audit notes surbhi bansal (ipcc)

110
i, ;)itf J t,hapter 2 i 'ir .,rt-i:t 3 Chapter 4 f] , til-f ) ir.t1;te'P $ (lhante.r 7 ' 't'tifrt0f 8 r 'hllrter 9 f'hrFter ( ihapter t..*ratriter Chapter (lhapter l4 ( ihapter l5 l0 ll t2 l3 Contents at a Glance Introductionto Auditing Basic Concept in Audit Preparation for an Audit Intemal Controls E.D.P- Audit Vouching Verification Some lmportantAccounting Concepts \ Company Audit I Company Audit ll Audit Repo( SpecialAudits Audit Of Govemment Entities \ Miscellaneous Auditing & Assurance Standards l-16 11 -25 26,43 44 .56 57 -62 63 -80 8t ,89 90 -93 94 - lt3 l 14 130 l3l -t53 t54- 168 t69 - 173 r74- t80 r8r -206 l-7

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i , ; ) i t f J

t,hapter 2

i ' i r . ,r t- i : t 3

Chapter 4

f ] , t i l - f )

i r . t 1 ; t e ' P $

(lhante.r 7

' ' t ' t i f r t0 f 8

r 'hllrter 9

f 'hrFter

( ihapter

t..*ratriter

Chapter

(lhapter l4

( ihapter l5

l 0

l l

t2

l3

Contents at a Glance

Introduction to Auditing

Basic Concept in Audit

Preparation for an Audit

Intemal Controls

E.D.P- Audi t

Vouching

Verification

Some lmportant Accounting Concepts \

Company Audit I

Company Audit ll

Audit Repo(

SpecialAudits

Audit Of Govemment Entities \

Miscellaneous

Auditing & Assurance Standards

l - 1 6

11 -25

2 6 , 4 3

44 .56

5 7 - 6 2

63 -80

8 t , 8 9

90 -93

94 - l t3

l 1 4 1 3 0

l 3 l - t 5 3

t 5 4 - 1 6 8

t69 - 173

r 7 4 - t 8 0

r8 r -206

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19_h4ptel Ilntnocluction to Auditrng

i . i i , r .r r iL i{AL i)t j i t POSE FIN A NCIAL STATEM ENTS

I i inanci : r l St : r tements inc lude the fo l lo* ing:

(o) Profit .& Lns.r ,4ccount: Wlrich inil icates prolit earned or loss incurred ..Jrrring ;r

parlicular f inancial year. T-r v) Yn<r..6{' l (! ' ,.t Lr;. o [.,r ' .,," rl 1 f. l i .,; ' p .

(h) Bulance Slrcet: Wlrich sho*,s position of assets &liabil it ies at a particular date- -it i . y ldi i i

(c) Cash flow & Jimds Jtow Stotement' Which slrorvs rnovenlent of cash/ funils ,:r.iiiffg" l' ''t t-,t';{

,.,pa r l i c r r l a r l l r t anc ia l ; ea r (Howeve r l l t c sc a rc no l O t "n " t "O , l ] , r ; f l e r r t i t l es ) ' " ; \

. .

(d) Notes to uc( 'out , ls : i .c . Disc losures or ex l l la t la tory l lo tes. f r " r I r ' ' ' \ r

' ' i \ I

i :, .',i.s f : l t , ' : " r l n t S

i lnR., E C C1

{ !nancia l, Owner

Managemenl

q. For evaluatirtg p-erfttrnnnce ol- business

I-A. For evaluatin g profitthili4' of business.

: . For evaluating their ow_n perfcrrtttancc.

, . For making decisi tnrs, l r . ,

' , , , r , , . , -' For j t rdg ing tn : r ' l i ab i l i t i es - . I

I

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I

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Lenders &credilors

Customers

Co,"'rliiliiro,i

t -

, Emplol,sgg

' Reseurch

, onal_ysts elc-

For eslinntirrg expected future outconies.

For judging credit wortlt iness of the entity.

For jrydq11g r1couerubiliry 1f lfeir dues,

For determining general consislency of the business.

Por .ut.,,iuiiro,r't of1fi r e: c t r i.

For ler.ying excise duty, VAT. etc.

For determining reosottobleness of wages & salaries etc.

For creatine de martd for honus.

- For evaluating lrends.

' For judginginvestnrcnt opportunities in the enti[ ' .

t

I

I

t

t 1 ATJDITING

. Audit is an independenl exantirtotiort,

' Of frnancial irtformotion,

. Of any entity whelhter profit makirrg or not- irrespective of its size & legal structure.,

. When such an eXamination is conducted rvith a vierv to exprcss an opinion thereott.

1 t' t,t I i i t t t g rrltr :; ..1.r.r.'/rrrD. r !l"l!-" II;er t rr resi

{ lha ractt 'r ist icso1 'Arr i l i t

br wh;;

S'i'.r/i,urolrc c&

indeg,e71dgn1

Iiitulrtc ial

slulentents

Etiitl'

Opinitirt

. \u t l i t i ras t , r be c.n i l i rcGd i i r a proper ruou. ) i ' , ' , \ '0 ' l I i \nr ' ' r ,u l i

Autl itt:,r slroulcl be cornpletcll ' otriective (unbiased) in l i i-, lrppr"r,a,-rh

F{e . l rould i to t be i r r f luenced l r r t l ic c l ient .

, \ , , , . 1 i , , , - " o l l i r r i t r r r i s on l l r r : r r r c i r i l s t a temcr i t s i r r c l r r t l i l r s l ) v1 r f i 1 11111 11 , ; i.tcc(-rrtnt. I i lr lancc slreet & Notes to a(icounts.

J 'hc [ ' rcprr rat iorr of f inancia l s taternents is t l rc rcsponsib i l i t r o tnrariat:,t: rnerlt of- e rrt it l ' .

H i : , r : i i r ' r r t c l r n [ r c a r r y c r r t i l r u l r ; t t cve r i s t l r e l cga l l - on t r i e . . i l r l r ; r r f . , .propr ie lors l r ip , par tners l r ip . t rus l c l r company etc.' Ihe

err t i tv nrav be p iof i t or iented or a char i table one.

FI is , r l r i r t i t ,n is on ' I rae &f i f i r t , ie* , 'o f fnr tLrc ia i s tarerncnts

For t l r is . i t is r recessary t l ra t

(i) Financial statement have bcerr prepared using acceptable policrr.,rvh ic l r are consistent ly appl ied.

(i i) Financial statements have been prepared as per relevantregulat ions, &

(ii i) Tlrcre is appropriate disclosure of all rnaterial iterns.

I r r ln t l ia . a t rd i t is to be ct ' r r r l r rc tcd hy a profcss ional having good u" .ount ing & audir rnubackground. A chartered accourttant having certi l lcate of practice is eligible to conduct audil.

a

I

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1.3 INDEPENDENT AUDIT

Meaning ofIndependence

au,fitoittIndependence

Whyindependence

A.f""tt"g;t ;iintiepende niaudi t

(oj l"arp"'raaiia" rn"i"t tnoi it,.i"Jg"nl.ni of nDcr5on i r not suboid i r rare to u ' is l res o l :arroth( . ' ,. Pcrson

: (b) It requires that he should not act under any inl-luence.

, (c) Thus, lre carr work in a conrplete rrnbiased lnanner., - . : . . ^ - - -, (a) The necd for auditor independence is provided in AAS.

i (b) 1 ' t {E COMPANIES r \CT. l9-56 a lso conta i r rs speci f ic prov is ion to ensure audi tor ' ., independence.

, (c) Morcover, as per Tl'lE, CIIAI{TE,RED ACCOLJNTANTS ACT, 1949 as amended by'fl{LI Cl-IARTERED ACCOUNTAN'IS (AMENDMtlNl') ACT, 2006, independence of auditor

. is required.

(a ) l f a r rc l i to r rna in ra i r rs l r ig l l r t l cg rcc o l ' in t l cPer r , l c r rce . t ' red ib i l i r y o f f i r r i r r rc ia l s la lenrer r l s ; \: enha 'ced. i , r - , . , , r r l : r . \ \o i . , 1 p -o : r i ' ! ' i , , ' \ t ; t r " i . r i " , ' , 1 l *o \ {S i r ' ,

, (b; tnOepenclent auclit report \!i ' l l be accepted & respectecl by all stakeholders.i, Frtr nnnagemertt , (n) 1'lre1,can casilv judge reasorrs for losses along rvith thc reasons &. tr;r

: ' to corr t ro l i t .

, db) 1'he1' can ensure g:ne ral relialllitV_ o.l a. co_uljine sf'stem

_. (a) lt discotrragcs them fronr coinmitting frauds as it acts as a moral check

. o r r t hc r t r .

, 1b) l h:t can jud_ge

leasolablerress of n1v11e1ll *:t t salary, o:n1t

"1":\ /

\ r ' / .

, For Enrployees

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i t t t rr t t Iuct ion I o . '1ucl i I i r t , :

t " -

I:or Iendt:rs

I;'or ComputingTrtr

I:ttr ()wners

l:or orhitruliorr

I'or insurer

Iiir prnspi,iirit,oint,aslor

" [ ]anker : , can p iace r<r i i : t r r tc ( l r audi ted f i r ran, . : i i r l s taternents ' r 'hr1e

rr iak i r r : t iee i - r ior r abot t t r ' . : t : i t \ \ ' ( ) r i l l lness o l k)an lpJ l l icants.. L'-,r 'cu lri ie r provicling loait. lhc auclited statemcnts ol'brtrrou'er heip tlre

le ndcr to j r r t lge recovera[ . i i l i tv of thei r funds.. \ u ( l i l r ' ( l s t r r t c rne r r l s e l r t l r : r r r c , ' s t he r c l i ab i l i t ) ( r f e ( \ t npu t i r t i o r r o l ' l nc ( ' t r l c

carr red by ent i tv . thus he lps i r r c letcrnr in ing inconre tus.. Arrd i tor a lso chec:ks corr rputat ion o i -exc ise dut1,& sales tax ctc .t T l rcr r :c t t " . l p i . rur l ' u l prr r f i l : & lossc. carr rc t l .. . I ; rorr i sr , rc l r s tatenrer l ts . thcr corne to krrou 'abcr i r t the i r share in pro i i l

(as i r r par tnership f i rnrs) an( l ca l r cxpect c l iv idend.

I r r ca :e o l d i sp r r re . a t r , l i t c< l s t i r l c l l r c r ) t s l r c l p i r i s c t l l i ng c l r r i r r r s .

I n cA ,e t r l ' l r ' : > t ' r da rnagc l ( ) t l r r ) l ) e l r - \ l r r I l r c . t l r eR e t . . i t l r c l ps t he i ns t r re r l ose t l l e t he c l a in .

t )n hasis o{- pasl 1 ' . . . ' , , , ,J i tcc l l rn l r r rc ia l s ta lcr r re r r ts . l l rer carr , lcvrseexltected prolit trends fbr dccicline rvltether to invcst in the entit.v or not.

1.,1 g.a::l{ ' ASPECTS TO BE COVEITED BY THE ATJDITOR / AUDI'IORS FUNCTION-\

. Of Accounting systenr & lnternal Controi systern to ensure about their appropriateness. -i

, Chccking books oIaccounts to ensure their arithrnetical accuracy. [o"',{ i,, '1 ' ' '

} '"tf

, E,xaminirrg docunrentary evidence to supporl the books of accounts.

.lChecking -rvhether

all entries i. l ,],?, book-s of Accounting havl been taken rvhile: -p repa r i ng l l r r a r t c i a l s l a l en len l s . ( f r ' t T " { ' -

" ' r - ] r t : ' : i t \ * ' v '

i [-.xamining r.vhether in{brrnation corrtainecl in financial.statentents is proper and it docs

not contain any crroneous or fraudulent entl] ' .

Checking thei r conrpleteness, ex is tence, va luat ion & d isc losure in f inancia l s tatenlent5.

i ' : ; l : , , . , i i { r f i i '

{b} i ; , ' , r l ' . . r

{c, :*_ " . . l , . . -{ ( f . i , ' t , r r . r lus ion

Ie) Pt 'crFr ' r 'ness

t i .f ' r iq'afi1l11 of l

i ' ! i : r l i i l i t i e s

ig , l i r i , r f o l -Y' ' i l i t p l i A n c e

(ht l) ist: losure

. i ) $ c r r f i l

i ' : t i l a t r :Ss

i - ' . i . . ' , , I , ,L , ,u { . t i r , - i r . i .\ 1 ' * 1 1 \ \ ' \ -

ln case of audit of banks, General Insurance Companies etc.,

" "1 ' , r 1.. i

.ntur" io"ipiiiiii.

! ' , ' - i :

. - _ ^ot

t;;, financial statements

"vith relevant statute .

. Exarnining rvlrether the information in financial statements is disclosed propcrly as

accourr t ing pr inc ip les. / \5

.$ Clrceking * . l rc ther i inanci t l s tatements a. a . rhole represcnt t r t tc & fa i r r l ierv of nrnt ' t

. / loss and of Assets & l iab i l i t ies in the requi red f rorn.

1.5 QtiAl,lTIES OF AUDITOR

(a; [ntegrity

. ! l l v

r d . ' F ) t r l r p r . : n d e n c e

i r n , r l X u \ q ' r i ' l' f l

ni ,a l i " . i i ro i iO i re honesr , s incere & st ra ight fot*" tO * t i i i " pe i fo"n ing h is professi t ina i

du t i es .

, H" ntuit aclopi unbiaserl & impersonit apprnr.t.r.'

r He should r rot suhordinate h is judgemeut to the wi l l o f ot l rers (c l ient or o lher p. r ton;-

: . He should be fqee_of any interest apparently as well as in reality.

: . He should audit the financial staiements prepared by the rratragement in unbiased" way.

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s l i i l ls

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(h ) l , cg ica l sk i l lq

(k) Caut ion

. l l c s l t o i r l , l l r ; r r i ' r ' , n r ; ' : , 1 k r t nu l . , l , , . ' r r l ' r 1 !1 ' 11y1 '5 . l - ' l : ' , i : : : 1 , : i ; r t ) ' i , t : : . ' : - . - . : ; , ' - . : - : r : ; - . . i t , ; i ; .

. 1 \ \ \ ,areness l rb<l i r : . laws l ikc - l 'ar . r t t i r . , r t

l l r r rs & Cr)n l r i i { r i , \ \ - ) { . } ' : r t incr-c l r ip Act .

I ,,"-, f- lonrpanies Act ctr. is alsr-, requirecl.- l lo nrust conl i r r r rcr r rs lv Lrpt la te l r is kr r t r rv lc t ig i : to cor t t l t tc t i rudi t c l icct i r 'e l r

l ) u r i r r g e o r r c l u c l o l n r r t l i t . l r c l i a s t o i i t l c r i r c t ' . r i l l t r ; t r i , r u s , t l f i c . r s < \ l : t l r l l ' , , f , , t j ; r n i s a t i , r t t , \

t l t i rd par t ics, t l r r rs he rcqui rcs goods ora l & u r i t tcr t conut t t t t t iea l i , . ' r r uhr l i t ics.

l I e rn r r s t be a t . l e l o t l : t r l w i t h C i f f e ren l pc rso t l i r r t l i l ] ' e r c r t t s i t t r l r l ! , , r r . l l c l r ; , : t , , t l i r ec l &

supen ise lri.s 11-11 staf't a's rvell, lhus he sltortld bc tactful.

I - {e s l rould be capablc to tak ine f i r rn iudgerrrunt as to n ' l t ich i tc t i r : ; l t t r : to bc checkocl &

u,hat should be the sanrple s izc.

l l c r n r r s l l r t ah l c t ' , i l l i t l y s ( .& i r r t e rp re t p r r , [ t l c t t r s so t l t l t l l r c c r l t t , q . ' 1 - , ' ; , l i r 1s l - ' ' l c i l r r r t l r ' l r ,

sarne.

l l c r n r r s t l r l ve g . , , r t l l l r r r t l t r r r ac_co r r r r t i t t g & i t t r , l i t i l r g c t c . N lo r r -o rc r , l t t s i i , r t r l d l r c ; l \ \ , . 11 r ' ) i

lu test developnent in audi t ing standards so that he can per l i r r r r t a t rd i t in e { ' lcct ive tnanrrot .

l l c s l r r . r r l d no t r l i s c l t r sc . co r r l r dc r t l i a l i n l i , r ' r na t i o r r acqu i r cd d r t r i r r g cund t t c t o f t h i -

prot'essional dutie s, t(.) i l l tv third par11'erccpt rvltctt

- Permifted by client or

Rcqrr i red by lau

Whatever he does, he rnttsi do rvith proper skil l & care.

1.6 RELATIONSHIP OF AUDITING WITH OTHER DISCIPLINES

A".ounting , t;l ,,r.taitoi pi""iOei"piniorr on linancial statemenls.I i :) ^ rlrr.*l:(b) For this, lre has to revierv & elaluate the firraltcial statements.L \ / , [ ' \ . r ; t , \ - . v \ r

.) tbi ' I '6trs

he s|ould have thorough & sound krrowle<lge about Accountrng principles & form and

contents of fi nancial statelllents'

(d) It requile_s 991ql9te e^rpertise o..f agcountirrg concepts:

(a) AuAiioi tjeals with financial ligures & arnout.tts that appear in financial statements.

(b) It requires knowledge of calculation procedure involved in comptrting various itcms for e.g',M:r f hernat ics

Lr l l ' t x \ r ' r $ \ r ' li , . )

. i r . r ' . ' t

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( c )

deprecation, provisiorr for tax etc.

l le 6as to make comparisons & perform ratio analysis. Thus. a good lrand on maths is

knorvledge regarding business & economic

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( . ) '

Statist ics. t

\.rJ5 ,.*, ttt ' ,1 4l-,"I n . , . - 1 r t \ v L /' n " ' r

Econo-micrs

req u i red.

(a) Sarnpl ing is an i rnpor lant arrc l i t ing tcchniqu*-

(b) f ror c l ra l , ing random sarnple, he requi res knou' ledge of probabi l i tv theory '& rar i t ' r r - rs

statistical concepts.

f"j g"foi" "o"o,i.ii"g

u.''itit, iuaitoi needs to obtairretrvirotrment affecting tlre cl ient.

. (b) Moreover, accounting rccords the data regarding economic activit ies (e.g., purchases, sales.

income, payments ctc) .

: (c) 'fhus

economic colrcepts are required to perfonn audltl lg, in a rneaningirrl way'

' i ; iA ;d idh" , t " ;h ; "k ; ; ; ; i i ; ; * . ; . i "o i ' ro" " i ty ; i ih :

: (b) For example, in audit of partnership firnr. he has to check if interest on capital has been

: provided in u."ount, even in absence of such a provision in paftnership deed' If i t is so" he

, lras to menticn this in audit report (as it is itt ccntravention of The Partnerslrip Act).

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r t - r i .. . , ,,(,c ) ,, Thus. he should have sound knowiedge of laws affecting the clientr - " I " t , ; j : ! t .

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l t : l ro, lucl i i . tr t to Awli t i r tg ----*):

Nr , . , v a t ia i . s . rnos t o f t l l c . : l i c r r t t l l a i r t ta i t t t l te i r aceot r t r i s i t l eor r tp r l te r ip tb r l r la t io t t sys te tn '

I hus \ \ ,o rK l l lg I ino \ \ . , le r l {c r ) l l con lpu ter i s req t l i r cd lo r aud l to rs t t l co t r t l t t c t a t rd i t in en

c f f 'ec t i vc waY.

l r r l r r r : r r r e i ; r l s t S t c i l t c l ) t t , l e l i c r r l . l q i t t l t s o f v a r i o t t : r t r p c r l t t i o t t s i f t t t l c t i t ' t t : ; ; 1 1 s ' r l l t r r r l l '

I r t r r e ra t t tp le f lnance- p r t rc l tase- sa le , perso t r t re l (payro l l ) e tc '

t j ' t i l a r rd i t . r l i as kno* , i c6g .e a i rou t bas ic bus iness opc- ra t io r rs , l re ca l l t to l , i l rd ,q t : the i r f inanq ia l

r ( : t l l t i i r r c t - l c c t i r c \ \ a \ '

, . \ r rJ i t t , r ' l ras lo t l c l r l r r i l l l t l t i t r t l ' [ )u15t - r l l l ) c l ' rl lcfrtvioural

":::111!s'-

[ , i r r t l t t ia l t ] ' \

ril:l tl [i li: {.' : !l i' i; t

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( a )

r i ) )

i i r )

{b )( c )

(a l

(b)

(c)

id )' ( a )

(b)

(oj(c.)- - .( a )

(b)

l le l tas to obta in explat t i ' t i t rn t ior l r c l ient 's s taf f & t l lanagenrent '

lr ' lr lrettver. lte ltas to ri irect & supervise his orvn auclit staff '

- l -6rrs , hc s lould Iaye tar . t o1 'get t ing a long wi th people '

t t" , ir,r.,t,t lr.rve knowlc.' i :- : l .t:] i

t i irt t.-n', iqtrL:s l ike, 1$ilt: l f

Vtis'--ftrn't ls f lorvs anal; 'sti

& rvork ing capi ta l lna l l rgc l l le l l t c t ' l I t - '

' l 'his \1,i l l lrclp hinr to rrttclerrstantl & evaluate the tlnancial staternent In a t)etter wa\' ' '

Auditir lg is a systernatic & logical process'

.rhrrs. arrclitor,s proceclrrres rnust bc rogical according to given situation.

Audi t . r is requi ret l a ' . . rnrn,u ' . , icute"ora l ly h, t ' tuJ l as in rvr i t i t lg (prepnr i r lg audi t rcp ' ' ' r t

e tc . ) .' fhus, he should l iave goocl conttnancl ovel language' rvhiclr is irt general usc

AND ACCOUNTING

Ilasis :

N'!c'.r, :r ing ::

l r ' u r . r . : ' r ! ( l t l :

tli ' tr liom

Pr ine ipXes

I t t l t i i l l ' \

re:iEiGttsibilit-Y

Erpertise'I ' ime ;i{r(:cttrrence

^;;,;;** il tle o.t or n.io..ti,ig, l iilJ ino"ptiio"ni Examination of financial

Classifying & sun-'n..o.i)itg- lt"""li"t , informatio' of art entity to express an opinion

I t t f trr tnat tr l t t thereon

i i i ec .xc lsn" " " i i ^ i i ,p . " t io |e , i i .qv : ' l i l : "1 " * ' tne ic1oun i ing ,y ' t "n' :

: i

Any perso. havrng good knjlledge ,ot ,-stat"tow oiait

"un onry ui conducted by a chartered

accounting .' , ,j Jt

't 'rN no'C

i" ir"i"t"i" ,i"Co.int. *. preparc fina'cial -fJ

fiait't iti'Oii iti un eff'ective way is the

statenlents is the- -resp.rnsibirir;-

of , responsibility of auditor

mrnarlejl]cfil- :Accotrnti tr g exPertlse

Accounts are PreParetl bY

rnanagetnetrt prior to get t lrcm audited'

-A;orlirtirig & iuaiti"g Eipertise (both)

iG-A; i i i i , i g i i ; ion t ina t io r ro f f inan i ia f i " io t *^ r ;o i i "i tl us carit be conducted prior to accounting

' I Il l"sg'I ItJ ' fair and must not be biased'

oUlectivitY and I (b) He should be

iniepenoence -

i"l *:nou'rd inairlta'l l:ll""li]i"-:'l:il:"ic o" ffi:ffi":l'r-:1 a trl r71 tfl r p\ /al lAlu tLt tiJ t+t F +t T _o-^^,J

5;,, .1 .Jr,'ir I f ,^ pr*,* I LffiFLr..."ffi, Fr--f T' T ^T- / W*' IJ*k{^ry wn,^^r:1;uur, M,

fh"'T 1h,,, R{.1n7

.-.^-*".-_; ir rrAS l _ tsffiaIpLE--,RNINcFTuntr

Dlsco fAtp--*- < - '-- t iitr U" straightfonvard' honestl . Integi i ty,

(a) luo' , tot : ' l : t . , - ̂ . - r -rrrc i .nt he hiased.

