalf of a client who wishes to lend money to a concern to know its financial position. Investigation where fraud is suspected by the proprietor Investigation on behalf of client who wishes to purchase the shares of a company Investigation under the Indian companies act. Investigation to accertain the amount of compensation payable on the compulsory removal of business. Investigation for claims under an insurance policy covering consequential losses. Investigation on behalf of the liquidator of a company where the directors are suspected of fraud or

misfeasance. Investigation on behalf of beneficiaries where trustees are suspected of fraud or misappropriation. Investigation on behalf of income tax authorities for tax liability or for detection of undisclosed income.

INVESTIGATION UNDER THE PROVISION OF THE COMPANIES ACTInvestigators or inspector may also be appointed under the companies act by the central Government in the following circumstances:I. In the case of companies having share capital if at least 200 members or those who hold at least one-tenth of the total voting power apply to the Government.II. In the case of companies which have no share capital, when at least one-fifth of the total number of the members apply to the Government.

Under the above two cases, the Central Government may require evidence to prove good reasons for requiring the investigation and may also call for security up to Rs.1,000 for payment of the cost of investigation.III. The Registrar of Joint-stock Companies may apply to the Central Government for the appointment of Inspectors –

If the company has failed to send any information or explanation which he required the company to furnish; or

If the documents filed by the company disclose an unsatisfactory state of affairs; or If it has been represented to the registrar that the affairs of the company have been carried on

fraudulently.IV. The Central Government may also appoint inspectors if it appears to it –

That the business of the company is conducted fraudulently or to commit fraud on creditors or on minority or that the company was formed with fraudulent or unlawful objects; or

That the persons connected with the management of the company are guilty of fraud, misfeasance or misconduct towards the company or its members.

V. The Government shall appoint inspectors if – The company passes a special resolution for their appointment; or The court an order that the affairs of the company ought to be investigated by an inspector appointed by

the Central Government.VI. The Central Government must appoint one or more inspectors to investigate and report on the membership of a company for the purpose of determining the true persons –

Who are or have been financially interested in the success or failure, whether real or apparent of the company; or

Who are or have been able to control or materially to influence the policy of the companywThe expenses of this type of investigation will be borne by the Central Government ur of moneys provided

by Parliament unless the Government directs that the expenses or any part thereof should be paid by the persons on whose application the investigation was ordered.

AUDIT OF COMPUTERIZED ACCOUNTS AND ELECTRONIC AUDITING.Q: EXPALIN THE MEANING TERM AUDIT OF COMPUTERIZED ACCOUNTS.

Computerized accounting system is the integration of different component systems to produce computerize books of accounts and computer generated accounting records and documents. It is a system in which accountants enter financial data into spreadsheets and other accounting software, and then mathematical

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algorithms compute the information into the necessary ledgers and financial statements. Computerized system also allows Accountants to create trending analysis, and report any variances quickly and accurately. Additionally, transactions from all company divisions are accessible through computerized accounting systems, giving Accountants better access to financial information.

BENEFIT OF COMPUTERIZED AUDITQ: EXPALIN THE BENEFIT OF COMPUTERIZED AUDIT.1) Speed : the work of recording of transactions , preparation of books, accounts can be done with greater

speed.2) Greater accuracy : the chances of arithmetical errors and human errors are reduced to minimum.3) Greater economy: under the mechanized accounting system, work can be done with minimum staff, with

minimum cost.4) Better records: records prepared by machines are neat and clean. It is more legible, systematic and uniform.5) Greater information : various types of information and statistical data regarding the operation of the

business can be easily collected.6) Interim accounts : interim accounts can be prepared without delay. This will help the management to

declare interim dividend.7) Analysis of data : once the basic information is feed into the computers, it can be sorted in many different

ways to provide analysis of statement .8) Avoid overtime : the work of accounts are done quickly , the accounts can be prepared without any loss of

time.9) Reduction in audit fee: the work load of audit works is reduced by the computers. Hence the computerized

audit reduces audit cost.10) Computerized audit reduces the monotony of audit work11) Computerized audit enhances the reliability of audit12) Computerized audit ensures flexibility in the audit programme.13) Computerized audit is helpful for the smooth functioning of auditing.