1r^{Mry til*** '{,$duv

IAudit ing utd ,7ssiu i i tr i i , { l hap " i

Ski l t andcompetence

Workpcrfornled byothers

5. Documentation (a)i i 1 \ ' ' - l \ y : r , , . , , ' ) . \ , 1 ( t r )?.. . i d ' . . , , t t ,1. , . . . r ' , t ' .^-1, ; , .1 -11,9, ' . .1 t r ' : t t r l

, I " ' I I l . r . 1 . , A i l -

6 . rP lhnn ing " ' , ( a )'

: : ' r { \ , ' f t \ t . . t " t ' ' \ a d ( h )

r,,, ' ' , '( ' , '

a"' t, ' . .,t i ,.t,r,.v ,.)

.",1 r..;\,\ '-fr ,cl-: :ri :,- 7. Audit Evidence : (a)

Q , l ' , ,u t t ' . . I 1 ' \ * i . ' ' : ' t . (b)

I ) t i r , ' , i i J ' , " t ' * \ ' i " i ; u r . , t " '

i

. (d)

8. AccountingsYstem and -f ,'

internal control

{,r \ (r,u\u.q\l : : t 1 l t-1 1' l l l, r J N f i , l i r ,

9 . Audi t

: (a )

:

. (b)

I

{ i t (c)

i

(a )

3.

4 .

{ r ) l lc shorr ld rnai t r tzr i t r t :or r l l r l t r r t ia l i t - ' , o f i r r f i r t rnr t i i ; r t ar :urr i rcr l r l r r r i r r l l r i . r , .ork

( t r ) l le s l toLr ld not d isc losc an 'u s t tch in l i r r rnat ior t Lr a th i rc l p iu ' t \ ' \ \ i t l rout spel r i f ic

qerurlss!on clf cl ierrt or legal or prrof'cssiorral t lrrtr to disclose .

(a) l le should per lbnr t rvork u, i th t l r rc pro{c 'ss iorra l cnrc.

(b) Audi t should be per lbrrned by 'pcrsor ts l rav inr l ac lequate t ra in i r rg. , : .xpcncncc ant lcon)netcnce.

(a) - l ' l re

audi tor can dc legate rvork lo ass is tants or t rse * 'ork pcr{ i r r rncd [ l ,o ther audi t r r rsand experts.

(b) I lu t hc rv i l l cont inLre to be rcsponsib lc tor l r is opin iorr on f i r rancia l i r r lonrra i i r - - r r

(c) 'fhe

Auditor is entit lcd to relv on rvork perforrrrcd by' others. provirft: i l

. l{e exercises acle<ruate skil ls arrd care atrd

. There is noth ing to doubt .

I l e s l r ou l c t c l ocumcr r t n l u l [ e r s r c l r r t i ng t o t l r e e r t i l i t ( r r r r r i n ta i r r so rk i r rg papc rs ) .

Working papers are maintainecl to denrorrstratc that the arrdil u'as carrisd cut ir iaccordance wi th the basic pr inc ip les.

l l e shou l t l p l an h i s uo rk t o con t l r r c t a r rd i r i i r c l f r : t t i i c a r rd l i r r r c l r r n i u l l l c r .

Plans should be based on knorvlcdge of the clients bttsiness.

Plans should be further deve loped :rnd revisecl cluring audit if circrrnrstanccs requireso.

Audi tor should obta in suf f ic ient and : rppropr iate aucl i t ev idcrrcc bv per lormrrrgcompliance and substantive procedtrres.

Evidences enable the auditor to drarv reasonalrle conclusion.

Compliance procedures mean the tests designecl to obtain reasonable assurance that

intemal controls l ' ,-ave been properly designed & operating eflecti l 'ely throughout

the year.

Substantive'Procedures are performed to obtain ev'idencc as to the conrpleteness,

T::i1"I 1nd vali_ditV ol_da1a produced by llre accountils sl1stern,

Internal control system ensures that the accounting systeni is adequate and that all

the accounting infbrrnation has been duly recorded.

The auditor should understand the accounting systern and related intemal controls

adopted by the management.

He should study and evaluate internal controls systenr to determir,e the nature,

timllg aqd e1t3nt of other audit prdCedures.

The audi tor s l roukl rev ieu and assess t l rc corrc lus ions t l rarvt t f rom the audir

evidences obtained through performance of procedures.

The audit report slrould contain clear rvritten expression o1-opirrion on the financial

statements.

His report is on whether:

, . The financial infonnation has been prepared using accei;iable irccounting

policies which havc been consistently applied;

' The financial information cornplies rvith relevant regulation and statutory

requirements; and

' There is adequate disclosure of all material matters-

(d) The report shouid be as per legal requirement. When other than clean opinion is

given, tlre audit report should state the reasons thereof-

ItI

I

I

I

I

I

aII

I

7

aI

I

I

aI

II

I

I

tI

CItI

tIaI

IIII

conclusions and .reporting

',

Lr $:i1:r t o r ? l\ ,L\i ,Nu'lt lr' r ' '"'

L)-?-" , ' \u 4 f"" ' ' ' 'b i i / , bc " , ' i , ' r i \ i t " { \ , . . ,

a \ , ' . , , " . \ , , . i .1 l t ' ; I i " ! ' -

L r - ; '

(b)

(c)

I n tr<tti uc t iort to "lud i t ittg

{ is.r [,L't-IV ES O F .\UDI'[

t s pe r AAS - l

' I t p t r , , lAS-2

Ileporlitt l4 ttrr*,ltttt?

T'rtitc & Juiir-LI errtr i tr14

Detec'tion d .rrtisstulenrcnl :

Autl i t is condtrctcd to express i l l l () l l l t l lor l

p r i r r t a r l ' , r b i c r l i v c i : R c p o r l i r r 3 .

The obiect ive o1-audi t o f f inancia l s tate l l l r : r l ts is to er la t r le t i re lru<litor t0 er:prc'ss

an op i r t i t ' r t . r t t s r t c l t i i n rnc i l l s t a l e l l t c l l t s .

fh. i.rait"t repons rvhcther l lnancial statcnlents represcltt trrtc & f air r ie rr '

It ciri tre exarrrinecl bv coniideririg rvhetircr:

(a) F i r rapcia l .s t i i ten len! hale t rcetr prcpared using consisterr t & acccp!ablc

account i r rg Pol ic ics &

(b) F i r rancia l s taternents cornpl l ' rv i t l t re levant r t r les & rcgtr la t iops &

(c) Financial stat-enlents_ qontain f isclosule of'all rttaterial rnatters

f i l A. i ,a i t . ' , r : is c*pectea to prov idc opi r ion on t rue & l r r i r r ' ie* 'o f l lnarrc i ; r l

statenlent as above.

(b) l le canrrot i rarne such opin ion i l -he is not able t t i conl l r tn / d ispel the

possibil i ty of existence cif fraud & error in financial statellrents.

(c) Thus ipc identa l i secotrdary o l r ject ive is dctect ion of r t l isstatet t ter t t i r i

f i ttancial staternents.

: (if pii,riit i;td'iaibitiry ;{'t;ventiori. detection & correction of frauil en<l

, error is that of management.

; (b) Horvevcr, if there are d<lubtftrl situation that sotne matcrial pis5lsleil lernl

. doubt .

: t. l Audit may not reveal all the ntisstatement (due to inherent I irnitations I 'f

: audi t ) .

: (d) If eruditor performs his rvork in accordance with basic prineiples;'

' governing an audit, he cannot be held l iable for non-detection <-;f

; misstatenrent in financial statements of clicnt'

i G) l jowcver. if he notices material misstatement resultir lg from fraucl' hc

: '

should communicate the same at appropriate level of tnanagement.

: to If rnisstaterneltts are found. he should ensure their appropriate disclosure

either in financial statements by tl ie managenlcnl or in his audit report'

: i"i U"f"r, AouUit"f iltuuiioni ii" tt.,er", uuiiiot is totaliyluitiiieO in r"tyi"g

: upon the management / employees of the c l ient '

: (b) He is a watclidog_ no! a blood hor,rnd,

or t f i tu t t t c i l r l s la f tn lcn ts . l . l t t rs

Scr:olrd:rrY; , ! ; I ' - . , i , ' t

,rs p"i iA'i-t

' As pr,, c:use of' "Kittgslon cotton

mills t:omPanY"

_JDIT OF FINANCIAT, STATEMENTS

I. IOAAS' - OBJECTIVE AND SCOPE OF THE AT

oni""ti". oruii . 6it ucl i l

. (b)

the objective is to enable the atrditor

prepared by management of entiw'

For this, it is essential that f inancial

accounting policies and practice and

disclose all material matters.

. ' - .to express art opiniorr ort f inancial statenetlts

statements are prepared as pcr the recognized

relevant statutory requiremeitt atrd they should

(c) Howevcr , h is opin ion does not const i l t l te an assurance as lo

: ' '

enterprise or tire efficiency or effectiveness rvith rvhich

; conducted the affairs ofthe enterprtse'

future viability of theits management !tas

I

' i

. i r ' , "i r i . \ ! 'l , \

l. | ' , '

. , t- [

J-ti

II(

I

(

ILes1tortsi bi l i ty ' fort h t l r n t t n c t a l

statcnten ts

Scopc of an arrd i t

Inhcrent l i rn i ta t ions6f aut l i l .What arcthts',:'.f

""". t. Urr\\t";\ . .o

r , , " . , . , \ . l i ' , ^ i l t l ' ( . )/ u !

\ l '

2. lYotura of (a)evidenccs

u r r,'{'J{*" 1O)'P,ri

"'t ' (c)

-1. Involvenrcnt (a)

of judgement

, ,1 : r r ! i t ! i t q r : ! t L i , ' i . \ J t t i ' (u t r : ( ' { ! i l p . I

(e ) I i te rnar r l rgcnrcn t i s l c ' sp t , r rs ib lc to r t t ta i r r ta i r t i i rg l r i r r r t r to t la lc ; r r r t i p r ' , rp r r . r r \ r ) ! in t i l ' , s

. , , : l ; l i i . r i r . i i l , i . , i l , t r {J l / ' L t r . r t . , i l r , . r ,e i . r i s t i i tu l t r \ : r I t \ .

( b ) ' l

l i c a u , l i t o r i s r c s p r . n s i t ' t l r f , r r f b r u r i r t r : a n d c r p r c s s i r t t u n q 1 ' i 1 1 i 1 , 1 1 r l r r i r , , i i l i l r r r c i i i i

su. l lc nl.- ' r) t : i .

; (c ) I t re a r rd i t r t l - thc f l i ranc ia l s l i r lenrcn t tk rcs no l rc l ieve lhc n r i r r r r rg , , ' i r iL r l i o f i t s

rcs l r ( ) i l s i l ) i l i t - \ .- l

l r r . ' l r r r d i t t r r t l c c i t l c r t l r r : e , , g ' . , , r 1 l r i s l r t r , l i l l u n ' i r t r : r e r : l t r t l l r ' :

r ) ' l

l re req i r i rcnren t cJ l - lhc t ' r leva t t t leg is l l r t ion

r r > . I i r e

p r ' l r r t . r t t t l c e l : r c n t s t l f t l i c i r l s t i t u t e ( I C A I )

: ) ' l -e r r r ts

o l 'e ngagc t t te r t t

I Io .uvgv 'e r . t l t c tcnr rs o l ' t ' r i I r {e r r rc r i I t ie r r t to t s t tpersc t ic thc p ronot tnc ]gnr . l i t , i ' t ] r c i r t s t i t t r t t :

r i r l l t c p r r ' r i s i ( ' l l s ( ) I r c l c r l l r l l t ' . i t l l l i t ' t t .

r , I . Test c'hecking (a) i \r ,rditor use s sarnpl i trg during pe rf irrrt tattcc erf lnrt l i t ,u , . . t

Ltfrr.rAr\ \t ') lLr; ': t (t.,) lts not ptlssiblc l irr hirn to condrrct detailetl clrcckiirg r.hrr: fcrt inre constra ints arrd othcr pract ica l problents.

As l rc does not cht- 'ck eacl r & every i tern, i t 's in tpossi t r lc l i r r l t i r r rto dctect all f l 'aud & errors.

l l rc er i t lcnces obta inct l l r r t l te r rur l i tor l l r r : / , ( ' r .T l l rJ ive ru! l te ,

thon t'ouclusive.

I he1' can't ensurc the auditor in a certain \\ 'a)'- '' l 'he;-'

can enable auditor to drarv onlv reasottable conclusiottstherc from (not absolute cortclusiorrs), I

Auclitor exercises judgernent irr evaluating tlte reasonablertc's' iof -iudgernent & estitnates made by the l l latl i lgcrlrerrl i t l

preparing the fi nancial staternents.' l-he jLrdgenrent by auditor rnay 1ot always bc correct-

Internal controls sufler frorn l imitetion suclt as collusion arnottLl

cmployees or wrong use of authority by managelnent etc.

lf internal controls are rveak, auditor may not be in a positiort tu

clbtain assurance.controlslf tlrere iiJ unyaudit reporl-

"onitiuintr,,t i"gi.dr tire scope of audit, lte should ntention thenr in his

l - Aucl i tor should coni luct audi t i r r suc l r a way that he rvould be able to obta i r l

su ff lc ient and appropriate aLrd it el ' idettces.

2. I le shguld cover a l l - inrpor tanl aspects af f -ect ing f inancia l s tatet l rents of - the c l ient .

i . l f there is inc l icat iou c i f n t issr .atement . l te s i rould exter td h is at rd i t proccdurcs.

I

tI

l , \ . ' \

f;, 1."ot.ue' - ' , HO r-tu\ i l '

( 9rl, itr,n tr

I

!

I

t1(

i,:, '."d}' tr. (

[ , imitation onscope-eff'ect onalrdit repgrt

tirguniting an auJii

: 4. Inherent', Iimitutiorrs of, internul

(b)

(a)I

{(b)

l . 1 l T"YPT],S OF ERRORS

As per nature (,l tritl r"iirt'liiigerrors

lb Nii,,,-i"ireveaiingerrors

(o) 1-n"r" npp"ii ..tuii'ig p."potutiot.' of aCcounts.(b) For example, if a clreqtre deposited is not shorvn. lt becomes

apparelt during Bf.S,,(a) 'fhey do not appear themselves during preparation of

(b)(c)

accounts.:fhese can be krtown only by detailed analysis.

For e g: capital expenditure shown as revenue expe1l{-itui9,

Inli'i xl uct ion t o A ud i t ittg

(t,) L,nirttentiottulcrror

(d) Intentionslerrors

(e) Unconcealecl

, _Ery9p_ (l) concesled

c> * Error

(g) Error. affecting trial, bulance

| (h) Errors not'. offecting triol',

balance' :', (, Ercor of' principle

! - ,

r'

, (ii) Compensating, Errors, g.\l

"" \ rlr' i o'i '-G"r-\

, . ^ ^ . r \ , \ . r r rI r l r r . . . 1 \ - \ \ ,

/ r . , " . r , y \ I o ' LI ' / r ' , \

, t ' { V l " ; *

:(iii)

'Omission

l i l : \ ' t {- t n' . '1 ' -- :"

$ i\.-lr

, (iv) Error'. commissian

] , \\ r r ' l ' e . f l \ \ " i

I

t ' ( ; t. . ' - * * \ i

\ r . . t r; ' r i

(a) Dcl ibcrate rn is takes i .e . f rauds.(b) Bad debts rccovercd rrot recr.lrrletl

misappropr i l r t ing t l re n lonev s<, . r .e cer ived

(a, \ ' l

l rcse are not dc l iLrc iute l r i is tak i : i( b ) I t n ray be due to i g l l . , r r r r c : . / i ) \ c r s i { l ) 1 r r i - f l r c t s .(c) [ "or exarnple. i l Pet t r casrr ier r i r rgcts to rccor i j l ic igrr r , - r i ' r (s

l0i- in petty cash bool,.

!

& . i ' t t t , . t .

i lCCOdi r : l r lg ASpeCt

ent i ty .

Sanre as unintent innai " , . , , , -

.No ef f i r r ls ur , . ,by pe11on conrrnitting it.(a) Wliereby tlre per-son ioriirnitting tlre

* 'avs to hide i t ., (b) These can be ascer la i r red onl -v bt dei i r i lec l checki r rg.' (;i ct". iia"a

"iroi..l,,. ro u,hich trial l.aluncc a.,"-. i,nirutt".

. (b) For exarnple: goods solc l to .A ' err terer l in sa lcs l : r r t rk Lrr t nor, i'l_ A_1 ac9oL111!,' (a) Two sided

".roi tir.li ir .oiiip"n.t"tirrg eir.r ,rr i.,i,1,r,r,,.

omission of t ransacl i r )n.folelgqnf el No provision lbr bad de lrrs.Recording An erltry in ft,nArirrrentally, i lrcorreCt n,nn,,"r"For example: Capi ta l . .xpei rd i t t r re chargecl to revenue.No effect on trial balance.B_y1 1!ey n1a.y 9ll_"-c! profit.Which are nultified t y iire i,npait oi inotiiei

"iior. -

For example.: expenses amounting to Rs. 6000 u,re.rrgivrecorded at Rs. 8000 rvhilc another expense arnourrl ing to i l.s.2000 not recorded at all.

: (c) No effect on Trial Balance.

i (d) But may affect prolits if one error arises in revenue A/c &, other in a balance sheet item.

i (;i--Wn"i; ;;;;i6; is 'ioi-i*coid"d i; ai",,iiti.: PartlY.. (b) For exarnple, Sales of 1000 to A eiiher: shown in sales Accounts but not postecl

, (c) Full onrission does not affect trial: omiss ion does.

, (.d) May affect profit.

of , (a) Incorrect r..oidit,g ofi tr insiir ion

; (b) Maybe of follorr,, ing t-r,pes:

,. Posting error: - wr-ong AccounL/AntounV Side.

,. Casting Error:- Wrong totall ing/balancing.

, . Duplication error: - entry recorded twice .

, . Carry forw,ard error:- Wrong arnounlr side .(c) For example: - Sales amounting to Rs. 1000i- recorded as

100/- or page totai of rvage sheets 500/- carried f'orr"varr.l ris:Rs. 5500/-.May cr may noi affect triai balance. Sameimpact on profit.

ui hooks, t lr ir..;by enrp loyee o i t l re

nrar le to l r i , . lc ihe r r r . r ' r

whol ly or

not recorded whollv orto A 's account-

balance but partial

. (b)

. ("ii ( b )

(c)

, (d)

: (a)

: (b)

ts lhe r,.:irsc lr{(d)

l 0 Chap, I

As per

Seit-rer eal ingi n c l t , q c l t -

revea l ing

CtItC

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ct

tI

C

tCItI

aI

I

I

I

t!

tCtF;

Crl;

6ddilC

:rtu re

in As pc r accoun { i ng

aspect

it

Error o{'cornmission

I ! I r c U l C r r o t s

U rrconcea led/corrcealed

Unintent ional /i r r tent ional

+Conrpensat ingerror

ItY

Al ibct ing ' l ' . l l inotatTecr t ing ' l - .R.

Error of'pr i rrc iple

IY

Error ofomission

Conditions rvhich increase the risk of misstatement in financial statement

t . Weakness in in ternal contro l system. ' I (

2" Doubt about competence and integrity of managernent.

3- Unusual pressure within entity e.g., entify facing problerrs in getting finance.

4 Unusual t ransact ions e.9. . t ransact ion wi th re lated paf t ies.

5. Problems in obtainirrg sufficient & appropriate atrdit evidence. For exarnple. managenlent deliberately not c<-r-ope rating with the auditcir.

I.I2 AAS-4 - THE AUDITOR'S RESPONSIBILITY TO CONSIDER FRAUD ANDERROR IN AN AUDIT OF FINANCIAL STA'IEMENTS

Fraud Nature : Intetrtiorral

: BJ whom* - Ernployees, or

. Management, or

. Those charged rvith governance, or' | - l-hird

parlies:

Example- : ' Fals i f icat ionofaccounts!

. ' lvl isappropriation of assets

: ' Suppression of transactions:I r Omissiorr of ef'fects of transactionsi:: ' Wrong accounting Procedures

. i r Misapplication of accgunting Policies

-'- -''l- -l-T-1--r r | ' l I

i D-j 'l'\)-)-- \ \t,

$ Un*iU

tfr*,,*"r;:$'*

I

_ C _ i ' , g r , ]

l , r r o r

I r t l r , t t , ' : t , ' I i t t t t t " . I t r ' i i t i t i . 4 i t

I I t t i t r i , i l l t i , r l l l i I

Sante t i .r '*n[r i :rvc

. l r ' l a ther r ta t i ca l n r is takcs .

r ( ) r c r . i S l l t t ' l ' l l r e t s .

. i r , l i sa fp l i ca t i6 r r g t 'Accr ru t r t i r rg I ' t t l i c ies .

. Prcvcn l ion & de tcc t ion o f l ia r r t l & e r rc i r i s t l re i r res l l r . rns ib i l i t !

. I ;o r th is - rnanagetne t l t cs t lb l i shes s t r i tab lc in tc -n la l ' i o ! l1 I ( ) l

s\ slel l- I .

. I lc lt lr ist \\ 'ork irt accordance l,r ith AAS'

. I f there is ind icat ion of nr isstatet l le l l t . hc shoul i l cxtcnt i i r i : ;

proce(lttres to corrl lrrn/ clispel the cloubt'

r I le should l l lo i t l la i r l documctt tat i t t r t

. But he can't be held responsible fbr prevention of f iaud & error.

. 11' auclitor u,orks in accordance rvith AAS, he can llof bc heid

responsible for tron-detection of fraud or error'

Responsib i l i tv

lnhel ' t ,nt lrnrl tat ionsof audi t due to

whith detection of

:r l ! rr l is:rtatements is

n0i t lossible

f l is; 'n lssionrnq t l I r " !es

Managcmentrepresentationletters that auditor*ho'*!r1

.,.

obtain

.J\t\

N r t l t t r t

B-1,*, l tott t

Exumplt

On port o.f tfutse

Chorged wilh

Oovarnonce antl

Manayement

0n purt ttf

rl udilors

vy1fl', llith members of audit, teqtn: - .:', H/ilh motrtgernenl:', With those charged witlt:

SOvernarl( 'e

Probability of Fraud and Error in financial statements'

Itegarding acc3untrn8 and internal contro! ttt,"-:, f. '

ILegarding fraud by management-

'fest nature of Audit lSngPlye)-

Prol'essiorral j,&nglt of ,\ud itor'

Perstrasive nature of Audit eJ1dep-qe rather than conclusive

l-irrritations of internal confol system ' 7 {

N4anagement responsibil iry* for accounting and l 'C' systenl

correct Fraud & Error-

Aggregate uncorrected ttt isstlttetnents are immaterial lbr f inarlcial rrltbrrnatiorr rn

opirrion of nlanagement-

It has disclosed the auditor all lacts regarding -

. Known frauds &

' Suspected frauds.

to prevent and detect &(a)

(b)

(c)

l 2 .1 t t i l i t i l t g r i i r i { i . .1. \ r i i t ' i . r r r ( , i ih : rp, I

i 1 ' a r t i i i i r I l r : i . : t r l l j c l t t i t i n r r i - r n i s s l r i t r ' l n c p i i r r ' . d r , r r i r t i l r l : ; i t r r ; r l i . , r n \

,l ' l e s l r r ; i r l . i c . r r r_ ! ou t cx te i r r i t : i l l l f ( ,L t : ( ' l l ucs in rcsprc t , . ,1 s ; rn re

4- - -

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-

I )o t rbt is d isr rc l lcd l ) t ,ub l is corr f l r rncd l jnable to conclude

J i . i( ) .K . I l e s i t r l r r l J cons i c i c r ' , r i r c i l i c r i t i s i i e - sh i , r r l t l c t ' r ns i c l c r r l i s c i os t r r . e

l r r t l i c a t i i c t / - c n , ' r o r l l t t t t l i r r { l r r l r t r c i ; r l \ t a t c l l c r ; i

^ - - ' t t

\ - - \ ' =

- l a - - - - ' t

\ r - - -

,

I:,rrol lrraud lf rnglt. cices i l fr l-.

i t tl l c s i i ouk l O .K" E {Tc r . { , , n , \

Corrs idc l i ts c{ lbcts\-

,Y-- , ./

i{e should ask rngt. for suitatrle disclosure in

Financial Staternerrts

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Documentat ion l .: ^

Commrtnication , I .

I:raud risk factors.

[{ is response to same.

offroud ond crror' At appropriate level.. on Timely basis.. If rnanagement is involved, consider conlnunicating to thlr,tc '-hargeO wrth

govemance.

of weakness in I.C. s),stenr. If IC. fails to prevent/cletect misstatement.. Therr, comnrunicate this fact to management.

ii; a;;;i,d"i itroi dire t,' ' *ii"riui *littii.i".',is. ii is not nossible ibr hirn tocontinue perform irrg arrd it.

Discuss all facts rvith nrarragcrnent and those chargcd with governarrce

Consider wi thdrawal f ror t t engagcmel t t .

Consider his responsibil i t ies towards appointing authority. / |

Consider his responsibil i t ies towards regulatory authority.

If lre resigns due to misstatements, he should estate the facts regarding these nrattersto incomins auditor.

Auditor unable to , '

comp le te the 'engagement ,

': l

:: a

i: 'i a

I ttt rorl u c I i ort iri .'1 ud i t itr,tl l- l

i . i J s . l i1 ' r ,

i i , \ iAI {Y OF I )U] ' lES OF AUDII ' ( }R i lEGAIrn lN( ; FItAtrD { i I ._t tRr} l la,S- {

: - : i : r : roulc l take in t r ' e , 'ns i t lcrat ion t t re i i i t o{ -nratcr ia l n ' isstatet t ret t t .

i , i , i , ,,.1.: rnanagclrtettt as tQ ilnv fratrcl or siqnil lcant errtlr.

l f c i rcr rnrstances indical r : t l re possib le ex is t r :nce ot ' l }aud or enor . the audi tor should con: , ider t l ic e 1 ' lc ' ' t ' . l i the

: juspccte( i i r 'a t rd or cr ror o l l the f i r lancia l in lbrr r la t ior r .

I Ie should per forrn i ippropr iate addi t ional proccdtr res.

i l i i , . r id i tor shol ld sat is f \ l r inrsel f that the cf fect of l iaud is propcr l " ret lected in tht : l l r ranci ' r l in tbr t t la t l r , r , ' l r

f he crrtr is corrected.

fur case audrtor is unablc to otrtain evidence to con{lnri or dispel lr rlottlrt rcgarding l iatrd, t lre attt l i lrtt - ' i lL.rri ' .J

! ',r! i j . i t!.: r rr: l ' . :\ '011t latvs attcl regtrlations alld ma)/ obtait] lcgal advice'

, l : . r , ! r , , , i i . i . : , l r ; t - r comtt tut t ica lc t l r is s i t t rat ion to t l lc l l ra t lage lnent .

Wircr , : i r ; j !g1 i f ica1t f r : r r - rd has occurred, the audi tor should consider thc ncccssi t l ' for a t l isc lost i r t : o f thc i :a l r , i

i , l t l ,, { ' in.rncial statenrents and if adequate disclosure is not nradc, the rtccessitt ' for a suitable disclt lsrire : ' t i i ir

r : r , ! r ' , C 1 , . , 1

A{]{]OTINTING CONCEPT-DISCLOSUI].8 OF ACCOUNTING POLICIES- - : . ;

i ti i;. - , " It ret'ers to specific accountiug principles & rnethods of applying thosc principle'

; "1 {' : ' '*

i\f

AeJr r

Vr

i l , t i l

r i r l { i : l !1 pol ic ies

, i t r ,c l t ls l t rc is

' . , , ' I

I

(a )

(b )(c)

adopted by entrty,

ln preparation & presentation offinancial statenrents.' f l r c r c ' i s

no s ing le l i s i o f Accoun t i ng po l i c i es t l r a t can bc app l i cab l c i r r x l l 5 i 111x r i ' i , r

Management chooses the appropriate accounting policy. i 'F-or e.g., depreciation can be charged as per rvrit len dorvn value method or straightt- '

t ine rnethod. San.re rvay.s, different polices may' be adopted for fbllou'ing:-

r Valuation of inventor;' Jl^ 'J{ tr'i"J'u \r:*[u-a]'*"r

r Treatment of experrditure during construction

' Valuation of f ixed assets. Conversion of foreign currency items

' Valuation of investtnents

" Treatment of researclr & development expenditure

r Treatment of contingent l iabil i ty

(d) 'fhe

profit or loss can be significantly affected by adopting diff-erent accountrng

po l i c i es .

(e) T'6us disclosure of accounting policies followed, becontes necessary so tlrat re;r,Llstri

, o{-financial statement can propcrly understand the vierv presented.

: t+l All significant accounting policies adopted in financial statements

, ' d isc losed: &

9r) Disclosure should, usually. be made at one place; &

: (c) f)isclosure shotrld from part of f inancial statement; &

' (d) Any change in Accounting poticies having material effect should be disclt ' 'sed alorrg

i , '

with amount by which financial statement is affected by such change ( if amount is

, "r"".tainable

) If amoult is not ascertainable, the fact should be stated' &

, (e) lf any funclarnental accounting assumptiotr is not followed, tlre fact shculd be

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t-i 'ahtu I

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, nl,r vrtu ? t, i , , : , r o),sc,h' . . 1 ' . ' . , " \ ' on f \ { '

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l tequirement of

Acc*lrntingst:rusi:lrd regarding

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"i i ,:r i i l i i slt in g policies-

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r-15 I\CC]fX]NT I Ti G CON (. I. I' 'T.- I; tJ N DAIT T.-]\.f .\ I, AC]COII N.T.I N {; ASSUM P.T I ON

N'[e:rrr ing

Three[unrlat t tental

:rccottnt ing

:rssunrpt iol ls

[- l isc!osurereqr j ; rcmcl t t asper AS- l

. ( lcr ta i r r { i r r r i l l r r r icnta i accorrnt i r rg assr tnr l ' r t i i t t ts t rnder l ic i l rc prcparat iorr & pres;crnta l r ( ) t l

o f l l r t l r t c i l i l ' ' t a t c l nc r l t s .

. ' l 'hc i r t tsc i : - , tss i t t r te t l .

t a ) ( l t ! ng ( ' r r nc t ' l n : I l r e c r r l c r l r i : . . i s r i c r r , ' , 1 ; t s so i t t g . t . o t t cL ' t t l . r l r r r t r s . co r r t i r l r r i ng oPCr3 t i r ) l l s

hrr t l re 1 i ,135;ggl r f lc { i r1r ; re. l t is : i "sr rnrct l 1} rat the et r terpr isc l ras r tc i t l rer t l rc in tent ion nor thc

rrecessi tv o l c losc . l t t * t t .

(b) Consistc lc1; I t is assrr rne ' j t i ra t accoLrnt ing pol ic ies are cotrs is tcnt f ronl ot te per i< ld 1o

i r t to ther pcr i , r r ! .

(c) Accrual : l {ercrr r res arrd costs are uccr t tcc l , that is , rccogniz.ed as thel are ear t tcd or

incrr r re i (a6d l rot i ls n lonev is rccr ivcd or 'p ; r ic l ) a t rd recor t le<l i r r the f inancia l s tatenlcnts t ' f

t l rc pcr iod to uhich thel re la ' ,c .

(u ) l l ' a l l t I r t . r l i r r r t l : r r r r c r r l l r l i r cu r ru r r l i r t s r r ss t r r t t p t i ons a re he ing f , t l l owed i n p rep i r rn t i on &

preserr tat iorr c , f f lnancia l s ta ienrents. spcc- i f ic d isc losure is not needed-

(b) l lorvcver . i f 'ar ry l i rnc lerncnta l accorrn l ing asstr t t tp t ion is r rot f t l l iou 'ed the fac l l ras to bc

disc loset l i t t t l rc f i r tar tc ia l s tatentcnts.

(c) ' l ' l rus

d isc losrr re is nceded onl l , i r r case of non-corrp l iancc rv i th t l te fundanrcrr ta l

lcc( ' ru l t l i t lc ; tsst t l t tp l io t t .

I

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GI

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OI]JECTIVE TYPE QUESTIONS

Clomment alongrvith reasons rvhether follo$'ing are'frue or Fllse.

( l ) I i in*nc ia l s tatements inc lut le P. tL account ing and Balance Sheet but not notes to nccor tnts '

FAt,Sll + Financial staternents rnean rvlrole set of accouttts including P&L account, Balance sheet and

disc lost r re i .c . . t r t>tcs to acc(r t tn is .

(2) Audit is inrlcpendent examination of operations conductcd by managemcnt'

FALsil l + Arrtl i t is indepcrrrlcrrt exarnination ol- f inont' iol slatemurls of arr cntity to express opinion

thercon. I t is thus exarnin i t ts f inancia l i r r forrnat ion, not operat ions of 'ent i ty .

(3) . Autl itor,s opinion is on True & F'air vierv of f inancial stltements. i

TRUI,, + For reporting ()n lrue & fairvierv, it is seen whether acceptable policics are consistelrt l.v applied,

regul"tion, *ha.,,e

t,ee,r observecl & appropriate disclosures lrave beetr nrade in financial

staten':i nts.

(4) Auditor needs to be indepentlcnt' J

TRtjE, c) Independcnce rncalrs that juclgernent of a l lerson is not subortl irtatc to rvishes of any pers'()n-

Indepenclent audit enhances credibil i t-v of f irtancial statcrnellts of clicrrt '

(5) Audited financial statements hclp the lenders'

TR{lE + Lenders can rcly on atrdited financial statemcnts r,vlri le making dccision abotrt credit r 'vofthitress

of loan applicant & later on, they can judge recoverabil ity of t lreir lunds.

(6) Arrdi{or does not need communication skil ls, as he is concerned only with financial information'

FAL5E 4, During concluct of audit, he has to interact with various oft-rcers and staff of client & third

partiei rvhich requires good rvritten & orai col.nmunication skil ls'

tt;

tC|l6I

CI|l

CfC;

6

r5

\

\

\

\

\

(?) i \ r r r ! i lor r r rust nra int i r i l r cont idct t t ia i i t r subject to ce r t : r i r l except iot rs .

r i i r i . ? l l c (A t rd r t r t r ) s l r o t r k l l t o t d i sc l r ) sc a l r v cc .n l l dcn l i a l i n f t r r r l a t i r r r i r ' : l a t i t t g i o c l i c t t t l l r r . ' ' r ' " ' i t t l

ca l l d isc l ( )se i l - i t is pcrrn i t : ' :d Lrv c . l ie r t t or rc( l t l i rcd br l : tu .

i x ] { , r . : t , t j r r l ' ! Do t nee ( l k l l o \ \ ' l c t l ge o l ' t c cou r l t i t l g .

l i^ t .S l ; l + Aucl i t t i r ex l ) i 'cs: ;es opin ion on l l r rarrc ia l s taternel t ts . I f he t loes noi r l iave exPer l k t tor i l t r lq l o t t

accognt i lg . l rc r ' .ap191 c l rcck *helhcr l lnarrc ia l s tatc l t rcnts prepl l rcd l iv ent i t r 's i l l i i l l i lgct r lent ar ' j

t rue & la i r cr r nrr t .

( ! i ) ^ ,ut i i to i l should have knorv lc t lge o l Cl - -S- , - *> ( ' ' r 1*7r ' ' ' I l R - I " : f lR\ ' t Ar lo l . { $ \ / iTt y '

' f l t I rE + Noq ,a c l a1 ,s , 6 r6s t o1 ' t [ e c l i ep l l l l a i n ta in t he i r accou r t t s i t . t co tnp t t i e r i n fo r r t i a t i o l t s l s t c :n . ' i i . r r r s -

rvork ing knt t* iedge on colnputcr is ret l r r i rc t l forat rd i tors l ( ) c , . ) l l ( l ' . lc i . a t rc l i t i r r an c i lcc l i ' , r ' ' , r ; '

t l t t . , r , ; ! r r ! : :q ' : : ! l ' t requi re knorr ' le t lge of business operat ions on J lar t o f audi tor .

! . - . i . ! ,S1, : c) In f inancia l s tater l t i : l t ts of c l ient- rest r l t o l var iot rs oPcrat i t r r ts i i r rnc l io t ts are s l ior t r r l l r r les: ;

aucl i tor 6as krr t , l lcc lge abgut basic bt rs iness operat io l ls , l tc can' t judgc thei r f inar lc ia l 1"- i ' ' | i t r ;1 t

eft-ective rvar'.

i I ! ) [ ]ue ur ! r { . } t r i . r t ion is rc t lu i red 1o be kept l tv audi tor '

TRUE A He shotrld cl<tcutnent Inatters relating to tlre audit (niaintain u'orking papers)"Working 1x,t1t':r ' ' ; lr ' ;

rnaintained t9 |erlopstrlte that the atrclit rvas carried out itcctlrdance witlt thc basic pritt ' :t l i-" '

i I1 , ^ . l i r f i ( r4, is responsib lc for pre vent ion & detect ion of nr isstaten, . , t t r . t ^ l i

i ,Al,SF- + primary reslt, l lsibil i t l ,of prevcntion, detection & correttion of fraud and error rs ihl: i i ' i l

managel le l t . ' f Igs i f audi tor per fcrrn ' rs h is rvork in accordance rv i th basic pr inc ip lcs 14r"" : t r ln ' - '

on ou,l it, hc czrnnot be held l iable for non-detection of nrisstatentent in financial staterne flt i .

{ } . } ' r l r ; : r " . t tc i l l l s tatements are rcsponsib i l i ty of managctnent ',ntl iF: * The malagenrent is responsible for maintaining an upto clatc and proper accounting t ' ' f 'rarir--us

transactions entered into during the course ofthe ycar'

f 14! $unrpl ing is a major inherent l imi t r t ion o[audi t '

i .[{.t i f,], .+ Auditor uses sampling cluring perfonnattce of audit. It is nct pcssible fbr hirrr ttr cr:ttdr.lcl

detailed clreckirrg clue to time constraints and other practical probiems. As he doesn't <:heck

each & evcrJ: itetn. it is impossible lbr hirl l to detect all fraud & errors.

{iS} l) isclosure of accounting policv, rvhich is adoptcd in preparation of f inanciai statements, is not required'

FAl,l iF: .9 The profit gr Iqss can be significantly aff-ectcd by adopting difl 'erent accounting policies.Thus.

disclosgre of- accounting policies follorved becontes necessary so that readers of f inancral

statemenls carr properly understand the vie"v prcsented'

disclosure of l irntlarlental accounting assunrptions is needed whether these are followed or

lf all threc lLndarnental accounting assuntptions are bering follorved in preparatrrn &.

presentation of f inancial statements, specil ic disclosure is not needcd. Tlrus' disclosure is

needed onl1, i1 case of pon-cornpliance rvith the fundarnental accounting assurnptiort"

ql{ ',1 rrs ;lcr AS -1

no { -

F"ALSE +

AAah h ' .

h r \ '

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+ P-, r;'ir ?i'"ri,f ii', b-l Gror trua'\r(l .-rn 'Au rt;l

> i i\1i , li.* n ir:rl ;i I ii ' l )1i" t' I

-+ ,/\rrd.tt'-il Rf,,,1tln*it,;\r*,'.1 witi' 'ti-c;ri; { t'r bno''

Drbi c i 'A ln l

.l-.. a\.vl !)v/ti't

tl ) ' , - " l r :u ; / , / , n , . r r r t r ,^ \ i r l i , t .L

of fm'.r'rl 5cr'\ i ) ( \ r [ *s t i l .4 [ . f , ' / ( i l ' , ' aI L '

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r . ,

)

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Nai,., ',, ,[ ! ' :\ i ' , ' it l " t I

Ia nhe,t*-*r\ f iraolahrrr

O\ i'"""t;t

) : ,q : l

Clraxri, ' ;k

Basic concepts in Aucli{ ing

; . . 1 ; ' i . : s..r 5-A UDI'I ' EVIDENC It

N't ea n i; r .,.

r) rr ffi' . i ' i ,' r ' i i i ;

1 ' : t l r

. , . . i . i :

Sut l i c tu : r ryA p ; l r r , ' , . ' .

&1."| ' i r_l! ls

Arrc l i t , Ev idcr tcc rc f -crs t ( ) a l r - \ ' in io l r r ia i i t - rn obta i r red bv thc audi tor so lhal ! te i - - ; i r r . l r : r r rconclus ions & express opin ion o i r f l r - ,a i - ,c i i i l s tatenlcnts.( r r ) Atr t l i l t r r s l i , ru l t l , ,h t r r i r r 1 l r : ] i t ' i t , t t t , ( , . t lg tpr t tJ t r i t i lc cv ic lc lces.(b) Sul'f icienc.t 'rcfcrs to qufttrttutt of aurJit evirlerrce.

(c) Applopr laterress re l 'ers ro qua[ i t l ' o t 'audi t cv idence.

(a) Degree of r isk of r r r is .s tatcnrent .

(b) ' l ' l rc rcst r l t o l 'ar rd i t procedtr res i .e . anl ' l raud & error detected by aucl i tor -(c) Materialitv of itenr.

, (d) Type of in forrnat ion ar ,a i l : rb le.

, (e) Exper ience gained dur ing previous aucl i t .

( t l ) ' f

rcnt l s l ro, , r ,n bt tccorr r r t ing ra{ i r rs etc . i

/\: ?r"t A5- ]

a , r r l ' { i ' ;

According toneture,

r l * r

I. Visuol .

Documentary

! . 1 ' ' , \

* ' . ' \

. . , ) Dc( 'umantary ' [ .g . . Having a copy of loan ugi"" . " t , t " t r i l ' . , - . . i l i, 16 ' i c ' ' ( ' ) ' ' '

f r . . , . 3 . O ro ! , / ^ . l E .g . d i sc t r ss ion r v i t h managemcn t r cg : r , i l r i r g1 i ' r \c * \ ( r ' r . ' t ) a , i o I * ' -1 crr r rerr t t rerrds in business.

According lo '. I. !ntern!!__ -. Which is created witlr in client's organisatir.:n. Ful

sou rcc f , f . I , t ' : : \ ' r , , J c . . g . . . cop ies o f b i l l s g i vcn to c ! . r : , r ' q r , i : 1 .1 .l 1 ' I , employee's rvage sheets etc.

2. - f ,y1eftqg!- , , fhis or iginates outside cl ient 's organisat iorr . l ;or

. Types of Audit Evidence

V

I .g . , observ ing stoc( iu t ing corrducte, , i t ) \ ' r l i , : i i r ' r . i, staff-.

According to source

Internal

! l ' ' ,

External

According to nature

f----- rr l rVisual I Orat

r lV

lr | 5to I{: wt e,rt

f : rrrr ; t . ' , r Sl

0b;t t l iva | ' - f c ' : 'yr " [

. i . ' €x f - r , ; . t .> 0 \4 Y i t t !

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, . . l ) i ' ' t ' 1.,t

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l 7

f \ ' ; : r r \ 11, I i , i r r i

ev 'l lr.r '1r,..,, . '\

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r- lrrA,f1 I

. l i i t r /- t .

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t 3 .'l t ul i / i ti t rtnd .4s -t u t. u t t t,. Lh: :p . Z

l\

I )iffcreilre bctryr:c rrtr rrtcrnal ct I ixterlt :r l[ . r i r le nce

lL-clirbiiii_v ofI lv idence

Consis tenc l o f , .Evidcnce

i , . ) , r r P t ! r r

i \ ' . ' , I ' t ' , ' , . '

- { ,Pro.eauiesi; . \"1'obtain Evidence

l las is Interr r : r l

I lettritty; : (, 'reaterl & , "t,, i ,",!

rv it l t ir i: c l icr r t 's orgarr isat i r_. t r_

l i l x tcrn:r I; .Ungu la t cs ou ts idc c l i e r r t ' s

, orgarr isat iorr .

Pu rc lu rsc i r r v t , i ce . l r : r r r k s ta t c i t r c r r t>j

: oiitsicte itre enriil,: lvlore reliable

so operated

(c) Writterr E.viclenc:e is more reliable than oral er.. idence.: (d) ln terr r . l L ,v idencc is re l iab le i f rc latec l in ternal contro ls are good.

1i) Tlie i, i , l i t "ui, l"r ' i . i , i ,uii l ,r"J it.ougt, .ri ir l i ." i i"uii. i oiora;ir"renr narure..,houtcr

, b" consistenl .

Q.i) tf thcre is itte ortsistertcy amof rg dif l 'erent evidences relating to a single item, au4itor

,ir, slr..rtrld pcrforrn

"d,l:!:?,:i:!!:ocedures to resolve inconsistency,.