DEMERITS OF A COMPUTERIZED ACCOUNTING SYSTEMQ: EXPALIN DEMERITS OF A COMPUTERIZED ACCOUNTING SYSTEM.

There are actually several disadvantages of computerized accounting system. They may include the following:

Not all software may be compatible for the things that you need to do when conducting your accounting business.

The cost of computer and associated equipments are much more costly when compared to manual processing equipments, such as pens and pencils.

Technological complexity of computer and its associated equipments makes it more difficult to learn and maintain when compared to equipments of manual information processing.

The use of computers require additional infrastructure, such as power supply and software backup. These increases the chances of problems due to failure of these infrastructures.

Failures of computer system can be more serious and difficult to correct, e.g. one scratch on a hard disk can make the complete data on the disk inaccessible. In comparison, manual system faults have comparatively limited impact.

ELECTRONIC AUDITING Q: WHAT IS MEANT BY ELECTRONIC AUDITING.

e-audits is a online compliance and risk management software solution for compliance managers to build and report all the checks you have or might want. It’s quick to set-up (no software is required) and easy to use. The flexibility inherent to the design means it works seamlessly with your organisations risk and compliance systems. From simple tick lists to complex audits you can build, schedule and assign by name, title, site, area etc. and report findings and designate tasks with key data instantly viewable on dashboards. Any deficiency can be designated for completion and our Action Manager module plots progress for you, freeing up your time. e-audits could transform the way you work giving better performance, reduced cost and management the information to get the best from teams and resources.

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MEANING OF SPECIALIZED AUDITQ. WHAT IS MEANT BY SPECIALIZED AUDIT? The auditor should examine the rules and regulations and the act concerned with the working of the certain intuitions and they are managed according to the procedure laid down by the government which grants permission to start the institutions. Auditor’s duty is to verify the rules and regulations governing the administration and management of the institution. The auditor should also get conversant with the procedure followed in recording the transactions, maintenance of records and control of transactions.

AUDIT OF CHARITABLE INSTITUTIONSQ. EXPLAIN THE PROCEDURE FOR AUDIT OF CHARITABLE INSTITUTIONS.General

The auditor should carefully examine the constitution of a charitable institution He should then inspect the minute’s book of the managing committee and ascertain how far its

resolutions have been carried out.Income

He should vouch the receipts from donation and subscriptions by reference to the counterfoils of the receipt books. Such counterfoils should be signed by a reasonable officer and unnumbered serially. Such receipts should be compared with the entries made in the register of the subscription and donations. The lists of donations and subscriptions should be carefully gone through

If the property in part is let out or the institution holds some securities outside, the receipt or rent or interest there from should be vouched with the help of proper vouchers.

The donations (or) subscriptions received in advance should be carried forward and adjusted accordingly in the subsequent period. If an amount from legacies is due, it should be checked. A schedule should be obtained for all such items outstanding.

Grant of loan from the government or local body should be carefully checked.Expenditure

He should see that proper distinction has been made between capital and revenue. In case of purchase of some assets or investment, it should be checked with the proper vouchers.

He should ascertain that all expenses incurred pertain to the business of the institution itself. He should carefully examine the relevant documents.

Miscellaneous The auditor should verify all assets and liabilities. Investments should e verified by reference to bank’s

certificate The auditor should see that reserves maintained for some specific purpose have been properly utilized.

AUDIT OF CLUBQ. DISCUSS THE PROCEDURE OF AUDIT OF CLUBS. A club is not an institution which earns trading profits. It collects subscriptions from its members and provides for their amusements. The following special points should be noted in the audit of accounts of club.General

The auditor should study the rules and regulations including the memorandum and articles of the club if any and note down special points with regard to accounts.

He should examine the minute’s book of the club. He should go through the system of internal check in vogue in respect of receipts in during rooms etc.,

and confirm that it is quite effective.Income

The income from subscription is the main source of revenue for a club. The auditor should vouch the receipt of cash on account of admission fees and subscriptions by reference to the counterfoils in the receipt books and the list of members

The subscriptions in arrear should be checked with the help of a schedule received from the client and it should be seen that it is duly certified by the committee managing its affairs.