: ri) feru!*" Compliance p.o""a,ii"i ii" p".r".r"a t"

"i-,"Cr d;;ig"i"g,;t".ui;iigpt:::*!_ ! effectiveness and corrrinuiry of I.c. sysrern. Audito; perfom-rs

lixontple

S'ource

Rel i t rh i l i t t ,

, 1r i ; I r i ienral e i , ic l . r ice i i

. ( [ r ) Ev idence ob ta inedthrough cl ierrr .

(i0 .sprocedurg,

2=---"

( - )opies o l - sa les i r rv 'o icc. u agrsheet

l r r i i t l c t l r c c r r l i r r

I e l ' s r c l r ab l c

gerrcralh,' rrrorc r i:l i irble thari iriiernal e uia",r".-direct l ' through auditor is more rer iable than that obtained

cornpliance procedures irt respect of the followiol lowing assertions relatingl-o internal control system :

Existence - t l rar the intemalcontrol " ; iatr .(design) ,- :

Operat ing ' - t l ral rhe I .C.too*y no,-./

- u

ai, I

, lv

n(!\. , u '

fr,\(''U \ \

, \ ./ \ r

r i - r l , { '' " '

t ' t . . '

i ,

1-.,. ' , ' , t t *1.. i

CIrb,r

.; 1r1)i1i'jh'lt tyl" : effectiveness

, , \ {,1 f , }. 'o

: . Conrinuiry ,.+L- ( . t i 'h l tJ \ f ' \

; - that the internil ;;.a;;i ha; G;;, throughout the period.

Substantive p.o."orr"i il p;;tor,n"a io -;ti"ri-"g1r[i"iJ".J,

"Sgi1.I an d va I i d i tv o l' I ranyg!_rensntrilhe.lgn,ggr. A ud i toi pe rforms

s u b sl a r l t r vEprdrlF€.*r-re s pect o f fo I I o w i n g a s se rt i on s re I a t i n g todata produced by oct:o tttrting system:

raiiiiu,iii"i . ij,"t " tii"taiiio" is iecoraea in ir'" piope. p"rioJ

: at. proper amount.

Presentstionemd disclosure

A;i G'n i; ai;;lo';4.;ii'iineJ "na aiJCiit"a o.,

V{ t lY '

A,JI {-,,1',.,,r i 1,., ' ,

11g.;r, \11"u, t-oft'

, . i . r

. t , t t . \

It,t

per recognized accounting polices and relevantstatutory requirernents, if any.

Contpleteness , ft.r"t ttr"i" ir no ,,niclorclcd asscr or liabilirt)' ()r

\.r CJr ( | r: $rr f , transact ion

, Occurrencg r,i r\", T'hat a transaction or event took place rvhiclr'

\ \ pertairrs to the entity during the reverent period.', Valuetion : That an asset or l iabil i ty is recorded at an

i ; appropriate carrying value-' Exis tence , th i lan ur i " t L* i iau i t i ry ex is ts at g iven daG.

R,igkts and , That an asset is a right of the entity and liabitity is- obligotions

I-

an obligation of the entity at a given date.

F.Fbt\

\

\

l i , t y i t ' r ' t t r t i . ' l , i s i t , . t ! i , rg __

; \UDl I- l l t { )Ctr. i - } t r i { t ,sIt .*

i 9

( t . tntn l i ' , ' "

. - . ' , . . - . ,' l 'o

tesi

i r . t ! a i

: : i I .

e l l c c a t v c i ,

' 1 " ' ' I u ' '. , _ , . , r g i ) e ( l

' i n < '' ' '

l : )

i r r lo r rg l to r t l

r f . 1 r a , !

) ri ' ' .

l ' h r

{t4

Analvt ica l rcv ie l ri .e . . . anal - " -s is o1-ratios & trcrrds.

-R,:{.,r Arlliy

:J

I*

t',",; 'o)" ;t;i;^t

f ' ' " t

S u bst a nl iv e Jtroce d ure

- l 'o l cs t c i t t t t l l l c te t ress- Ar { r i ,a i ( ; . v

& r 'al idi t-r ' ol- r lata pn' i i i r i i - , . , i , ,r

i r c c ( r u i l l i n g s \ s l ( ' n t . l i . r i : i : .

ol-I+

I -est of Detai lsI+

pr!)crr,il,jr Ll:

: ; i r l r i i i r t i r : r t

--l+

test ing

ba lances

(v9g!-c-11!9n) . Ll\'r\r\(, O*.'i 'rt"l. t tit ,Ivt',t' .ni,, f"i' ' ' '1'^'-' :l d";' u'

( orr rp l ia t rce & substant i t 'e proccdt t rcs arc pcr f t t rnrcd b; fo l lo* ing r t rethods:

I " I1sy.e9liott-

2" Ohserviliort :

\ {r ' i l ' l \ t : ' \J ' - I

. , i :

' -1. Inquiry ,,tri , (i1 Inquiry cotrsists of seeking appropriate infbnnattcn 'r"rtr

j- Cittfi inntion r,|i.r knorr leclgeable persotrs inside or otrtside tlte cntity-{ ! L '

. - . ) . . , t t l i i ) ( ' on t l nna l i on cu r r s i s t s o f t l r e responsc l o a r l l t t qu t t } '- t - ,

l \ ' l r '

l ' ( i i i ) [ :or exenrple, the: audi tor rec lucsts conl l r rnat ion o l ' rcceivaLi lcs i lv

: direct conrnrunicaticln rvit lr debtors'

, i. Ciiiitoti'ii1r- ll compuritio,r ioniiitt oi-ir""[ing iir" oiitttnt"tical acluiuCy ot-n," til ] ' 't'

, ":lo_l _t, i. A"oiiyiiiif . Anutjtl"ol revievv refers to studying signifrcant ratios anr-i {;r r:il:; ..lrii1

', Review : investigating unttsual flrrctrrations'

\rlstl Y)

*,'\l ur 1 ,,-"\,.

- ''y.j,t i,,,r .

I i irp".t ioi, .unriit i oi examining records, doctttrtents or taltgibl i ' . f ,- i 'r,:

Four tvpes ol-documcntary evidence are:

( i ) docume ntarv ev i t le t lce or ig inat i r rg f rot r t a t ld held by th i rd n; rn i ' - ' .

( i i) docurnentarv evidence originating front third parfy anrl ht:i ' : ' '" \ ' i \1:

e r r t i t y :

(i i i) docurnentary evidence originating from the entity and he'i i l lry thirr,!

parties: and

(iv) docurnentary eviderlce originating frorn and held by the ': lrt i t i

( i ) Observat ion cot ts is ls 0 l ' $ i tncssing a process or ptoc ' - ' - i : ; ; ' ) r i r r i '

perforr-rred by others.

( i i ) For exarnple, the aui i i tor nray observe t l re count i r rg r t f inr , : ' r i , ' : 'sI Lrcing perfornted by client's pcrsonnel'

t /

, : T T

I. ' r l r s .

,\ 1.,''i . r" l f.'

. .1 udi I i n g urtr i , l .s.; tr t ' t . l t t ,

, \ r

\ " Chay r " I

, \ , \ S r . i - \ N A ' \ ' T - ! { ' r \ 1 . P l l { } r - l E I ) t l R E c

i \ l een ing ' ' r \ r ra l l t i ca l p r ( )ce(hr rcs ' n lcans the l rna l l ' s i s o l s ign i f i can t r i l l i os a t rd t re t rds , inc lud inu t l t .

i r r ' c> t iga t io r t o f i l t r c t tu t t i r l l t s .

N ' , t t ' t . c t t l ' r \ r r r l - r t i c a l p n ) c c t l r r r c s i r r e l u J c e o r l r F n r i s , t t t . , , l l l t c c r t t i f r " s l i r t a r r c i a l i r r l i r r r r t a t i o n r r i l l r

Ana l l ' t i cu l l t ' l l . r v i nq : r , ? ' l (Y

/ h , r - Iprocc6rrres ' f ,brnparable irrf irrrnation for prior l .cri t 'ds / .Jr1rr.,r ,), ' r 1\, *: t t \ :r1ri l j

- . v J I I

. Anl ic ipr ted rcsr t l ts sr tc l t ; ts t -1 ' '1 tSf^b j 0 :u&. ,1 -ex

i r - r^ o l r fu : , r

Jr I r redic t ive est iura les l . r re l taret l l r r t l rc t rudi tor . -sucl r as est i rn i r ! !crn of dep.rct ' i l t t i t r r t

' I r t t l t ts t r ia l t rerr , l i f ,J , r r r . ' \ -1 ' - ;J I c '^- f lo+t" "F J

L j s c o f A I I I ' . \ n a | y t i c a l p r o c e d t t r e s a r e t t s e d --

!Y - , : ' , ; : . i l . , Q / " " , J r , , r ( i r t l n p la r r r r i r r g t l r e n : r t r r r . ' . t i r n i r r q i i n r l c \ t eu l , r f o l l t c ra t t d i l p roec , l r r r es \ J1 -

- - - \ ) v \ ' ' " ' - - r , 1 . . , t t t r ) aS a l r ove ra l l r e i , i c$ , r l ' t l t e f i l r ane i r r l s t r r l c t t t c t t t s .+ Q' /U. ' l t t [ l ' t^ ' ' "

STI \GE- l In . ' fhc audi tor should apply arra ly ' t ica l procedtr res at t l re p larrn ing stage tbr

Planning the l l t r r l i t unclerstancl i r r r . r , the brrs iness and i r r ident i f 'v ins areas of potent ia l r iskPlanl ing thc l r r r r l i t unclerstancl i r r r . r , the brrs iness and i r r ident i f 'v ins areas of potent ia l r isk

{ . , r r t i ' : / " , " 'u

. i r r ' . [ t uses both f inaucia l arrc l non- f l r rancia l i r r fc l rnrat ion.N { ' \ ' ,l \ ' \

STAGE-2 As r l le rnay use ARP at this stage as a rneitn to obtain extra evidence relating to an item.

, Substantive Wlren perfornting anall ' t ical proceclures as substantive procedures, auditor rvil l neerj

i {

. , , procedt t res to consider rvhcthe r to re ly orr rest r l ts of ARP or not ,

{ . _ _STAGE_3 In . . He should apply analyt ica l proceclures at or near t l re end of the audi t whi le

overall revien' at... i :::] i l [: ;; i :" i[ l*:Jt"

f inancial staternents as a rvhole are consistetrt with his

t h e c n d o f l l r c a u t l i l ' " "

, , r^ i { i : / . r . r . , . . i .c . i ; ; r i - \ - ; t ; ) ' In some cases. t l re audi tor rnay ident i ly areas rvhere fur lher procedrrres should be

i 1 ' "

aPPl ic t l hef i r re re Port ing '

' Extent_o[*r -c l i4 'ce The appl icat ion of analyt ica l procedrrres is based on the assunrpt ion that re lat ionships

q! AB"P ' anrong data exist :rnd contitrue'

, Tlre exterrt of reliance on the resrrlts of analytical procedures depends on the following

fa c I ors:

(,a) Moteriolitl: s1 tlte itenrs irtvolvcd. For exa:npie, when inventory balances are

r later ia l t l rc audi tgr docs r rot rc lv onl r t tn arra l ; - t ica l procedures in fonning

cor tc lus ior ts .

(b\ other oucli l proL'edurc.s applici l for t lre sarne audit ob-iectives:

(c) Accurtu-1r rvith rvhich the expccteci results of analytical procedures can be predicted.

F6r ",iun1ple,

t lre auditor vvil l place greater reliancc irr comparing Pross profit

margils f iom one rrericld to arrother than in cornparing discretionary expenses. sttch

as rescarclt or advertising: and

(d) as.ressrn ent of inherent snrl conlrol risks, for exarnple, if internal control over sales

order prbcessing is rveak, then auditor would consider adopting more substantive

tests rather than ARP onlY-

Unusualfluctuations

Wiren ARP identifu significantinfornratiorr, the aLiditor should

f luctuations which are inconsistent rvith other

pertbrrn extended procedures.

[ ' ] r r i B ( | \ i , - ; , - ' ( t I t \ : t ' I t Ls i t t , I t t t I i I i t t !

t3 At-r DIT h'I AT iil{ i.\t- l-tY.4. --'l

. , . . . -

I+ f6c-l-t'*.'c'

\lu,**., rv; ob{fnaq "Jl : , l lv 'o

{.ufr^"i .l e' f't - \ \, , J ! \

\l r\o- t' t '. '

\Ieuuirtg . \ ' l a tc r i l l i t c rn ' r t rc l l r r ' , se r r ' l r i c l r t t t r t t l r ! t . ' i : l t l i r : j r : i i g t i ; r r : ; i i c l

r t sers o1 ' { l r ra r ic i l r l s t i l t c t l le i l t s .

' I t r n a ) b c q t r a r r t i t i r t i r c / q t r a l i t a t i v c .

depcrtds ttyrttrt '

a

a Statut r r r ; pror is ior ls^ t ' l i

I trr .rrn -txrt lr

poitrt tr f ' r ' icr 'r s

' I r t t i i r idua l Ace ,x r t r t a t tc l

" ( J v c l a l l l t r l t r t c t t t l s t l l l c t l l c l t l s .

, lu t l i tor s l tould I . Deternt i r l ing N' f E of 'audi t proccdt t r ts : r t t tc l

consider ). E,valrratins cfi lct o!-rnisstatenrerrts.noteriolit-t' *'lt ilc

' Relotiott Inve rse relationsltip betu'ccn Degree of'Atrclit Ril l i ,r: ' , r ' ' ,1;1s1 ';;r ' i- '

r l t l i t v l e ' c l '

Rcasott Gcrrera l l l . tnana[- lenlc l l t i ernployccs dotr" t co l ] i r i1 ' l r , : i ! r ' r " "

i , : : \ t

v l r lue i terns. N' loreover . as a get lera l pract icc, au<j : r ' " ' . : ' ' ' l "

va lue i t e rns i n de ta i l . l ' h t r s . i t i s l c ss r i sk l ' t ha t h i l i r , r : ; I ' . , " r r i L i

L ' r ror ntav not be delected ' T 'hrrs h ig l r rnatcr ia l i t l ' !er '< : ! l l l ; rv ' : ' t : l i id l t

risk at lorver degrcc. I ' lencc. inverse relation.

. Audi tor decic les upon nrater ia l i ty level dur ing p lanning stage lv l r ic i r ! !1 . r ] i :e t : i t t r i t ; ied

during progress of audit. lt rnay be increased/ clecreased ftrr specil lc rl i l ' 'rr ' :r:rf

. I f ARP indicates rn isstatements. audi tc l r s l rot r ld adopt other procedt i ' ts t t ' ' : , ; f . i l l r l t [ i : 11.

y t t L . l t

II t D \" l l r"

S i z c , r { l i r e u r : I ( l , , r - 0 , t l r r . l )

N a t u r c o l i t e r r t . { u t i , 1 " . ' 1 1 \ , - J r . i ' ; ( \

I'Iulcriulit-t, tut hect, ttsidc-rcd

?4. i ,

i . : j :

; t i l . r . ' '

1II

( ' * ,A . .

. ' ! - l i r

, \ ' i '

t l t '

l l t r

l , ! i " i q r s l t

. r ' ;e rns t l y

a t

. t ' l t : ( - l

: ; r ' r l t ! U l l l

i":;,,,i;;;

If Agclitor conclucles that aggregate uncorrectetl t l t isstatctltcnt arc rrtatc'rial

IY

. Specific t l isstatetrletrts identif ied by Auditor +

' Uncorrected misstatenlents (not identif ied) +

. Net effect of uncorrected misstatenretrts identi l ' ied clurlng,

p;ev ious ycar 's at rd i t

IVlanagemcut refirses

JQ,rra l i f icd/ adversc t rp in ion

Ask Managetnetit to ad.itrst f irrancial statemcnt

Managemettt does

Jo. K.

TI

I

I

t

2Z '1 t iJ i t i tt g ttnd -1s.\ itr ( t I i( e i hagr- L

i \ ' IanagernentRcpresentat ion

'fypcs of NIRI,

Elenrents of MIt l-

^ . i \ \ . {4' ;. f' ''t '

1 -

l - '* ' ' " \

1 N' 'n {u) l

, , \ ) "

' t r \' NlanagementRepresentation :rsAudit Evidence

lI I eaning

I',,t'ontplc

I

$, / r - iu-c11 i ora l conl l r rnnl i r .n t r r , thcrr t rv r . t r tc- r r r . r f fccr in i l l r r ; i l< : ia ls ta t c r r r en ts -

. [ ]or I r inancia l Sta{e r r rcnt as a u 'hole.

' [ ]or Account inr I ) t , l i r ic . a . , ] - ' r I t \ L l *1(

. ln lcut ion to l ro l t ' l Invcstrner t ts' l ' r o \ i : ; l r r t t t . ' r c l l r g t \ l ; . , ' , . r ' , 1 { ] . . r , / ' ) l : ' r ' l '

\ - t )

r c { . ju { . : ! l l t )

tI

!

!

I

!

I

rt

tJ

I

tJ

J

I

I

i

tI

I

t

af

aI

tIeI

tC

tI

l-et1er issrred b-r' t lanlt gcntent.

l -e t ter f l 'or r r aut l i tc . r cr , r r ta in inq i , r is r r r r t lerstanding rvhich is r l r r iv acknorv le; l t r r , i , i l l

conf i r r r rcd lx ' t i rc lnani rgc l l tc l l t .

I t should bc adcl re ssed to Aqrdi tor .

I t shorr ld bc dated ar td s igned l ry proper at r thor i t l ' .

Date of MRI- shoLrld be earlier t ltatr,/srtme as clatc of audit rel)()r1.

For spccific transaction, there rlal ' bc separate managemellt reprresentaliotr letters;

f )ncumentat ion

Refusal by Management :

[ -Managgment prov ides

iO . K

( l :ar r . i , , l ro l I r rvesl r t tent)

. He slrotrld rrse lris professionul jttdgernent to decide tlte arclts in rvhich it/1i.1 r.

requi red.. Managemerrt Representation shotrld be in x'rit irtg.

. Auditor shotrlci seek corrohorolivru eviderrccs.

. Evaluatc its reosonobleness and cotrsis(ency.

- N,lanagenrerrt Representation shor-rld lre provided by rvell infornted persons"

. Managenrent Representation Lettcr cnrr't be substitutel for otlrer audit evideric.r:s.

. Hgwgver, somelirles i j rng be onl-v evidetrce,

Of both :ypes

of Management Represetrtatiorl l-elters,

Auditor asks for MRL

-tI

Managcrnerrt Refuscs

iI

Audi tor should h inrsel f -prcpare h is understarrd i r rg wi l i t a

managonleltt to acknowledgc thc sarrle

iManagement acknowled ges

Io. K"

Management rcfuses

ILinritation on Scope of' u't 'rrk of euditor

l j tuic i t tr tci : I . t t .s ir t . 1.trt I i t i t tg L JF\

\

\

\

) i 1\ 1{ ! - EXTERNAL CONII IRNIATIONS

! ; i

l ' r r t , :

| . , . i r i e r l t a l

t u i r i , r i t { ; r t i ( r l l s

I t is the { ) r ( )ccss o l c 'b ta i l r ing arr t i evaiuat ing audi t cr i t le t tce throug. l r r t ' - i i l ' r : ' : t

cr t rnnrr t r r icat iorr l i r r rn a t l r i r t l par tv i r t rcspot tse to a ret iuest f i r r in lbrr t ta t ion at rot t l a

par t ic t r lar i tcrn.

. Sc l , - ' c t i ns t l r c i l cn r ) l i ' r u l r i c l r co i t l i t r t t r t l i r r l r s i r l c r t ccJ t , l .

. l )cs igrr ing r l rc tbrrn of thc cc,nf innat io l t requcst . | ! ' , : ' '

' Conrrr r r rn ic i r t i r ig , t l tc co l t f i r t t ta l ion ret l t test 1o th i rc l par l r ' .

' Obta in int response f rorn t l r i rd prr t l ' .. E,valuat ing thc i r t ibr rnat iorr or abst- t tce t l f 'conf i r r r la t ion.

. l ) c l r t o r b l r l i r t t c c s :' Crcdi lc i r balar tccs:. - fe

rnrs o l - : igrec lnut l t or t rnr ts l .c t i r ) l ls \ \ ' i t l l t l r i rd par t ie s :

. [Jank IJalarrcc artd other irtf i trrrtaliorr fronl bankcrs;

. Stock held by ' t l i i rd par l ies. '

. Propert-r, t i t lc ciccds helcl trv t lr ircl parties:

. ln l 'estn le nts l )urchased b i t t c le l ive rv not takei t ; &

' I larrk k'rans.

Er lernal c t r r r l l r r r r : r t igr r rnay be rcqrrcstet l c i t l rc l a t t l re balar tcc s l rcet c lnte or { ls i t t a t t \ ' ) l l ! ( r

date c lose to the balance sheet datc. I lcspondents rv i l i be nrore rv i l l ing to a conf i r t t la ' l r t . - , r r

reiuest conta i r l l n g niatrageltent autlrorf z-ation,

Positive , lt asks the resporrclcnt to lggty,to the atrdilor in all cases either bi '

confirnnliott indicating the rcsporrdent's agrecment/ clisagreetnertt rvit lt t lre giv<,:r

reqyest , inforrnatign, or b1, askirr,g the re.spondeql to fi l l in inforlnaf ion,

Negative , lt asks the rcsponclcnt to reply-only_i11-t-!t-e" C.oS!! -o{ di-sag1-e.enrerrt ir"itl'r' confirnrotiott t lre inforrnation providcd irr the request. Ncgative cottf irrnation reqr-lcsl

" . : : i i l l i ' f e

i

l : r - i

, r l r ( ) I t S t l l : t Y

[ ' i r ' : , , , j l ' , .1 . tc rna l

t ' r i r r i r r r ' l : l l i 0ns

i . : ,x€i i , t r ancl

| r r ; . i l i '

( lsr tr i ; r ' tn:r t ionf l r i : , ' . 1 . . :

[ ' h , . : ' , t , ' r ' i s t i cs o f! o . E " ' t . , r l r ! t t t l s

I hc t ' \ (ernal

c{)nf i ! ' Inat ion

[r l -{)(t} i :S -

c( ir l is ldcrat ions bY

: r r i ( l i t0 r

re{Juest sliould be used rvltetr:. inhcrent and corrtrol risk is lorv;. a large number of srnal l ba larrces is involvecl ;. a substantial nun.rber of errors is not expccted: and. it does not appear to the auditor that respondents rvil l disregarcj

Rcsporrdcnr', . . , ' , , , . , . : l , i ' i : :Tff i : ; ."ctc'ce .f fect the rcl iabi l i t ' . of eridcrrcc. Tlrtrs" thcconfirrnatiorl rerluest shoLrkl bc addressed to appropriate indivit jual.