The auditor should ascertain that the subscription received in advance are carried out and adjusted subsequently in the accounts.

If a canteen is running under the club its receipts should be vouched. Similarly if some property of the club has been let out, the income there from should be verified.

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If some special donations are received by the club, it should be seen that it is utilized for the purpose for which it is meant.

The auditor should see that the heavy expenses are spread over a number of years instead of their being charged to the years concerned. He should see that all purchases of the club are duly sanctioned.

He should ensure that proper distinction has been made between capital and revenue. The expenditure incurred by the club should be properly vouched.

Miscellaneous He should verify the assets including stock in hand and see that they are properly valued. He should check minutely the inventory of wines, provisions and similar other materials.

AUDIT OF CINEMA THEATRESQ. DESCRIBE THE PROCEDURE FOR AUDIT OF CINEMA THEATRES?

While auditing cinemas, the auditor will pay attention to the following points.General

At first he should enquire into the system of internal check in operation so as to enable himself to be familiar with the short coming of the system.Income

The income of cinemas is usually from the sale of tickets. The auditor should check the daily receipts as entered in the cash book with the daily returns of tickets and counter foils of the tickets. He should ascertain whether such receipts are deposited in the bank daily or not.

He should ensure that money received on account of advance booking has been carried over. The income from advertisement on screen, slides, lobby etc should be vouched by reference to proper

documentary evidence.Expenditure

The auditor should check carefully the capital expenditure and ensure that proper distinct has been made between capital and revenue.

The auditor should check the payments made in connection with salaries, wages, electricity etc. The auditor should check the entertainment tax with the counterfoils or tickets sold and see that it is

being regularly paid to the government. He should vouch the repair and renewal expenses He should check the advertisement expenses by reference to the actual cuttings from newspapers.

Miscellaneous The auditor should verify the assets including the closing stocks and see that they are property

depreciated. He should also see that films etc are properly valued. He should examine the accounting records relating to sales of tickets and hiring of films carefully.

AUDIT OF EDUCATIONAL INSTITUTIONSQ. EXPLAIN THE PROCEDURE FRO AUDIT OF EDUCATIONAL INSTITUTIONS.

The auditor should examine the rules and regulations and the act concerned with the working of the institutions. Auditors’ duty is to verify the rules and regulations governing the administration and management of the institutions. The auditor should also get conversant with the procedure followed in recording the transactions, maintenance of records and control of transactions. In particular the auditor should look into the following

In case of educational institutions, the charters, trust deeds, university act etc containing rules and regulations should be examined and those rules which relate to accounts in particular should be taken note of in detail.

The system of keeping the accounts should be ascertained and go through the proceedings of the minutes of the meeting of the governing body or managing committee, especially those related with the accounts.

The auditor should obtain a copy of the budget sanctioned or the financial statement or acquaint with the different heads of income and expenditure of the institutions.

The auditor should vouch all the receipts through student’s monthly fees with the help of the carbon copy of the receipts and the registers of students into the cash book. The auditor must see that the cash received is deposited in bank daily.

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The auditor should see that the fees received in advance have been properly dealt with. Grant – in- aid from the government should be carefully verified. The auditor should verify the admission fees with the register of new comers. The auditor should examine that extra fees for laboratory, library, examination and games have been

charged properly. To check the money received for a particular purpose has been utilized for the same. The auditor examine that the free ships or concessions granted to the students are duly authorized and

any charges irrevocable have been written off. Donations received from different charitable bodies or persons have been duly acknowledged and

recorded properly in the accounts. The auditor should vouch the incomes from the properties, buildings and other lands. The hostel fees and deposits received from the students should be vouched with the counterfoils of the

receipts from the students and the outstanding amount at the date of balance sheet should be agreed with the schedules.

All the establishment expenses should be carefully vouched in detail and the capital expenses should draw his special attention to ascertain that it has been properly dealt with in the accounts.

The auditor should examine the stocks of furniture, equipments, stationery provision etc very carefully. Special attention should be paid to the stocks of books and equipments in the laboratories.

The provident fund of the staff should be duly checked and it should be seen that it has been properly invested.

The auditor should check the payments made on account of scholarships with the help of receipts from the students and the scholarship register.