. T l r c : r r rd i ro r s l r t r r r l J n ra in t r i n co l r t r o l o r c r sc l cc t i on o f f l r i r t l l t a r t i c s f o t t l i o t r , t

request rvil l be scnt. the preparation artd sending of recluests and the rcsponses to

t l rose reqt icsts .. I le shoulcl cnsure that he directl l ' scnds out the cont' inrration requests. the requests

1rc propcr ly ,addressed and that l r l l repl ics and the uncle l ivered conf i r t -nat io t ts are:

dc l ivere<l d i rect ly ' to h im.

" Fle shoulci perform alternative procedures if no response is received to a positive

extemal con flrnration request.' The auditor slrould consider r.r 'hether cxterna! confirmations appear to be unreliable.

- Fle shoulcl trlso consider the causes of inconsistency revealed by external

eonfirrnation. ifan,v.

2,1 I t ft/ i t ! t t c t tt t t1,,1 :t s ur anc r' f h:iri. -l

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N'tr:tn:rgcntentReques ts

tll Ltuttinl;

IJ he ugrees

I-f h<' rloesn't(rg ree

I t ' l i t r t l i t , r t \ \ i l l t t s t o c t ' t t r t l n t r cc r ta in i r r f i r r r n i r t i on l r i l l r r r a r ragen r r : n ! .re( lUests l l te i tL I ( l l tor t t t t t lo r l t t so. l re s l ro i r ld consKlcr va l r r i r tv o l groul rdsfbr sucl t e rcr l t rcst . I le shoLr ic i usk t i te r : lanag)el ) rcnt l , r suhrrr i t i ts ret l i resti t t a ' ivr i l ter t fornr . a lot tgwi t l t t l re reasous i 'or s i rc l r r r : r r lucSt . l le s l r l i . i ldr i ta i r t ta i t t d t tc t t t t te t t ta t ion o l '1 l tc requesl ruadc t r ' , t l rc rnrrnat lcntet l t a lo l t r lr r ' i t l r t l re reASons g ivcn by the r r iar r : rgcnrerr l , .

I { ' l rc r r r : rccs to t t t l t t t i t ' , le t t rcr l l lc ( luusl nol l r ) iuek ur tern l l corr f i r r r rat iorrregar t l i r rg a par t icu lar ntat lcr . t l rerr appl l ' a l tcrnat i r 'c 1rrc ,c , r ,1ures io obta i r rsuf l lc icnt appropr iatc ev idcrrccs.

l f t l t e : r t r J i t t r l ( l ( ) cs t l o l acee l r t t l t t ' r r r l i c l i t r o l r n l r u r - - cu rc r r t ' s r cqu r , s t l r r r dis preverr le t l f iorn ot r ta i r r inq c, . r r r f i r r t rat i t rns. thcre is : r l in t i ta t ion on tht :scol )c o l t l re audi tor 's rvork. l le s l rould consider thc possib le i rnpact : r r rt lre ;rtrclit r-e por1.

I

I

oBJECTIVE' tYPE QUESI- IONS

Comment on whether lb t lowing i l rc ' f ruc or l ia lse

( l ) l lv idence should be sul l ic ier t t and appropr ia le.'I ' ttt l l l + Auditor should obtain suJfit ' icnt & Appropriule evicicrrce. Sufficiency rcf'ers to quanlufl l oi audit

eviderrce. Appropriateness refers to cluality of audit evidence.

(.2) Auditor should consider consistencJ" of evidence.'I ' l{tJ[" O The audit eviderrces obtained tlrrough different sources or of different nature should be con:i:. i trrrt.

If there is inconsistency among different evidences relating to a single itern ,auditor slroulcipertbrm additic'tnal procedttres to resolve ittconsisterrcl '.

( l) (- 'unrpliance proced u re is u ndertaken to check transactions & balances. I n\u l o \ f ' ' : ' ' \"r 'r L. "

IrAl.SE * Conrpliance procedure is undertaken to clreck desigrriug, operating efl 'ectiveness and continuity of'internal cotttrol systems-

(rl) Substantive procedures lre carried out to check data produced by accounting system .

T'RUE + Substantive procedures are undertaken to check corrtpleteness, accuracy and validity ri l ' dataproduced by accounting systenr i.e., transactions and balances.

(5) Auditor nlay use analytiurl review procedure at planning stagc.'| ' I{UE + The auclitor should apply analytical procedures at ;rlanning stage for understanding the trustnoss

( ( r )

and in iderr t i f i ' ingareas ot 'potent ia l r isk. l t usesboth f inancia l and non- f i r tar rc ia l in forrnat iorr

N{: r ter ia l i tcnrs are < ln ly qu:rnt i ta t i l 'e in nal t t rc . r ' t r t l - . \

' " \ ' " 'n

p'ALSE + Material itcrns are those which nray influence the judgenrent of users of f inancial stlrtentcnts. it

tnay be qt rant i ta t ive and qual i ta t ive as ' " r 'c l l .

(7) ' l ' trere is inverse relation between materiality & audit risk.

I ' l fUE + Generally lnanagemellt /employees don't comrrrit f ioud in lr igh value itet-ns. Moreovr;r. ds a

general practice, auditor checks higlr value iterns in detail. Thus it is less riskv that high value

fraud and error may uot be detected . So, high materiality' level leaves audit risk at lorver clel:,ree"

(8) Nlanagement representation letter can be of trvo types.'I 'RUE + (i) Letter issued by managetnent

(i i) Letter front auditors outl ining his understanding. which is duly acknowledgcd and etnfinned

by thc Inanagenlent.

--ata.&-

Chapter 3Prcparation for an Audit

3.1 AUDIT PROCESS

( l ) A .ud i tPror:ess at ag lance

I ElLglggllgrt of Auditor.

7. ALrditor Obtains know|9dg9 cll_.li"nt'. !usines1

3. Forrnulation of audit plan & progranr.

4. Determining NTE, of sr-rbstantive procedures-

5. on the basis of results of complilncg_ryocedures, perforrning:\b*_tLu:g proceclures

6. Maintaining working papers.

7. Forrnulation of opinion regarding financial statements.

8. lssuarrce of Audit Report.

(2) Audit (i)f 'rocess (stage ivr'ise) .

Stage l :

P lanning

( i ) Fonnulat ing overal l p lan based on knowledge of c l ient 'sBusiness.

(i i) Prcparing detailed audit progranrs for every aspect to becovered in Audit.

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II

tIIIII

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1 r ' , ," 0i: \ . r: Stage 2:

Performingprocedures &obtainingevidences therefrom

\(i) Exarnining systenl of intenral controls by performing

compl iance procedures.

(i i) Based on above, determining NTE of substantiveprocedures.

(i i i) Conducting vouching of transactions.

(iv) Perfornring verif ication of balances.

(v) Ensur ing appropr iate d isc losure of in fonnat ion.

(vi) Exarnining forrn & ct-rntent of f lnancial statements.

(v i i ) Analys ing s igni f icant rat ios & t rends.

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( i i i ) State 3 :

Concluding &Reporting

(i) Fornring conclusiorr on tl-re basis of evidences.

(i i) Providing report on TrLrthfulness & Fairness of f inancialstatements on the basis of conclusions.

(iii) Ensuring that report coniplies with the statutory requirement,i f any.

(iv) Communicating the Report to the appropriate authority.

I

P r e puruli ott.for ctn ilrul I t

' f [ . [{ l ! tS OF AUDIl ' t iNGAGEN'IEN't

r (.'nt ( ' l i c n t a n . l , \ r r d i t , , r s l t o i r l t l a S r e c u n l c r t t t s t t f e n g l , q e r r r . ' r r 1

cr rgagernent l c t tc r . t t t a ro id an1 ' n r isunders tand ing .

Auditor shotrld serrcl arr eltgatlclnLrnt lettcr. prefcrabh bcft-trc cotl lmenc(mertl, oi

engagernent.

- f h e o b j e c l i v e o f l h e a t r d i t : t e S t a ' t ' ' ' ' \ l ' t t l , ' r ' 1 , ! - \ " n l i i ' ' ] Y r i - i ' r i . ' i r i ' ; l i \

V t r , , t l 4 i \ q 4 : . ( t ? l { , r l [l ' l re scopc o1 ' t l te at rd i t : ' ) , i - r , r r , : i 1 i r " . ' . f '1" ' . \ ) L l

N,lanagernertt ' s respon s i bi I i ty for the fi n ancia I staternents:

lv lanagemcnt 's rcsponsib i l i t i , for se lect ion and consistenl apl l l icat io l l o l : a f l r l ) i , t ' la le

accounting polic ics: y. C-g"'.\ i c-( 4 \Lrr-

Management's re sponsibil i t-v for preparatio' of the financial stl i tetnertts ot: it ; ' '"t;rtrq

concern basis,

Management 's responsib i l iU* for rnaki r rg reasonable judgmcnts and esi i rnates:

Managenrent's rcsponsibil i ty for the rnaintenance of adequatc accotrntinp, rccil- i is

and internql corr t ro ls :

Unrestricted acccss t() records 1_d do-cgry941ation:

The fact that due to (l) the test nature of an audit, (2) persuasive rathelihan

conclusive nature of aLrdit evidence. (3) involvement of judgement and (4) irri l<'nt'nt

l imitations of any, accounting and internal control system, there is an r:tra"'rieJlhlr

risk that even sonte material misstatements may remain undetected; &

Thc fact that the audit proces-" may be subjected to peer review' (

Pi;;;;.;il;;;;i'

' reasonableness of such a request.

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2 .

Pr t n t l i r ; t i c { )n te l l { s :

D [ [ r - ' 1 a l t r r " r ' iL t ' ' i

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t ; l / rp} ' i l ' : l

, i i r ' n t , r . t t u \ t l Y { . \ i r : r' , , t j ' l l r 1 " ' t , , r f ' r ' r r , ; r t

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. , ; , I ; , ' 0 r \ r r i f ' . i -, l

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i I ' i r ' h i , : ' , , ( , , " r . . r i , r ' , ' ; ' , l , t l l

.1 , , . , , ,1r r r tL"1 0" , '

- t 1 I, ' \ _ \ r , . . , i . . j 1 , , t' , ' - ' . l , t l i r i t ' ; ' l ' ; ' l

4 r l : ! i i i r tn l t r i l Mat te rs

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Expectation of receiving MRL. AfrVtt

Requesting client to confimr the terms of tlre engagelnent- t$\."oo-r fu{fl* 45Ury1 f\-!J'

Description of any other letters the auditor expects to issue to the client.

Fees and bil l ing arrangements. { l ' . 'r \ ' ;

Arrangements w,r.t. t lre involvement of other atrditors anc.l experts ancl internai

When the auditor of a parerrt entity is also the auditor of its subsidiary, bratrr:h r;r '

division. Auclitor shotrld colrsider Legal recluiretnents, independerrce of the managetn€Ilt

etc. to decide rvlretlrer to send a separate engagenlent letter to the component'

: _ ^ .: It before compleung the engagement, client requests the auditor to change tlre

, errgug"r"nt to tne, ii,tri"t., prouiOlt a lower level of assitrance, he should consider the

auditor.

: I Atrangements to be rnade with the predecessor auditor'

Audit ofConrponcnt

Recurring Audits Th" ;"Jii;. th",ti; consider rvhether circumstances require revision in ternrs

engagement or if thcre is need to remind existing terms of engagelnent to the client'

, ! ; i ; n i , : t i t r

Flngagement

23

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. I r t J i i i r tq ( u r , I . i . \ . \ t t t .uk \ ' r . i r : rp . j

I l c s l r o i i l r l co r r s i dc r t l r e r cc r i cs r f l o r r r c l i c l r t 1o c l r ang ' : i l r c t ( r n l r sI

-ll lcascnable - f ust i f ic l l , ion of c l rarrgc

( i .c . to change prev i t rus rn isurrderstancl i r r g )

JCl ie 'nt ant l r \uc l i tor s l rot r ld asree oni' lcrv ternrs

Nt i reason l rb le , j L rs t i f i ca t io r r o f ' change

L

I lc s l rouldrr ' t agrce t ( ) a change r - r f 'e r rut rgr : rncrr lani l shotr ld cont inrre rv i th or ig inal cnga: tcr r icr r t

tI l -c l ie- r r t c loesn' t pcrrn i I l r inr to conf i l t r r , . r

or ie inal engagctnent

J\ \ i i thdrarv and cousider other obl igat io i r

(i.e . report thesc circurnstances to ollrr:r

parlies l ike IIOD or shareholders)

4 (A

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s

3.3 SAMPLE ENGAGEMENT LETTER

Vorr l ra i 'e ;cq i ;ar iad ihut " ; "

i rJ i t lhc bal rncc shcct of (Nanrc o l the Ciompurr- r ' ) as at J lsr MarCh, IXXX and therelatccl profit ancl loss account and the (cash flc* statenrent) for the year endecl on tlrat date .

We are pleased to curfirm our acceptarrce atrd our understancling of this engagenrent bv means of this letter. Our auditrvil l be conducted with the objective of our expressing arr opinion on the l lnancial statements. We wil l conduct ouraudit in accordance rvith the auditing standards ecnerally accepted in India and with the requirernents of theConrpanies Act, 1956. Those Standards require that we plan and perfornr the audit to obtain reasonable assuranceabout whether the financial statements are free of nraterial misstatements.

An audit includes examining. on a test basis, evidence supporting the arnounts and disclosures in the financialstatctnents. An audit also includes assessing the accounting principles used and significant estimates made bymanagement, as rr,ell as evaluating thc overall f inancial st:rternent prcscntation-

Ilowcver, having regard to the test nature of'arr audit. persuasive rather tharr conclusive nature of audit evidencetogether rvith inherent l irnitations of any accounting and internal control svstcrn. there is an unavoidable risk that evensome nraterial nrisstatenrents of f inancial statenlents. restrlt inq from fraud. and to a iesser extent error. if cit lrerexlsrs.may renrain undetected.

In addition to our report on the financial statements, we expect to provide y,ou rvith a separate letter concerning anymaterial weaknesses in accorrnting and internal control systcms, rvhich might colne [o our notice.

The nesnqnsibil i ty forthe preparation of f inancial statenlents on a going concenr basis is that of the nranagernent. l 'hemanagement is also responsible for selection and consistent application of appropriate accounting policies, includingimplernenhtion of applicable accounting standards along rvith proper explanation relating to any rnaterial departuresfiorn those accounting standards. The managemertt is also responsible for making judgments and estimates that arereasonable and pnrdent so as to give a true and fair view of the state of affairs of the entity at the end of the tlnancialyear and of t lre profit or loss of the entity for that period.

{ l h r ; ' ' Prepurotictrt Jbr un Autlir

. i i t ' : r w : , 1 r t l i i s i b i i i i y o f t h e t r r a n a g c t r r e t r t a l s t . l i n c l u d e s t l t c t r r a i t r t e r r a n c c o 1 - i r t 1 c c 1 r t a t e

( . ( , i t i : : l , . , . ,F , ' r , la rd ing o t ' the assets o f the company and fo r t l te p reve t t t i r tg a r td t l c tc t : t i r r : - ' f i r r r r l , r . r r t l r , - r t i . ' o r r ; " ' t ' s -

.As r i , r , . ; : i p foccss . wg u , i l l reques t f ro rn managetnent wr i t t c r l con f l r l r l l i t i o t t c , r t l cc r t i i t l q r ( l ) ;u ' i ( i l : l l l i ( r r r \ l ] - i , " ( i c

21)

; i ] i , wi th the audi t .

lv i te ) ,our at tent ion to t l re fact t l ra t our audi t process is sr r l r . icct to 'pecr rev icu ' t rnr lcr l l te ther lerec l

l )atr:

I) lac.tt

Accognl i i ! r ' lq ,4r : r 1949. Tf ie rcv ie rver rnay eranr inc our u 'ork ing papcrs c iur i r tg t i te cot t t -se o{ ' t l rc pccr rcv ierr ,

lVe look i , r twi l rd to fu l l cooperat ion r r ' i th vour s taf l -and we t rust that t l tev u i l l r r rake avai lablc t " t ts u l t l t tcvt : r r i :corJs '

t locurncl t l t ion and other in fonnat ion are requested in connect ion rv i t l r o t r r a t rc l i t - Otr r tccs n ' i l l bc i , i l icd; rs t l tc w'ork

pr 0ufcsscs.

l-lr irr !r:ttcr r,, ' i l l b,r effbctive for f utrrre years unless it is termiriatcd, anrenclecl or sttperscdcd. [ ' iytsc sigrr lrrlrJ rctrtrtt ihe

attachcd copy ol this lettcr to irrdicate that it is irr accordance \\ ' i th Your unilerslandirrs of t lrc ari i l l tg,: 'rrlcrl l '-r 1-4rr i.,r1t. r , r r i r t i . f i l ' . ' f in : r l r i : i i t I s tatements"

XYZ & { lo "

, . ' l : . r , ' , r i . ' , r 1 , . i . ! l l A n t S

(Signat t i rc)

; i . , i ; i r . , , , i i i l re Mernber)- l - . tes t ; : , i i : i i t t ln)

4ckr,'rwledged on behalf of ABC Company by

lSrg,rr,rture )Nanic and Designation

l)ate

3"4 ATIDIT TECHNIQUES

i Rudit techniques refer to certain means & methotls for collecting evidencesfiri r, l:, i il t!$

f ixar;r tple i t. Posting checking

4. lnqur ry:: '1 . Year end scrutiny .

.--.-" -------::'-

2- Casting ghecking

5. Re-cgmputation

8 pol\.1"_3"*1]_1':l ut :

3. Physical verif i cation'

6.*ALPa_

?-r: l ' i i l r :rce BetweenAudit I ' rocedures

"8 Autl i l' l 'echniques

Basis : Plocedures- : - - {

( i ) Meaning : Basic way to handle audi t work '

: i -

, (ii) Types : Trvo tYPes -

Compliance and substanttve

( i i i ) Nature A specific procedure mayrequire a number of techniques-

. .'!9,,l"1i'tt!n:-t M"ir,".ir "r. ",r'tfto1'".1

lbr condrrctingprocedurcs.

; Many (refer to exanrples given abot..:,)

I; ;;' 'n;;ii;- ;i Assets, rnauytechniques such as PhYsicrrlexarnlnatlon, In(lt l lrycomputations are needed.

. to,1 uili t itr g tl i ri . i :;.t t i r r ;t tt' t' L i l ra l r . , i

3.5 . \AS _ B - AT IDTT f } I .ANNINC

II

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C

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C

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CtCttttatI

tttI

tttCteta

Planning

al,pri."itiritv

Cont"nts

ur.f,irit"ri

Kno*' ledge of thecl ients Business

Dil";;i;;;i;hClient

l . I l r e r t t r r l i t i ' r s l r o t r l c l p l l r r l r i ' r t t ' ; k t o r ' t t : t b l e l t i r t t t , , e , ' r r r l r r . f a r r c f f c , . ' l i r ' , , . : l r r r l i t , : r , , ', :1 f ic icr r t and t i rne lv ntanl rc l r .

2 . l t shoulr l be based on krro* ! r :dgc of the c l ient 's i rus ine ss.l . I l r c S tu l cu rcn t i s f r a r r r c t l i r r r l r c co r r l c r t r r f l c c r r r r i r r u ; r t r r l i t s .2" I r r a f i rs t a t rd i t . t l re at td i tor nurv cxtend l r is p lanrr i r rg process bcyonr l t i rc nrr r t |crs

r i isct rsscd l rere in-

l ) l : r r t t r i r t g , s l t t r t t l r l l . t c r r t t l i n r r o t r : . i r r v o l r i r r q' I )cvc loping an overal l p lar i f i , r scopc and conduct o l - t l i r : ar rd i t ; ancl' [,)evelopilg an audit prograrnrnc.

, , \ r rd i f p lanning hc lps to ensurc t l ra t :r appro[)r iate r l t tent iorr is c leroled l (r inrporlant arclrs of '' potential problcms are prorrryrtly ide]jiificcl:' the w'ork is iornplete in t inrc. . 'N l {

t hc aud i t :

tr assist:rnts arc uti l iscd prope rlr,. anrir the *'ork done b,v other auclitors and cxperts is dul_r, co-onlinated' l

l rc iuc l i tor . ; , i "bt " i ; i

i , i .n tn, , rv let lec l ionr -

\ ( i ) l ' rev iot ts Expcr icr tce.

. ( i i ) Discussiorr wi th people rv i th in ent i ty .

: ( i i i ) Discussion rv i th in ternal arrd i tor .

. { iv) Discussion rv i th other aucl i tor .

((v) Discussiorr with knorvleclgeable people outside. entitv.(vi) [ 'ublication rclating to industr_"- irr rvhich entity operates.

' (v i i ) Legis lat ion and Regulat ion., (v i i i ) V is i ts to ent i ty /p lant .

. (ix) Docunrents produced blr entitv (minutes, rnanual,.. plans) etc..

{* l Cl icnt 's anrrual repor t to sharel ro lders.

f*i) Client's policy and proceclure rnanual.

a(x i i ) Minutes of nreet ing of sharel ro lders, BOD etc-

(xii i) Internal periodic reports.

, (1iv) _C_onsi!9ra1i91o_f 1!aje of ecollomy uld llt implct on clientls busilqss., Discussions with the cl ient may include fol lorving:

: ' Changes in managemcnt organiz.ational structure, and activit ies of the client

u . Currcrrt.Government legislation, regulations and dircctives affecting the client.

) t Currcnl brrs i r tess developnrr : r r ts .I r Current or inrpending f inarrc ia l d i t f lcu l t ies or accot t r t t i t tg problems.' ^'. '

Dxistcrtce of relatcd parties rvil lr lr 'honr transactiotls arc l ikely.\ r Nerv or closed premises antl plant facil i t ies.

1 ' Recent or impending changcs in teclrnology.

.it. Significant Inatters arising frorn previous year's {lnancial staten.}ents, audit reporl and\. management letters.

( . Clranges in the accounting practices and in the systent of intemal contreil: r Scope and t iming of the exarninat ion.

, t Assistance of client perstlnnel in data preparatiorr.

: . Relevance of anv rvork to be carried out by the client's internal auditors.

\

Pt t'prit'tt!iort f r,;r uit .1uc!ti

I ' hc tenr ts L ) l - cngager t le l t ! i t t td a r lv s ta t t l t i )n rcspor r : ; i b i l i t i cs .

Nature ar td t i tn ing o f re l l t l r t s t l r o t l t c r con l l r l t l l l i c : l t l ( r t l .

A p p l i c u b l e l c g a l o r s l J l l l t ( ) n t c t l t t i r c t t t e t l t s .

Account ing po l i c ics adopte< l bv thc c l ie r t t and c l t : t r tnes i r r those po i ie ies

Efl 'ect of rtetv accounting or aucl i t i r tg plol lot l l lctrr lci t ts ol l the arrdit .

ldent i l lcat ion ol ' siqri i l lcat l l l t t t t l i1 at.eas.

Sett ing clf t traterial i t) ' levels f irr arrcl i t purp()ses.

Copd i t ions r -equ i r i r rg spec ia l a t le r l t ion such as t i ie poss ib i l i t y o l - r r ra ic r ia l ( - ' r r ( ) r t l ' r

l iarrd.

Rel iance to be p lacecl on accot tn l i t lg systenl at ld i l l tc l l ia l contro l .

I{otation ol'enrphasis on sllecif ic audit areas.

Nature, t in t ing and cxtet t t o1 'arrd i t ev idencc.

Work of internal "udiltrrs

.rn(l the extcrrt of't l ie ir irtr 'olvenietlt-

t{t lnvolventent of other attditors.

i: t lnvolvelnent of exPerts.

, . Estab]i,shlg

. tiitiliiior should do",tnl"nt his overall plan. Fonn and extent of the clocurnentation .lill

--i. Araiioiihould prepare a'uvritlen audit progranrnrc listing the procedtrrcs reclrrired'-", implement the audi t P lan.. 2. The progratlme should lrave sufficient details so that it can be uscd as a soi i. i t

I : instructions for the assistants-

: 3. The auditor shotrld consider the

. ,P) Timing of the Procedtrres;

, '1ii; ' l-he

coordination of an-v assistance required l l 'om tlte client and tlte availahilr i;

\ ofassistants; and

(ii i) ' fhe involvement of other auditors or experts-

4. t

Auditor normally has flexibil i ty in deciding wlren to perfornt audit procedures-

, Ho*"r,"r, in some cases, the auditor rnay have no discretiott as to ti lning. F,tr ' :t,tmpie

r observing stock taking conducted by client.

J I{ i hup 3

f )g r - r6 l911nr { ' r ! t { } f , i l I l ' .

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r r - r i \ r ' 1 ) \ n . \ ' l

r . ' r t l r { ' r r ,

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Docunrt i l t * t i { } t l

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$ur i l r f r r l l i , ! "a tm

" 1 ,1 ,,'''.-\l : :ll:: j\' ^ 1 Q \ t i J . ' l 1 ' :

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3.6 AI}VANTAGBS OF AUDIT PROGITAM

(ij s.i*,'tin" oiAssislzrnts

( i i ) Inst r t tc t ionsf qr,r siaff

a fii; prograrn helps selecting assista'ts as per thcir capability,

; lt contains instructions for staf f as to rvork to be donc'

it; i; fiF;it-';t}"ii pi.eirrn, iri"i"-ii no .i.i"i" 'i a.'Aani;tioverlooking s':'nreimportant matter.

! i ,1 I { f l tCk-ii p.;" i,l;; .ddt ;i;aLiiJ ;a tii tr'"procedures and techniques to be adopted.

i ' $ l . i a

l,ist

(vi) Noor

rgnoranceoverlooking

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(v) l lesponsibi l i t ' r 'f i r :rt ion

(r i ) i ' t t tgrcss t l fl t 'ork done

( r i i ) Superv l s t0 l l

(r ' i i i ) " l ' inrel l '

conrPletion(ir) [ ]asis for

l ' r :port inq

{ . i f r u tu reAud i t s

{r i) Safegrrart l forIud i tor

!rdf!!:!: I ' . r i i i - r l / L t ' C h : r P . 3

l ) r o l l n rn r c l ca r l , f se t o t r t J \ t { ) \ \ l r i , l \ t c . i u i r L ' t l t , . r , . 1 .1 u i r a l t i cL t l a r u ' o r k . ' l l r us resp \ )ns ib i l i tV J

can be fhcri.

l l t u p f , , . ' t r . r : i r l r 1 1 r 1 L c : t i t l l e ( 1 . ' i ( , : r t t l ! . . 1 ( I l l l t t b i l \ l i ( ' l t ' l l t r l L ' , r t l l t l t p t ( ) t l r i l t l l f

I\ [ o r k l r r i l : i ) j . i l l l t t l 5 c l l t I t c c ; t s i i ' . ' t t 1 r . i - r i : c , l l l v r e i c r r i r r g t ! i e p t r ' ! r l l l l .

l i r ' c t t r t i ' t c . c . r r rp l i3ncc t r i t l t L . - , : - i - rg r iu l l rs cher r :kcd s ( ) a \ t ( ) co t t tp lc te the ur - t rk t r t t t i t t l c l | | !

bas is . J

l r rograr r r c { l -s l l v sc ls ou t p r r rcedr r rL , ' c ' . i t l c r rce - c< t i i c l t t s i0 r t . c l t l i t t . t t , cnab le 1 i1g x l l r l i t r r r t t l l

express op i r r ion .

t r t i . ' i ' ' l ' r l r r r i t ' C

I t sc l i vcs as a gu ic lc lb r a r tc l i t s to l , t ear t ' ie t l i t r t t i i i l . i te .cu t l l r rg rears ' t

l r r c a s e . a t r t l i l r , r l i r c c s s o n t c c l i : i . ' l i ' r ' r t r i , l i t , ; r t c c . l i L ! i l l t r l c l t ' t t t l l t i r r t s . l t ' [ r r s l t , ' s i l t g i t t

C

cC

ttaI

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LINIITT{IIONS OF AUDIT PROGRANT

n. , iy .n, i - - ' i ,u t i ' . , i t r r lcc l r lu i ica| l j , ' ' ' i i l routLrnt lcrstan<l ing1hervholecot lcept

APPrgacll(ii) Inflexibility , ft" pr"gioni .',it",r b."o',r"t rigicl & iril lexitrle. ;\ssistartts are not atrle to chartgc it as per

. requ.lrerr1e1

( i i i ) Lackof iH ; ;a& i i i tp .og .on i r i i r . t r t i i e in i r ia r i 'e& iudgmenta lsk i l l so f l ta rd rvork i 'gass is tan ts '

r.iv) Monotonous , ti i",it"J A. "ii i. i"nt

ttoffb".ot.u"s frustrated clue to anonvmitY irr program.;.

i ; ; ' ; i l ' ,# i l " , r t i . y rh ink tha t i t con ta ins ex tnr rs t i rc r rn t tc rs . 1 "hey 'd r , r r ' t *c ' t l t i t r k o f a '1 unu"u i l

inefficicnt , matier, rvhich is not listecl irr progranr cverr if its preserrce can clrirnge auditapproach'

assistants :

WaVS rO CARRTOUT SYSTEMATIC & EFFICIENT AUDIT3.8

t. ttcgularitYr A;af ilil G;#i;d out regularll"

Z; Recortl of time i f i otti"ti a J"p"tt"i; i i; i" of assistants are recorded' it rvill act as a riiornl clicckioi

1

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: them.

j- C;;iti"i"n"., : Sp""int p.',itio,t of tuork shotrlcl be cornpleted on A;rilr Uasil, a -

4. Documentation ' w"ti.iiig p"p"tt_trtouia bc nraintaincd regarcling all tlrc ri'ork donl

5. co'fidentiality , Aiiaii ififf irroiii r i' 'ofaii.utt the clie't s afl-airs rvith trrrtsiders'

es tun ip iG . :A fd | " *u ' ' ' i no i i o l | l vouc l r e r s l r l s l bcs ta r r t ped . . ,

7. Colour : c;i;.d p"nrp"'i'irJ a aitt"ie''t ticks shou|cl be trsed ttl illdicateAitt"i""t i ,aii

diffe rcntiat ion. . . - :

' 5 . i " r i - l [ i r ' r v iS tOn

proceoures.

Audit team nranager n uii p"iioAicallv re'icir & super'i:c the *'ork done'

y. negurai , il;ilg ";,lii,

trr;;a.iio"ra u".ontinucrus intcraction amo*g the tnembers of atrdit teant

, discuss latest f indings-

t;

l0.Flexihi t i ty-- i i1;* l '1 i ' " -1 ' ; "a11-de' ' ; i l i l lLau" i"v iseddur ing=]he1oule-of lu i i l

\ ,-

3.9:Firrco;

i - i A S!]I I . ' ICATTON OF AUDIT ACC{}RDING TO TINI t.- OI' ASSI]RAI\CF]\

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Fb

: -' IIeunittl;

' Arlvattluges

Lintilstiotts

, Meoning::I:::: Alvtntages

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Agdi t t l ra t beg ins a t ie r l l r c bo , tks [1 rc l ru t t t c l i l sc t l l r l c r t r l t l i 1 i . ( . ' , i , ' r r r i , i r

p e r i o d & t h e r c a f t c r c a r r i e d o n c t r t t l i t t t t l t I l " t i l I c t i r n p l e t i o n .

( i ) \ \ ro rk i s car r ie t l o t r t in s ing le c ( r i t t i r I t l ( , ) t t s s i t t ing .

( i i l Su i tab le f i r r snra l l c l ien t .

( i i i ) No t t tan ipu la t i c r t t i t t acco t tn ts , o t l ce c losec l .

(yv) No interrtrptiorr in regular rvorktlolr of cllerrt

( i ) B,xcessive rvork loat l on audi tor a l e t ld o1 'account i t tg ve l t r .

( i i ) N ' lay not be sLr i tablc for b ig c t t torpr ise.

( i i i ) lv l isstate l l lsnts cal tnot be deterr l r i t rec l ot r ar t ear lv basis-

( i r ) Lcss t i r t r e l u r dc t l r i l cd cx l t t t i t l a t i o t t .

exantirred tf ie rvftole vear round; it is te rnted aS contil luotrs atidit

per iod.

(i) Earlier discovery of tnisstatentents-

(i i) Presence of audit staff acts as ntoral check on client .

I ( i i i) Client's accounts are always kept up to date-

(iv) Auditor has more time for detailed checking.

. tul Auditing rvork can be completed on zr t imely basis.

, (vi) Helpful for client as auditor can provicle uselul suggestion afier

detailed clreckirrg.

: (vii) Routine checking is completed in advance.

, (vii i) Less pressrtre at year-end.

( iv)

!")( i )

( i i )

( i i i )

( iu)

(u)

,El it

Limitntions : (i) Records may be altered after being exatnined by auditor'

. 1ii; Not suitable for small organisation.

: (i i i) Audit staff may overlook a matter not completely exanrined on lasi

v ls l t .

Sometirles, client feels that regular presence of auditor interrupi:.

his rvorkirrg,

It is v:ry tilne cSlsumlnq

work shorrlcl be completed up to definite stage during each visit.

Importaut balatrces should be noted dorvn at end of eaclt visi{ &

compared at next visit so that any alteration can be detected-

Visits should be on randonr basis (surprise visits)'

Special attention should be given to altered figures' if any'

Auditor should try at his level best lot to interfere in clierrt 's eiay to

day rvork.

Prectutiorts'' to avoid,, Iimilotions:

3.1 i u , I i t i t t t t t , t , i . l ' t t , r ' t t t t r ' , t-hnJr. -t

3. IO AIJDI 'T - w- .CIT iK INGP r \ P l i l l c A A:*'a

/

( i )

( i i )

( i i i )

( i v )

(v)

I)ocr.rrrtenlat i t t t t rc

c , f h is a t r r . l i t u . 'o r k .

tt is the record ol plirtiilut-g.-p1pge4ry-c1p9r -19ry1c{-9fidcrcl ,fblitUlcd & 9qqqiq1q1r5 tlt'rtrr rt

I t s l ro. , r 's that au<i i t r r r r tk l tas t ieerr cot l r - l i tc tcd r rs p11 rcr ' l t l i tc t l tc t t t

\ \ / .P :ho i r l d hc t l , - ' s i ! : r t r ' t l & . o rga r r i s . ' d a t t ' , ' t t l i i r g t t ' t i I r . : t t t t t s t l t t t ecs t ' l e l t e l t ; t t r i i t

r\s thr as possihle. $,orking papeis shotrl<l be kellt in 5,ti i l ldqqtl ist 'cl i irrrn.

Doc umentat i or r :, l r tr u l d L''e s u ffi c ic n t i-r' c o t tt p l e tc, d illcd, & !r glr q.l.

AI I s igni f ica l t t p i : I t ters i1r 'o lv i lg l t rdgl l rc ' ! lL .s l lou[d bc docu1rcnl r :c l .

. , \s per ICAI. docurncntat ion is t l ie propcr ty of audi tor & hc shotr ld nra inta in i t a t le ; , t l r t ' lo t r

I {l-r-qa6 frotrt dnlc: of signing of audit rt: pofi.

(vi) lf i t is in elcctronic irnagrretic meclia, hc shorrlcl take properqalj t i ir i ts storage & retrievirl

(vii) t le shguld rnainlain 9!!r_[d9+g!q'( slrotrkl not show'lris W P to c'rtrtsiden).

ln i lse o i ie"urr i ' rg arrd i l . tu ,o type o l f i les r r rc r r . ra i r t ta ined to avoi t l dupl ic i ty of c lcrcunrentat ton

Thcse arc as fo l lorvs:

It contains rl i tt"rs wlrich dou't change very ofterr. ' l-his

f i le is Lrpdatecl t irrring

each arrclit. l ts contcnts are as lbllor'vs:-' lnformation regardirrg the legal and organizationirl strtrcture of the erlt ity

Iror e.g- in case of Cornparrl ' , this incltrdes MOA & AOA

fa'i t, 'r i ' , ir i f i , ig p,ipr.rt kcpt b}' l lre auditor itt connct:t it-rtt r"ith perti- ' ! lrrtrct'

I

I

IIIIIII

II

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Nleaning

Ilasicrequil 'ernents

\Y0rking paperliles

! r t ' ' \cr \ [R o rr

I .

t--t Lw2*1, a-l c t' vr er""t'1

4 PJ , i ' * "u ra t .5 t .

t-) [1"cp1*u'o'* bt]t'r.0 t ) t

b ?i"ufi*r u" i tLr f'f'^u'iu "

,,'3;:\3'? qF^".. . c-,ror^l ^ "^"&, t obSe"r .

7'f t . I c+iv'r$ Is\\( rL1

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Legal documents, agreetnents and minutes relevant to the audrt

A record of the study and the evaluation of the internal contr'ols

Copies of audited financial statements for previous years'

Analysis of significant ratios and trends.

Copies of rnanagement letters issued by the auditor' i f anl'.

. I{ecold of communication rvith tlre retiring auditor.

' Notes regarciing significant accounting policies'

. Sic.nif icant auciit obsert'atiotls of earlier years-

ft iorii"int uiuni.i i itatlng to audit ot' singte period. Its contests are as

fbl lorvs:-r Correspondence relating to acceptance of atrnttal reappointntent.' Important mattcrs in the rninirtes of Board N4eetings and General Meetirrgs

as relcvant to audit.

Evidence of the planning process of the audit and audit programme

Analysis of transactiotrs and balarlces.

A record of t l re nature, t i rn ing and extet t t o1 'at rc l i t ing procedures"

E,vidence that the rvork perforrned by aSsislal)ts \\ 'as sttl lcr\i!setl artr-l

revieq'ed.

Copies of communication rvit lt other auditors, experts and third partics

Letters Of representation or confirmation received tiom t|e client

Conclusions reached b-v the auditor concenring significant aspects of'the

aucl it.

Clopies of the financial information being reported on and the related

audit reports.

2. Currentoudit file

ur P,vs*d (oetsinkYlLl .

b A'\e\'t t(% 'b riq""slcrtl' ID c.y* \{o'* ,

C$rrvw""

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t '&l*1t\"L1 {udr't t'ro-u'e-\

'

. .'*'ft'X'i'$1, n*L) nL* '

.LAP Lv's4'

f i $ ; 3 i ' , ' i t r l

; td t ' l ' . ; : : i ' , t t t

work ing

[]:1 g]r: i's,

{-}nis i i ! rur r : t }(} i .e

OI I i : t : L i i i { } i -S

r i g l r . , ! s ' ! i t , n t

& p r i r a , . r e O k

A(.i ", . r , l l his

docr i rnent

I"eoturcs/rtscfulncss

J:)

,lleanin;4 l i i . gc l l c r ' . r l l i i i t r , r i i t t i l [go ! ; i . , ' h iC i t rcc i t r r l s ia rgc . ,a r ie lv c f n ia t te rs , . ,1 . - : r r . re j. l i i i . i ' i ; . a r , . i i i .

E-runtples o.f (i) Alrcl i qrrclics n(){ :;(rlvc(l i lrr;ncdiatcl_r..(onlenls

( i i ) I r regrr lar i t ies r ,hscrve<l drr r ing audi i .

l i i i ) Inrpor lat i l i t t i i r r r t ta t i r , . t t t - t rgard i r ru c l r t i t r , r - r : - l l i i - ,peer i r rg in : rccgrrnts( i r ' ) I r r rpor tant r l l r t tcrs i i t r l l r t r r rc i -c le ' rerrcc

( i ) l t is ; rernrancnt rc :cr . r r l o l 'aLrd i tor . r r l r ic l r c i r r r be ref 'er red to l ; r lcr o i r .( i i ) I t con ta ins a l i dc t : r i l s o1 'n ' o r k ca r r i c t l i ' r r r Jh i - s r vo rk cen he l i r r ke t l . i l -

c , r r rec rnc ( l as r i r l ; r r t t i s l t u a i ' .

( i i i ) l t co l t t a i ns a l l r ' ; o r l i { l ou , o1 -a t r i l i t i n Cc ta i i

( i t ' ) l t carr be in tpot . t i t t r t i le f 'cnce f r l r arrd i tor i i 'act iorr for r regl iccncc is t r roughlagai t rs t I r i r t r subser l r rcr r t l \ ' .

(v) l t sht l tvs rvcaktress in c l ients svstcnl . th t 's i re lpfu l i r r for rnulat i r rg at rd i t- prograrns in l 'utrrrc.

(v i ) I t l rc lps in fo l lou,u1r o{ 'u ,ork donc.

( i t Provihes gqidql rcc to i r t rd i r s laf f . r

(i i) Responsibilt ly of rvork can be {lxed as docunrentation kcpt is signed and checked byappropriate personneJ.

( i i i ) Act as a defer$e i f charse of negl igence is brouglr t against l r imr

(iv) lrnportant for futurg planrring- (

(u) Contains briq!-s-for lbrrning an opinion. r

(v i ) Helps the senior to rev lqw w,ork done bv l rss is tants. '

O rv r re rs ! r i p & c r r s tod r o l 'wo rk ing pane rs res t s u , i t h auJ i t o r . l hus . i t i s. arrditor's property.

Rttle'of c:on.fiderrtiolit.s' '

A, p", n AS-l arrcli lor slrould not t l isc!,ose any confidential nratterre lat ing lo c l ier r t to any J" ' pur t ) t r r r lcss i t is

Permi t ted by c l ient

',1,, ,"*n, /Professionat al,y ,o

disc lose

Ci i t , in t i r i i i i i i i , ,g 3;d par t ies No. otherwise i t wi l l \ io late ru leof conf ic lerr t ia l i ry aspopers to ' '. including , above.

otlter :out!ilors

Client . (i) Ct l "nt doesn' t l rave inv r is l r t to afcess audi iW.P. kept b i , audi tcr .

But auditor nlay, at his discretion, shou, some/conrplete W.P- to c l ient .

( i i i ) l f he shows W.P. to c l ient i tse!1, ru le ofconfidentially does not arise ai all.

( i i )

t(\( : J ' ,

. l { ! ( i l raJr . 3

. t , t I

Y "l:t!ttg-\ \ ' l rv i t is rergu i r t r l

[ , , , r lrrnplc.s r i hrrc i trn: i l ' l lo t ' i rc

sui ta [ i lcu R(s

i-9 laatuw.''\ iflq"vr

I r t) rtU,.;rr'&i')\$h*lrt

J, C.tr qlPocctuvL1'1-" ;Ji3{C'"

I 'r 'ec:r rrt ions u,hi ler:onducting lrstchrrek lng (huw tomalqcr salnplipgef-f?i:tive)

, Saypte should Lrc chosen in unbiased way.r,/ F.rroli l 'otrritl irr ,..nrpt" should be anaiysed properly.

, i e : . t c l t , : ck i l l { t t l c i t t t s e ru t t t i t t i r r g l css t l r cn l ( } ( ) ' 1 . | o { ' i t en rs i r r t he pc rpu la t i on' k , ,

. \ i r t l i t , ' r t l i i r ; r l l ' , r i r , ( r 1 1 ' 1 l r a r c C r r , , t r r , l r l r r r r c l i r r . t l c t a i l C r l I 0 0 ? o c r a r r r i r r l t i . r r( i i , | l ' {ur r r t re r of t ' r r rs^e t i ' r rs / l l l lar rce-s l r re scrrcr : r l l t ven, r r ish.t i i i t \ ' !cst l . , , i tcrns l i rc i t lcnt ica l .

l i . i l1- orr ba: ; i - . t r l 'cor t t l . r l i r tncc proct :c lu les. i t is concludecl that i r r tcr r ra l c6ntro l svs lcp.r r : i. . , t - r - i c f f ccr ive . t l rcre is no r recd f r r r c lc t ; r i !ed 100?i , exarn inat i t tn .

, i r ( l r e c k i r r : l l r : l r ; | . . . r . ' t , , r r e i l i l t i , , r r \ l i r t r ' n l ( . t r l L i :I i i i i t c l ' i 1 ; 1 1 i s 1 , a 1 i r - , r i ' ; . i a t ' r i i i g i r i r r l i l t ( ) u n i i o l ' , i ' . ' ' I i '

{ i i i l i rer . r l r t r rs l re t i r lns . r i t l r rc lated p l r r t ics.{ i r ' ) I - ' c i i i r a r r s l c t i t , ns . l r i r v i r r g t r r r r r s r ra l no t r r re .{ \ ) i ) isc lost r le lc i l r r i rcr r rerr l c i f accorrnt i r r l : \ t i tn( ' lar ( ls .{ r i ) Conrpl iarrcc: u i t l r s la t r r t t t r l pror is iorr .( r i i t S is ,n i l lc i l r r t er r l r ' ies r rcar i a t vear-end.n ' i i i ) Fcu ' l ransucl iorrs i r tvo l r ing fore ig ,n erch:r r rge .( ix) \ \ ' l ic r r i r r te lnal co l r t lo ls arc ve n * 'e i rk .{ i ) T l torot t l i l t : l t t t l . t ' . r2 f l l rc l lou o l ' t lar rsrrc t i r , r r . s l roulc l hc ct r r r rp lc lc l r s tudicd i , t , . l i r r t .

tr.c:c,1yttylirtg{},s1j:rru aCopting sarnltl ingl( i i ) T l t t t rough st t t t l - t ' t l l l ' ropcr s tuJv o l ' i r r tcr r ra l aontro l sys lenl helps the audi lor to

I.C, Systepl.(i i i) Araas not srtituhle

foy lompliry;:(ir) Proper plannirtl4

(v) Classilit'tttiotr

1vi) i,uipte sizc

dcvise furlher tcst check plans.