The amount of salaries paid to staff should be vouched through salary register. If necessary, the agreements with the employees may be examined. Increment in the salaries should be carefully scrutinized and ascertain that it has been duly sanctioned.

The auditor should see that all the assets and liabilities are bought into account. Distinction should clearly be made between capital and revenue income and expenditure. Verify the balance at bank and cash in hand as usual. Verify the stock of provisions, lien, furniture, stationery etc., as usual see that proper record has been

maintained for such articles.

AUDIT OF HOSPITALSQ. WHAT IS THE PROCEDURE FOR AUDIT OF HOSPITALS / HOW DO AUDIT THE HOSPITALS?

The auditor should satisfy himself that proper control exists over the purchase of food – stuff, kitchen equipments, meals etc served to patients, purchase and use of surgical instruments, medicines etc. He should find out whether there is a blood bank attached to the hospital and if so its income and expenditure are recorded separately. Similarly if the hospital is attached to a medical college the accounts of the hospital should be maintained separately.The auditor should check the following

He should examine the letter of the appointment and ascertain whether it in any enlarges the scope of his responsible.

He should carefully go through the charter or trust deed under which the hospital has been setup and take a special note of the provisions affecting the accounts

He should examine and evaluate the system of internal check and control and devise his audit procedures taken in view is weaknesses

He should vouch the entries in the Bill register of the patients with copies of the bill issued. Issued bills pertaining to a select period should be test – checked to see if theses have been correctly prepared taking into account the period of stay of each patient as recorded on the attendance sheet

He should ascertain whether bills have been issued to all patients from whom charges are due and whether the same has been done accordance with established rules and procedure.

He should vouch collection from patients with copies of their bills and entries in the bill register. Arrears of dues should be properly carried forward and where theses are deemed to be irrecoverable, they should be written off after due authorization from trustees or the managing committee, accordance to the predetermined criteria.

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For rental income from landed property settled on the hospital, as shown in the property register. The auditor should vouch the rent rolls and counterfoils of rent receipts. In case of arrears or advance payment of rents, he should confirm whether appropriate entries have been passed and the respective sums duly disclosed in the annual statements.

In case of legacies and donations received for a specific purpose, the auditor should ensure that these or the income there from as the case may be are not applied for any other purpose.

Actual collection of subscription should be checked with subscribers register and the difference whether due to arrears or advance payments, should be carried forward and properly disclosed in the annual statements

Grants – in- aid received from the government or a local body should be verified by reference to the correspondence with the authorities concerned and entries in cash book

The auditor should see that a clear distinction has throughout been made between capital and revenue expenditure.

Expenditure of capital nature should be duly authorized by the valid resolution of the managing committee.

Payments for the purchase of stores, drugs, linen, clothes, instrument etc should be vouched. The auditor should vouch the payment of salaries to the members of the staff and other expenses also. He should verify the assets including closing stock. He should ascertain that proper depreciation has been provided for. He should ensure that expenditure of different categories do not exceed the amount budgeted.

AUDIT OF HOTELSQ. EXPLAIN THE PROCEDURE FOR AUDIT OF HOTELS. First of all the auditor should examine the system of internal check vogue with regard to the purchase, issue, payment etc of provisions, stores, wires, linen etc

He should also familiarize himself with the system of book – keeping in vogue in the hotel. This is very necessary

The receipts from the travelers should be checked by reference to records made in the cash book which should be compared with the window ledger.

For balances outstanding, the personal ledger should be examined. Other receipts should be carefully examined The auditor should see that proper distinction has been made between the capital and revenue. It has to

be ensured that heavy prices have not been paid for purchases. The payment of wages, salaries etc should be vouched. The petty cash payments should be thoroughly checked. The auditor should ascertain whether proper provision has been made for depreciation on crockery,

furniture, linen, etc., the method for depreciation should be applied consistently. Sometimes these articles are revalued.

In some hotels, the expenditure on these items in capitalized and a renewal account is created with an amount base on previous experience by debiting the Revenue account

The auditor should see that the expenses incurred on painting, equipment etc., are spread over a reasonable number of years

He should see that all assets and liabilities are properly and distinctly shown in the balance sheet He should see that all assets have been adequately depreciated.

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