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Audi tor shor . r ld take care to ensure that deta i led conrpletechccking is done l-or r-equired itenrs (as abovc).Proper plan l irr rest chc;kii ig ;h";id be i levisea & explainetl toaudit stafF.l ' r ansae l i o r r : & l l a l l r r ccs shou ld he c lass i f i cd & s t ra t i f i ed . i frcq u i led' fhe

nurnber ot ' i terns in a samplc should be appropr iate lycleterrrr inecl.

l,i4 i,i i,ii(vii i) Anall,sic

misslalenrcnl

ycq-n ing- ' Snt"pt" t i r " & composi t i ( )n f l rc c lec ided on basis of audi tor 'sexper iencc-' I l 'h is is a t radi t ional rnethr td o{ 'sampl ing.

t i t r , r i i i i i i lc r r r r r l . lcc ide to chcck crr t r ics i r r Jr r ly . Novcnrbcr & Fcbruary ancl Marc l r, dtrring atrcli l of certaitt 1'clir & out of remainirr,g months in next -year

(Rotat io l q f Emp!1sis)Atlruiluges :,. Sirnple to opentte.

' ' ' I 'raditional approach thtrs understandable bv audit staff with the l itt le

' . ., expertlse.: r Rotation of ernphasis is clone.' ' . Norrnal ly year end t ransi rc t ions are checked in deta i l: ' cut off procedures are atleqttate.

Umni : i ins ( i ) Unsci , r r r i f ic met l rod.(i i; Tlrere rnay be personal bias.

, (i i i) Sample may not bc true representative of population.

I ( iv) Not su i table i f s i tuat ions changes mater ia l ly (due, experience of auditor in lhat particular area).

t0 ensue whether

to inadequacy of

I

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"-,'tu,Ltt,'lDL vuh'ca\'Ylle(Lrsa''> '

ft[euting

.-ldt,anluge.t

I : - , : t ^ t ; . , . . ., , r , , a a 1 r a r a 1 , , . , \

---':i:::!:" 1: L;: tt'11-

, San. rP ie i s choscr l i r . . app l . , i l r r ce i l r l l i i r i l a t l t c r t ta t iea l & s t i t i r ' ' t i ca l

o e v l c c s .

t l t i s gcnera l l r i r l t : r ' t r - i < l t t J r ro l l i r l r i l l t r t l t ' ' r ' t - '

( i ) \ lo rc ' : i . -L r t i JL

t i i t No r l ( t so t rL lb i ; t s

l i i i ) I {esu l rs 0 l ' sar i l1 - .11- c : r r r t rc e ra lu r r tc r i & Pr , r i cc fec i i t t tnorc re I i l tb lc $ar ' .

( iv) \ \ ' idclr scccptt:r- i r ' ,a-v i- , f sentpl ir lu. '

t l ) ( iolni- ' le. ' l tc oPcrl le

( i i ) N o t s u i t a b l c l c r r a r r d i r s t a f f l r a r i n u . r i o k r t i ' u ' l e t l g e o 1 ' s l i t t i s t i c i r l t e c h r r i q t r e .

r i i i , 1 l t r r r r r r l ' c t i t t t c e , ' t t s t t t l t i t t g c \ t ' l ' C l t . ' '

l : . {iOD FOR SE,LIiCTING ]'I{E SANII'T-Iiiil l

! ' ?q= l i , i tHa

I

Mt* . r r r t l * | i

R.i i ir;. i l tr i

Sampling

Method rneatls the rvay in lvhich sanrple is chtlscn'

Method slror-rld be such tlrat sanrple cart bc expectcd tt l t lc trtre reprcsL-lltativc of

populat ion-

For th is , i t is necessary that each i tern in poptr la t io l t have equal chance of being

_clrosetr.

There are basically trvo methocls by rvlrich sanple catr l le selected.

Rarrdorn sarrrPl ing

----.--=--a--

---l

Simple random Strar i l icg.^randotn ,^1n -Block

{1,,.; ;:i*ttV^ lr *:il^?Ss, l*';;i'o'' o'Ut'o,ni,rg

t" 6) All items have equal clrances of selectio'.

ln terval / systemat ic sanrPl ing

,Clustera f ucc

Scrill *l tnbr: ituw>- ̂ tr

3 r ' L , 1 c l t " ; 1 ' 1

1 * 1 r . \ 1 \

I i\,!.1'-'1,;. , \

{: '

r ' f - l

. l " N :

| . l ; r r , i , ( r

i ' l ' ' r

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(1) SimpteRantlottt

SantPlirtg

( i i ) l t may i t tvo lve t rse of random nurnbcr table '

(i i i) l t cart be of trvo types i.e. sirnple rattdonr or stratif ied randotrt '

( i) Each item of population (tbr Eg. :_ eaclr clebtor) has equal cltance

, of selection.

: (i i) l t can be clrosen bY

. use of random number table'

' Picking up nunrber in a rarrdotn rvay'

: ( i i i ) S u i t a b | e f o r H o r n o g e n e o u s p o p t r l a t i o r r ( p o p u l a t i o n h a v i n g s i r r l i l a r

;

' i tems) . For exan.rpie:- Debtors ransirrg tl 'onr Rs' 5'000 to l5'000'

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aaCC;

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CCtctCCttt

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o , l t rut i ictRondonr\anrytlirtg

i"nnirg

'1 u C i t ; n g ttn d I s t Y1g1c1-lJlt-r

" i t an f i f i " a t i on , r l c ; r r l s c l i " ' i t l i nq a l i t ' l t : t ( ) { l e r l ( ' : ( l l r q ; r r ; n t r l l t i r r r t i r r f r - '

tnore ltotnogcltcotls strb pt-ptrlatiorls'

, Sanrple is taken l ' t ' t ttr each sub poptrlrt icit i (stratttni)

' l t i s t r se f t t l f o r d i r c r s i l r t t l | t 'Pu la l i ' r t t '

. For E,g.:- Debtor itr ratlsc of 20 Rs' 1o 5'00'000 Il: ' ' *.here tt catr

be d iv idcd in to st rat r r t t t as l i l l lou ' ing '

if\,t"--

\ ro,0oo

L----I D

l'::::"':: 1,00 .001 - 1 .00 ,000

Norv, random sarnple is chosen frotn eaclr stratull l

l ts resul ts are more appropr iate i 'case or 'p t - 'p , r rat ion l ra l r l rs

different clraracteristics'

It is simply atr extensiotr of sirnple randotlr sarnpllng'

I lowever, it requires spee ial attenticln tt l j trdr' 'e conttlt l ts qf' saQh

stratum.

M;;;-tInterval /systematicsempling

Items are chosen in sttclr a

between selections-

rwav tltat l lrere is constant interval

The first inten'al has random start'

Interval maY be based ou

(i) Certain number (Eg' :- every lOth sales irrvoicei'

( i i) Monetary total (E'g' every increase of Rs' l0'000 in

cumulative rvage stttntrtary )

It is used in case rvhen populatiott cloes tlot corlesp('nd lo

particular trerld'

It can be of trvo types - block & cluster'

a

I

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I

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I(1) Block

SamPIing

Clustersampling

S.i..t ion of a defirt itc block of corrsecutive itcnrs'

For Eq. :- f irst 50 purchase invoice fbr montlr of N"';trrrt ie t

Th i s i sas imp leme t l r od l i ke ju< lgemer r ta l sa r r rp l i r i g '

llorvever, it rnay bc biased at times'

(2)

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I

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/ ' l ' l

(3)

(4)

eopufution is diviclecl into groups called Clttster'

A number of clusters arc selccted on ratrcl<ltn basis'

For Ec, . : - 1000 sales i r rvo iccs are d iv ided i r r to l0 c luste ls havi t tg

i;; i l*t "u.t,,

tt l t" lrd'6th & gth clusters are chosen"

Lese effeciive tlratr rirudom sampling since each itenr i:; i l . i

randomlY chosetl '

!-

P r. 'Dtu't i i i r tr t i r tr Ltt t " l tr t l i lJ9

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r,",\ r"tr{}t{ AFFEC]'IN(J SIZE OIi SAN'IP[.tr.

( i ) - l

t , lc ra i . r le [ : r ror .

( i i r l : r . pe . t cJ I : r r " r '

( i i i ) S r r r r r l ' l i r r t r . l { i s k

:. ') l \, lzrxirrrult [-.rrr,.r irr pt' l tulation tl l tt irt i t l i tor is rcatiy to acccpt 1br a giverl saniple siz-c.

: : > i l 's r r ra l ler t r l ier ' i rb le e i i -or . b ig sr t r r tp le s iz-c is r iccc led '

Itt contplitutt:t: pro<-edurt Nlariurunt rt lc ot'cltrviatittn fiorlr e statrl isl lccl Procctlure c'f ' l .C

' Itr srtbstntrl ive Drot'edurc , I\ ' laxirntrttt tr lottctarv errclr.

: - ) l f aut l i t t t r cxpcct ls possib i l i ty of cr lor i r r poptr la t ior t , large r sarr lp le s ize is reqtr i rcd-

r -> l f populat ion is c . rpectec l lo be l l 'ee o l - r r r isstaterncr t t , snta l !ersat t tp le s ize is r rcecled.

I . l t arisc froni pt'rssiir i i i t l" t l tat

: : ) Aut l i tor 's concl t ls ion t rased t tp t l t t sar t t ; t lc '

:) Nlar be tl i{fbrcnt fronr.

: :) Cot.rcltrsion tltat rvould lravc beerl rcachc(I,

i - lf sartre auclit procedures werc applicd ott etrt ire ptlpttlatit lr l-

, 2 . l t is ah.va1"s in sarnPl ing.

3. l f acceptable sar t tp l i t lg r isk is lorv, large sample is needecl '

4. It arises in both conrpliance procedures & substantive procedttre.

Itt c'ntplisnce , Risk of rtntler Based upon sarnple, auditor concltldes rhat l.C- systetn ts niit

proccr|u,i- reliuice : adequate, horvever actually it is not so-

, : Risk of over Based upon sarnple, auditor cottcludes that I.C. are vcry: : . reliance : effective & thus decides to rely ott them, however it is trt lt '-;r

: : in real i tY '

1 In substantive- , i i : i t i i j , Based upon sarnple, auclitor concltrdes that tratrsactiotts/

' proce:aure .

' ,;:;::;r:^ ,

::ll"""t are materiallv rnisstated' rvhereas in fact these are

: r:i:!:,,; '4ccePlutrce nr isstated '

i ' c : r : f , t i l i {

Fl -i'"c.) r'

i I r . ' { ' ,

[ . r t ' ; , l l '

r . i l i r f : .("It l:: i'.-

!r i { .r i lrrpliatrce Procedttre

iri I iulrqlanf ive Procedure

' i i i ' , t:1,

Risk of Under re l ia t rce

I t isk o l ' i t rcorrcct rc ject ion

These both lead to lllore rvork to be

performed bY auditor.

However audit rePort is noterroneous.

I l isk of over re l iance

_ Ii. isk of incorrect acceptatlce_

+l 'hesc both trtay lead to erroneous opinion

by auditor.

! i t t i i t i ; t ; ' . I in(1 ,1s. \ t l r |1t | ( r ' Ch:rri. -1l i l " . , '

' * i : -

\ - r . l {

tI

eC!GC;

IF

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; ' l l r r s i s [ 'cst ( ihcc l i ing

l t \ i i l r t l l t l l l g l t s s

\a:

l . I l t r r l t i r t g

7 . Ob. icc t i ve

3 . N : t t t t r e

J . t ,eve l o f

I ; t t t t ct ion

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i r t t c c len tc t l l

'u L\(i)

l l ' ,rn u l iI lc l) lr.puli lt i t ln' z4,

lc t ' l '' I -o

l i r t ' r r t i t t t t l l l i t t i t ' t t t l t t i l t ta . r l c i i l l

s t l j l c r r re r t ts t t t t t l r l r l .as is o1 ' c r .a r r tL l i t t io r t

. I se l ce l t ' t l i l c t l l -> - ' ' t t l r '

l t N4ur I ' c . i t rc lgcr r l c r l i l r l o r s t l r t i s t ig i l !

t l r ' r i r t ' .' [

l t c c r le n t o l - sar t r l l l i r r t r i s e l roscr t L ry

i r i ! . l r c r l e r c l o l ' r t r t l i t : t : r t l .

l lor r { ine Clrec l< ing

I)eta i tcc l chccking of a l i aspects o{-a t ransact ion

s r r c l t l i s e as t i r t g . pos t i r l u . e a r l ' r l i ' r * l r J .

c r r l c t r l r r l i o r r . l . a l n r r c i r r g e te .' l -o

ensure ar i lhrnet ica l accuracv o l -er l t r ies in

or ig i r ra l bc loks & e l ls t l r ( ' l l te i r corrc ' : t pust inu

l1 is u r t rec l tanical pr t lce ss. r r 'h ich [ . ,cco,r res

l l ( )n(r t r rn0usi t t i rnes-

l ' l r i : ; i r o r k i s J t ' l cg l r l c t l l o j r t t i i r r r l l l l ( l i t s l r l l :(

!

CI t sa les t i r t r c t r f a t r t l i t s t r r { ' t

Sut'r-u '

I t is nrore t i t t te consttmtug-"/,?- (q

AAS I5 - A I iD I ' f SAMPLIN( ;l . l 5tC

tCtJ

t

t

t

i \u t l i t SamPl ing

Design of Audi lSlnt;r le

Sanrp l ing Uni ts

Sizc of.SamPle

Nlcthod of

Sarnpl ing

[!xpected Error

Tolerable Error

i l Ieut t ing Af tp l icar iorr c ,1 'audi t proceclures t l t l L :s . r than 10096 of i tcnrs '

> lt rnzrl ' be statistit::r l t lr rton-statistical'

-) lt rcclr,rircs skil l irncl conrpetence on part of auditor'

represent4Jive r'r l ' popu lation'

) c i loosing a l l i lenrs uboi ,c ccr ta iu a lnount is not sar lp l i r rg.

I t c lcpends t l r l tb l lo* ' i r rg :

(i) Audit Objecti- 'r 'e - Specific objective and procedures'

1 i i ) I ' op r r l a t i o l r - l t s l r . ' u l d be app rop r i l t c '

i"'l tt*,tt:,-t.,io' - Dividing. hctelogeneo:' ldl11-":1 :llT:t"::::.'],,f,:::1]:T,,'i;r#tffi;g"u",**'iri,r.rliu. "t,nr*teristics)

sub-populati.rrs' For getting same level

of assurarrce, i t resLr l ts in srnal ler sample s ize '

lnd ivrJual t r i l i ts const i t t r t i r rg the populat ion ' l

A't l i tor slrgrrld corrsi6er. oi 'cratl population. iolerable "' iu'. "*p"ttecl

erroi una 'totnfi inI

r i sk.

F t r . . l r i t sn r i t r pop t r l : r r i , r r r r l r o t r l t l havc cq t ra l c l t a t t ces o f bc i r rg c l r osc r r " I l t r r s

{ I ) * .en4onr S:r . r ' lc - Use of ranclom number table. Each sarnpl i r tg t rn i t has equal

protrabi l i t l o l ' bc ing sc lected '

(2) S1'stern:rtic Sanrplc - l laving tirc,cl . intc-rvll l

bctrveen anY cotlsQcutive trnits selected'

I I.u,e'er. it ca. lrc acl.pted lnl ' * 'hen populatiort is not strtrottrrcd in a way t.hat it

t

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t

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corresponds to a par l ic t r lar t rend'

(3) Haphazart l Select ion - No intent ion

equivale i t to rat lc lo tn sarnPle '

l f audi t ; ; expects crror i t r populat ion ' ther t

sa r r t p l e s i ze i s aPProPr ie t c '

Maxintum Error i r t Prr1.11111i t l i r t l ta t at rd i tor i ' ' ;

to includeiexciude a parlicular itern' lt is

- : l

takc targer sanrple size. otherwise smaller

ready to t;ati ioi i gi,rerr t"*pi! iiii'

' \ ; : - l f t l i I

III

lrf. t,n irl,l tP

l "'

!.:, r:l t t!!J,, t. Lt n ti u( I i /

, ludge * 'hethcr l r r i i tenr is err r i r t t r r r t t fI l - su l ' { lc icr r t errd r tppropr i i t te ev i rJe:ncc can. ti r r i l ]ec i l lc i te r r r_ i t cOulc l be ar) cr ror .

i \ r rc l i to l shoul t l lo c l rcck ( I ) carrsc o l cr ror ., r l l r t ' r ' I r l r l r s c s , ' l ' ; r r r t l i l .

l t!i l " Stcp -

ilnol.l,sis oJ' 1.,rrcrin SunrplL,

I["tStcp -.

Prttjectirttt ttJ'I:rntr

!II'd iteJt -

,l?ccssessirrgSantpling llisA

bc ir i- , i : l ined regal i i t ' l : ,

a r rd 12) i t s i rnpac t { }n

T

- lf there is cor'nron trerrd in error, he sh'urcr perform extendeclltrcrced u rcs.

I 'roject it to cnlire popLLlation b.r- appropriate rrrethod.c.ns ider both qrrar t i ta t i 'c and qual i ta t i 'c aspects er f error fbrr r i t livh i le pro ject ing.

r r cr r ( r r i l r [ ) ( ] [ )u lat r0n excecds to lerablc error t l ren audi tc l r shorr lder te n<l aLrd i t proccdure.

> I t ar ises l ior r r Possib i l i t ,v ' that aur l i tor 's conclus ion based upon ;* t i ; ,nr ,y , , ,diff 'ercnt f i 'ont concltrsiort that would have been reached if conrplete populatigrn wrrresubjected to santc audit proceclure.

I . I ' ' ; ' SE CHECKS

lq. : " , rr ! r rrrendat ionsl , r , i l

' . L r k

l " The elemert of surprise iii "" "rbit

;;G ilii itiii; r;g;;; to i[" ite'i,s riinr t;i"i ,,i' :i,,iaudit. that is the selection of the clate at rvhich tlre auditor visits the r:[ ient,s t-rff-icc tccarD/ out the auclit and the selection of t lre items, rvhich are subjected to autj it-

2. Surprise checks are ttseftt l nrcthods of deterrnining whether or not such errors exist andrvhere thev exist, of brirrging tlre matter prornptly to the atlention of the ar!anagcnl.j{ lt

3. Surprise clrecks are also particularly relevant in respect of certain itenrs, tor exarnpii:,cas l t , i r r vcs t l r t e r r t s .

4. Wherever feasible, a surprise cheok should be made at least once in the course of anaudi t .

1 . Surpr ise checks should be corrs idered as a cres i rable par t of each audi t .2. Tlre areas over rvhich surprise checks shoulcl be employed would clepend rrpon tire

c i rcurnstances of each audi t but should normal ly inc lude:.(a) Verif ication of cash and investnrents;

, (b) Test-verif lcation of stores an<l stocks and the records relating thereto:(c) Verif ication erf books o{'printe e ntry and statutory registe rs.

3. 'fhe

frequencl, of surprise checks nlay be <Jetemrined by the auditclr jrr {i lgc i rcunrstances.

1' The results of the strrprise checks slrould be communicated to the management. r{-+,t

5. ' fhe

at rd i tor should sat is [ 'h i rnsel f that adequate act ion is taken b-v the r r i ]nagemopt ( ] l lthe matters conrrnunicated by him.

6- It is not necess;try in all cases for the results of the surprise checks to be inclr.rcled rn theauditors' report on the accounts. They should, lrorvever, be included if jn ihe r-.piir io* rrfthe auditor, they are material and afTect a true and fair vierv of ihe financial stateme nr.s.

d

1,Y '

Lr l l

f lN-

{, trnpter" 4hrternal Contl 'ol

4.1 INTERNAL CONTROLS-I}AS I CS

In ternal contro li \ l ean rng ( r \ s ; re rAAS- 6 )

5copc o l ' ln ternalcontrol system

. Objcctin" oi :z i . .

i . " ' I n t c rna l con t ro l s' rcgard ing

ar :corrur ! ing system ,

L l A l \ t ' 1 i i r , \ 1 { t * , , ' . J r L ) " ( r f l r t *

L) - | ,^ P-rnt i i ' \ , / t , t

r I ,

Contro lEnvirt lnment

, ' l ' l r l f lan of nrga ' r isr r l ion anr l

. a l l po l ic ies & proceclures.

. adopted by man:rgerncnt,' to ensure,' order l ) '& ef f ic ient conduct ofbusiness.

( i ) l.C s-vsfern consists <tl! torttrol e nvironmtrtl ttntl procetlures.( i i ) I .C systenr extends hevond just account i r rg & f inarrce.( i i i ) l t seeks to ensure order ly conduct of busi r ress in a l l funct ional arcas.(iv) l lou'ever auditor is concerned rnainly rvit lr those internal controls 1ra,, ' injt Ciict: i

bear ing orr accotrn l ing systetn.

(i) Proper execution of transaction as per management authorisation,(i i) Prornpt recording of transaction:

(a) in appropriate account

(b ) i np rope rpe r i od i t ' h - l t r

: 1 r { r ' , u r - r l i r ' { r { t ' : ' r i 1 l " [ . - ' r h f ! f c [1 i . , f

1 (c) at correct atnount V v

( i i i ) Safeguarding of assets f rom unauthor ised access. use or d isposi t ior r .(iv) Periodic conrparisorr of recorded assets with actual assets. &(t') Prevention, detectiorr & correction of material nrisstatement on tirneiv bitsi:;

Meaning , ' Overal la t t i tude. arVarenesS &

: . actions of Manag-ement

: r regarding I.C. system & its importancer in t l re ent i ty .

Factors affecting control environment

I

CI

I

II

IaI

I

tI

I

I

tI

teI

I

I

I

I

I

atIII

tI

I

I

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T

Organisational

stry9!1qe-I. Orgonkotionol

Slruclure

Management super-vision

(a) lt should be such that noSystem.

I tersonnel

(5 )

(c )

i "O* ia, ,of carr overr i r le the LC.

It should provide for segregation of incompatible function, sothat misstatements can't be committed easily.

For example, authorisation for purclrase, record keeping &access to assets are sorne functions regarding assets, whichshouid be sgqregated.

44

\ , ' -

( ' h ' , [t t / t' rt t,t I r-' rtn i rol .i5

FFb\

\

\

2- ilfdn0genrcntSuncrvisiort

3. Persontrcl

InhcrentLimitotiorts-

l n i t

L i m s t , 1 i , ' : r , r f l " C .

\'!rI'

(a ) [ ) cv i s i ng and r r ra in t l r i r r i r r g l . ( ] . Svs l c r r r i s r l spo r r : ; i h i l i l - , , 1r ' r1 l r1a gelnent

(b) N' l i l r rage:rnent s l toul r l rcv ieu i t per iodical lv to enr ; l l r r i i , ,e f l -e c t iveness.

(c) N4arragernent can e: ; t i i t r l ish a separatc rkpar l i t renl ca l le<l" ln tcrnul audi t " to chcck rvhct l rer other in terr i l l c t in I ro l : r ; r r t :opcral irrg effectivclr '.

Note: I r r tcrnal audi t is a par t o l ' l .Cl . S1 's tern i tse l f . u i r ic l r dedicatedl tensures u or th iness of i r i te rnal conl ro l syste nr .(a) Funct ioni r rg of l .C. s) 's tcnr c lepends on the capahi i i t r '& honest l '

o l t l l ( )sc operat ing i t .(b) Thtrs , personnel s l t t ' ' i r l< l bc properh ' c} ra l i f icd" t r : t i t i l rJ , r r i r - i

cxpcl icne ctJ .

L inr i ta t ions " r 'h ich

arc i r tseDaral - r le f iom systern of l . ( . ' .

Meorring

Elfect

lYlrst are InherentLimitations ofInlernsl c0ntrolsystems?

a

I

I

r

t .

L)uc to L i rn i ta t ions r i l ' I .Cl . Systenr .

i t can provide onl l ; rcasonable.

not absolute assuraltce .t lrat its objegtrygs are aclticvecl-

Cost ' Cclsl of implementation oi control qlra'/ '

Effectiveness , bc rttore than its beneflts.

: ' Tlttts, ntanagement ttsultl lv dt-,ci:J. ' i

I inrp lernent best contro ls .

2. Humsn Error : - l luman Error, rvhich rna1,' occur iviri ie

; carrying out LC. systenr": - It nray be due to rnisunderstatrding on

: Part of Persollel,

: ' Entployees tnav comtnit l iaud 1f116'lglr

, co l l us ion .' ' l t nral' be among tltentselvcs or rvith

o r r l s i c l e l s .

, . The persrrn responsil l le lor exercising: corrtrol can hirnself ove rride it"

l ig. :- f 'crson lesponsible for issuancr: of

' stationery to various clepartmcrtts ,:nl-y

, for authorised use. can hirnself

. rnisapprclpriate stationcrv for his pers,:i- ial

, t tsc.

Nlani l l t r l r r t ion by h igh lcvc l nt i rnagent t r t

: rtray not be detcctecl b}' control "!)'rlt(:lrl.: r E.g. , Mapipulat ion ip est imatcs apgrc*rr i ru ', in f inancial statements.

' An) tut t tsual t ransact ior t r t ta- r ' not hc

: cr :nt ro l led.' . Because control proccdures are generali l '

ruadc for ust ta l t rat tsact ior ts .

ir : Estnblished control procedures l ltav hct: '- i i ttt:

, inadequate in a fast changing ettvironrnent"

3. Collusitttrsntongemployees

i. Ai,niii i1Autlrcr i ty

i. rw ii ii1,ii i"t;li;,,by ntontgentent

6. ii'isii,tTrsnsactian

7. CltangeConditions

46 , . . h , l 1 ; . , l

Conlrol Risk trIeunirrg (rr Dcr,/l:lS-6

" l n t c l ; r : r l ( l t r n t r o l s \ s t e l n i l i i : - l r . r .

' [ )1 -gr g i l t o r

' I)clcct & ct 'rrrcct,

. j ' \ ' 1 iss ta teurcn ts on t i rne l t b l rs i : . .

' I t t l t t ' r u t t t l i r l i t . t l i t l n r r r l i r r ! i . : r 1 1 1 1 i . . r 1 1 i r r , l .

. I ) t re to Wl r ic l r l . ( sy s te r r r ia i i s to o l )e r i r t c

ttI

I

IJ!g

t

t

!

Accorr l r t ing &financi:r l controlshe lp i n

Ressott

i l s ( t ( . S i l ' C ( 1 .

(l) Specifying Authori\, to crnter itrto transrtctit rrt.

( i i) Safetrluurdin6'ofassets.

(i i i) Recording of Transaction irt the accotll l t cort-ectlr ' .

( ir.) Fixing responsibil ir l ' fbr rvork donc.

(v) \{airrtainins recc.rds in stsndardiserl u ar.

(vi) I 'erfornting rvork in logicol seqtlence.

(i ii) trfinimizing /osses-.

(v i i i ) [ : r rsur ing conrpl iance rv i th Rcgulat ions having d i rect hear ing on i icc{ j r in t tng

(ix) Preventingtnaterial misstolements.

(x) Detectitrg & correcting rnaterial misstatetnctrts

(xi) Preparation of periodicol reports on timcly' basis.

(xii) Ensuring adequate and tirrrely'1/7 nancial reJtorting.

(xii i) Segregil ion of accourlt ing & cLrstodial f irrrctions.

(xir,) trstablishing procedures in such a wa)/ so tlrat single person (:{ttt '? hut't: ".:ttrrf letr-econtrol over a transaction frorn starting to elrd.

(xv) Providing for internsl check, by rvhich rvork of one person is rev tc,r.r ed !-'v arrtilitct'

(xvi) F-ormulating cut-off procedures to separate transactions of tr.vo cons(;,'rtr1rr,/(: tr'trrs.

(xvii) I{avinE proper documentslion/ nanual at every stage

4.2 RIVIEW OF I.C. BY AUDITOR V

Revicrv 0f l.C -

Meaning

Need for review

Role/Advanragei of

Review of LC. refers to,

- Examinatigl and evaltration of lntemal control sysleln of t lrc clicrlt

roii',i" ln;i i.C.-;tai;;i i;;d;q;;i;.ri

"nuui"s tli; ;udii;; in it""rtiin *t.'etn"i

(l) Internal control systenr is otlequote& operating e ffectively'

(i i) I .C. is able to preveltt, detect & correct rrtatcrial misstolemetrl.

(i i i) l .C. Properly safeguarcls the assets-

(iv) l.C. ensures correct recording of transactiotl.

(v) Reporls & Certificate provided by managernctrt are reliable'

(r, i) l-C. are weok / excessive in a pafticular area.

. .qvii) Effective internsl oudit departrnent is in operation'tt" '*i\,; i i)

Suggeslions can be given to management to improve the l.C. s)stclrl,

. (ix) Extensive Substantive procedures are required'

I t*) Audit procedures or techniques need to be changed from plarlned e'rtes"

t

fIf

f

Ictttt!

tlI

tCGetC

C

C

C€

1tReview

r l r ' r , , 1-) ;-. ir . ,i {t\. I 1 rr. , - . \-

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t i u "

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) ,,^1rii-\t.rc r, Cov. b(

qnr\o^ ii

, r{i rv"' 1,.:

J N {f rl ar,/it

"*-L

IttIcrt,ul c()nlt"ttl , | '( - \ ,

' I- l '

x.-:,' ' q ' t h e I. '\urrutive

iiy<'ordX'Ieuning

[:-rrurtple

Atlvurttages

Lintittttions

2. Check list Meoning

. ( t t r r rp le i c & exhaus l i ve ( i t tu i i o l - s r s l ; r l r

. i r s l i l r r ra l i l r opera t ion bv t l rc l r rd i lo r .

For -s tock cor r l l t i l t : va lua t io l ) . i t c , , r r l l r i r rs r l , , , . t r i : , r , i : . i . l ip r e p a r e ( l . c r n p l o r , e c s d i s c h a r c i n i . l l t r r . i 0 L r s , l u l r r s .var io t ts S t i t ges o i ' s tc tck r l lo . ! en tcn I s e l -c .( t ) \ \ l t c ' t t p r r ' l . e r l ) f r ' ; r r r r c r l l i , t r r r l r l l . t . . , r : t t . p l i r

r ro l l i r r r r r t l , c ( )n l l l l c tc dcscr iy r t i r rn i s neet lc , . l .( i i ) S u i t a b l c f b r s n r a l l h r i s i r r e s s .

( i ) i ) c ta i l c< l obsen,a t i t tn i ; r rc . :Jc t l ( t ;n tcc ( r l t s u t n i n { ) .

( i i ) l t doesn ' t rcad i l y iden t i l , r , . uc l rk l r t - r : , s i r r . , . , , - 1 , ,( i i i ) Cor rs tan l r rpdat ing is nccdcr l i1 - r : i r c r rn r : ; r l i , ces

ar ( j ch{ i l )ged.. l t contairr . t r"r i . i of-cluei t ions.. to be lrnsu.erecl trv the audit staf i.

\ .

I l r \

'1'J , \ \ . .

, r \ F '

E-rantple : "Are ts,ders inr ited befcrrc placirrg ttrcler:r '-, ' i ,Jr,,., ,;' mernbcr of aLrc l i t s taf l 'checks l i rc sarre g : i1r , : , . r , . r i ; !, ( "yes" . " Nci ' , "or " Not Appl icable ' . ) . , ! . i ic ;

anslver ing, l re puts l r is in i t ia ls ; .Advan tage ( i ) ( ) l r t l r c . l , r t t r equ i remqr l r , t l r ' s r l ( r t i \ , : r r i . q .

i ( i i ) Cornpleted checkl is t is s tuc j ied bv the : ,c , , r r r . i r: aLrdit stal-f. thus $,eakrresscs cai;,r br;

ovc r l ookcd .:, (i i i) Eas;" location of rveakness.

Liiitiiirrit . iil n"qi t,:"t int"iiig;n"" io pi"pnr" pr.{r,)e:r

Meuning

check l i s t .( i i ) l i t nc c r , r r s r r rn ing .( i i i ) Cl ient can manipulate rvhen responi i i r r : : i t r

qr.restions raised by auti it slatf.; C,,ttipi"he'isiue seii"i oicl,iestioi,s.r oll each aspect of 1.C.,. Prepared by auditor & fl l led by the client.s

enrplovees.. . , 4' - l-Jo

_\cru kcep rnvoice pre- nurnbcrecl'/" Norv clientans\\,ers i ls ") 'e s", "No" or "Not Applicable".Usuallv questions are frarned in sr"rch a ro,,av thi$"r ro" s l t , r r r ,s rvcakrress.

t i l Deta i led , i r , . i t ionr i r . i re , rhui i ro i r r rpor tantaspect is over looked.

( i i ) Weaknesses arc easi ly locatcd.(i i i) Evaluating I.C systenr beconres Systenratic &

easy-

(iv) Recommendations can be readily provided by

J

3. r.c.Questionnaire

( , , . 1 \ . r\ r \ i '

r r" \,\.}\:t" - niii,r,1,t"

Advqnlage

:Limitotion :

audi tor ,

T ime consumins.

Client ,.ruy onrri", it in a lrasw rvay.C lient rnay manlgy-late'the answers.

( i )( i i )( i i i )

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II

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,1 ut l i t i t i . : t u i i i i ' '1 s ' . ; l t t ' t t t ic e

4. Irlort't:ltttrl I lcurr i r tg

Erunrylc

rltl't'tttt I0Xtt

Litni lai iott

' G ranh i c p l - c : - r c ' t l l i l l l on -

. o l cac l r par t o i '. cnt i tv 's i t r tcr t ia ! t i l t t l rcr l s \ s tenl '

St t , .c l : c t tn t ro l l l r t ,cer l r . r rc cat t be del l ic tec l i l t i l l , r t t t i l ) l

r lragraln. -l ' l tc

r\trt l i tt 'r prcpares it alicr pt.ope i strrt lr

o f l . ( . Sy 's ter l i c '1 'c l ie l { .

( i ) Cor tc ise prcse t i t l t t io t t .

( i i ) Easi lv t i r lc lcrstant lable '

( i i i ) Civcs "Lr i r< ls " .g

' , ic rv" of ccrnplc lc s)st ' - r r { ! l

( i) ' l

in," ".-t,,tult l irrg

to prepare strclt a tltrs't:h:'t 'r!

r v h i c h i s c t ' r t t c i s c v c t s i l o s i n g e v c f v t { l } l i { - ' t 1 ' ! t r iasPec t o1 ' l . ( i -

( i i ) \Veakne ss oal r ' t be Lcadi l -v located '

l' Iools to revieu' IC SYstent

4.3 EXAMINATION

Meaning

Example

- - -(-lonclusion.

, . Clrecking a feru transacticrtts'

, r fronl the beginning to tlre ertcl '.

, ir:illl,-i]l?lffi::#TJi'iiii?t;ure ii to u" "i.]i*"a i,, ,r"ptii, ioiio*ing shour. He, checkcd:

, (i) Tlre tlrder rcceivecl frott ' t customer'

( i i ) ' fhe copy o1 'sales i t rvo icc g iven to h inr by 'appropr iate author i ty l

' i i i i l f ' f .r" cntrf in stock register sho*'ing clispatch of goods:

: (iv) ' f

he statement of accottt.tt given to him;

: i"i Dtrplicate copy of receipt issued to hinr'&

. iui) Corr"spondins-er,try- !l-!it 19co-unJ 1! \\'el! ats !1i 9a$ pgokt ,-- -. : : . . . - - - : - : -

. ( i ) I te r lab les th ; ; ;a i io ;d i i . ' ay ' " .o .a ingof t ransac t ionatvar iousStages .trincs recclrds & atrthorities at each stage '

( i i ) A t r d i t o r exan l l nas reco ros Gr ' - t t r t r r ' r r r ' ! J " . ' ! : " " - ; ' ^ : ^ r - ^ r , - . , a r o

" - . c i l l c i t e r . i n a r r

. ( i i i ) 1-hus, l rc is able to urr t lerstat td or ,era l l in tcrnal contro l over a speci l ic i te l r r i

c l ' l -cct i le uaY'

4.4 INTERNAL CHE,CK. Cl t " .k on day to d iy t ransacl ions '

, ' Operating continuotrsly as pilrt of routine system'

: . Whereby rvork carried-ogt by one pgrson is a-utomatlcally 9[ec-ked by anglher'

: . 'fo pt.u"itt ftuua I "itot,

&'

Meaning

Objective

n"i"ii"" *iitt t.C.py_sfem

I r E,arly detection of fraud and en'or --' i;,;;;i i;;;i'-'' p".t ot'ou"ioti rnie'nitI

. device.

1 i rY" { { . r

11 gJ.l,.r,l

CJni.or St;t"". & op"tui"t ot u uititt -ln

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l rl l , t " . t f ; L !

1 l

r r ; f ^ ' r 1L

J,^ l - , r ' 'o \ C- l ' t tk

i i \ c \ ' , ; "

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\ - ia _ . t 4' !

- l, ' l ! a{ l

L

l r l l y l i,'\ 1l o drr-r \t t' C;*^q Lb

f ' hn ; i . ' l Intt:nto/ conlrol .11)

FFF\

\

\

\

\

\

Lbb

(lener;r t

r ', i ! '

1 , . { '

I. Distribution ofpt)WCrS

:r n l

irl of i

ndnrinisiiiiiue & iinu".i,iii :> t r i r rg c i rcques etc. l s i roui r ipersorrnel.

A Single person should r l ( ) t have indepencl in t r ; , .y11111 r l n .er an- \ ,impor lant aspcct of brrs incss.

Persons having physical custoc l l , ' o f i isets shoul t l not hr ' . uaccess to accounts or rccords.

Al l acts of on" p"r . . ,n should corne under the rcr icr ' , o f anot l rer

powers (Eg:- orderinr_: prcduct.t rc drst i lbuted i t r r r i ) t i , t Ci l ' l r ' r rnr

it 'o"t,t be changed from tirnc to tirne iuiih,:ut

2. No Independentcontrol

i. C;;i"ij-niiiiii'clistribuliotr

: 4. Check by, ttttother: . .i 5. Job Rotation

Leuve

E,ii'i','ig"lirycontrol

Budgets aiidld * p'.poiiodiflerence betrveen budgeted &should be enquired into-

for imporlant acr i ; i r i ;s.actual l igure is sisrr i l icanr.

i

: 6 .

Duties of staffP_t"Yi9u,s t,oJi9_9:Every personnel should be encouraged to go on lcave at ieastorrce in a year. Fraud done by ernplol,ee can be dctected easil lwhe;; he is absent.

l. 9-9!trg!_ -a ^: 9. Stock Control

' 10. Cash Control

For each important asset, accounting control should alscper iod ica l ly cxamined.

During stock taking at end of accounting period, tradir:gact iv i t ies should be suspended, i f possib le.

To prevent misappropriation of cash, mechanical devices (8g".

t:<:

ii: ii;,i"ii,,-;i-procedure

autgmar,!9 cpn,$9eig1er) can be employed.t i ; ; i t ;a"t;; of tro.;J;;; eniutes tne ,nunug.n,"nr ro changethem- if need arises.

iT,i'}'URI\AL AUDIT4"5:l .

1

,vleanin[; r within an orsanisation-i r for revierv of activit ies and

! . providing suggestions for improvement there of., : a : a - ; - -

F unctions of i (i) Review of accounting system & related I.C-

Inte l"nal audit i (ii) Examination of financial & operating information for management-

i ( i i i ) Examining operat ions of ent i ty .

_ __ _-1i9_ _l!yf":!!l*iflion f v_ei{rg1iot,3. tlbjectives ; Objectives of internal audit are to:

i ( i) Check accuracy and authenticity of records presented to managernent.

: (i i) Ascertain that accounting policies are followed as per plans.

i (i i i) Establish existence of authoriry for acquisit ion, use and disposition of asset.

; (iv) Confirm existence of Liabil it ies.

; (v) Analyse & improve irtternal check system.

i (vi) Facilitate prevention and detection of misstatements.

i (vii) Examinc safeguarding of asset.

: (vii i) Conduct special investigation for management.

: (ix) Provide new suggestion to management.

i t*) Review operation of overall lnternal Control Systern._* :_\?__ __::it::Y_P":1Y]

q

ttt7

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t \ r D r \ ;\iiD ll.l".i Itki\'l\i. CUN i i((ri.5' t ' \ , . r l i 1 , r \ t -

. € ' . q n

AccDl i n t i : i ' ;

Svstertt

ilIeaning

ll 'h],uuditorshouldunderstund it

llTeuninl;

Objectives

ln t r rna l Contro lS-vstem

Ser ics t . r t ' task: t l r l r - l rca( ! r ' (1 , \ o l - a t l er l t i t t l rv i r l r ich t rans: tc t i r t l rs i i re

plocesset l ? ls a l l lc i . i l is i r l r r la i r l l l t i r t ing f in l r l r r :cor t ls '

' I -o i i lcnt i l_ t and urr , - lcrs tunr l t l re f i l l lorv i r rg at c l i , : r r t 's s i tc-

e . ( ' l r r sscs o f t r l r t ' ' t c t i t t t t s :

b. Iv lanner o l ' in i t i l r l i t r r r o l - l r r t r tsact io t l : t

C. Signi { lCarr t : tcc, : ) l . t l l t i l lg 1-gct- r rdS, St lJ) [ )o i i i l l { ] i i t ' ic t . t t t lc t t ts ; t t r t l rp ' : : l f i ' -

accot l t t ts in t l re l l l l i r l lc ia l s tatc tnents; arrd

c i . I l rc account i t ig l t t r< l t lnarrc ia l repor t ing: pt ( )cess '

I t rc fers to a l l thc J, -o l ic ies " t , .1 p. , . , . .d t , res l t t l , ,p tcr - l b1 ' t l lc i i ian: lgenrcnt of

t l rc ent i t t ' .

a. Clortdticting the business in arr orderll ' and efl-cctive manner:

b. r\t lherence to tltanagcnretrt policies;

i . . Se feuua rd i r l g o l ' assc t s : u r t d'

.1. Detection of fratrd attcl error in a timely ntatlne r'

Contro l ' l t t r leat ts t l re overal l a t t i tude' arrareness and act ions r l i ' the',

f,rrr'r'rrri*ent , directors and ntanagelltent regarding the internal control

. , systenl and its importance in the entity

tIII

I

!

t

tI(

(

(

Component

Meaning

Camponent

t, Cr,,iiti'roii I ifr"t" are policies and procedures established in order trr

t i)ro"l"aurrs ' achieve entiq"s specific otliectives'

' ' n '1":',\: ' ' ' I

, i;a'.;i;ki,ah; rirr.. tr,"i tr;;;oi,;;;"v ei'" "" i""pp*p'i"l:.ltii i:l .,,\ ., when the financial statelrlents are materially rnisstated' l ' f l1U-l ' ' ' \ ' t ' ' \

' ' ' t l

. A u d i t r i s k h a s t t , r " " . o n . t p o t i e n t s ' v i z ' t d s f g $ d t L ' c o n t r o l r i s k a n d d e t e c t t o n lIilI

t;- l { isk Metning ! | Irtherent risk i, ir'," t"i."piinirity of an accou'ta lnaterial misstatement- assuming that

balancc or class of

there were no internal

r isk.

y lrr l iercnttransaction to

controls.

N,{CTONS AFFECTING INHERENT nrsx

At level of F inancia l Statement

l .

2.

lntegrity' of management'

Managetnettt cxPerience and

knowledge-

3. Unusual Pressure onmanagement.

4. Nature of ent i ry 's business

5. Factors affectirtg Industry'

I . Quality of Accounting SYstem'

2. Accotrnts prone to t t t isstatemcnt '

3. CornPlex transaction.

4. Judgernerrt involved ilr determining balances'

5. Assels prone to lnisappropriation'

6. Cornpletion of unusual transaction at or near

period end.

7. Transaction not subjected to ordinary

processlng.II

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i r I t ' r t tol c0ntrt . . t /':: !

ll{eunittg

Re ason/InlterenlLimitotions ofInternol Conlrols

Assessmenl ofcontrol risk

C,r , r t . , , i r i sk i s the r i sk tha t r t ra tc r ia l t t r i ss ta tc r t ' cn ts r l i l l : ; i : l 5e

prc i t r r l c t i r , f r i t tec ie t l , r r t i cu t i rc te t i t t r t a t i t t te iv b l ts is i l t r i " .

, ln te rna l Coa l r t i l Svs tem.

a . ( ' o s t c t ' f e c f i v c n e s s :

, b . ' I - ransac t io r ts

o f un t ts t ta l t ta t r t rc n tav be rn issed t rY t r t r l s t c t t r t { r ' l l s .I '

. , , c. Pote rt t ial of lruntan error-:

, ( 1 . ( ' i r r U n t v e i r t i r r n o f c o t t i r o l s l l i l r , r l u l t c o l l u s i o t t :

: e . A t l rse o f cor i t ro l b l the perso i t uho is [ r imse l f rcsJ) ' ) l t s i t ] ! c t i ) r. - i 1 r I

: excrc ls l l l l } . l i . A l ' ,

, . f . l r ra. lcquacv of procedures c l r re to chi rnges in condi t ions. ar lJ

1 'g. I " lan ipt r la t ior ts b l n- ,anagcnrenl .:t, Preliminory , l. It refers to evaluating the l ikely cflectir ' ' :rte-':- ' '- '{

, Asi&iiteht of . an entitv's irrtenral control systent in p'evenlin* t-.t

t Cyyt-fql {., iSt " : detecting and correcting rnaterial nrisstatern'i i l t: i .

; :2 . The audi tor shoLr ld obta in an understaniJ in l : . ' f: r: : internal aontrols to make a preliminary asseslnleni

: : of the corrtrol risk'

' , 3. Thus, the atrditor should assess the contrcl risk

i , as high unless the auditor:

: . (a)ls able to identi ly internal controls whtcii arc

: . *:3.,fl,iffJ;J":,1;f"'and c<'rrer:i a

: :(b) Plans to perforrn test of controls.

: i

'1 Test o/' R-uditor perfornls Test of control to obtain au'.lit

, Controls , eviderrce about the follorving-' ' (u) Whether the accounting and internal control

I i systems are suitably designed to prevent or

; , detect and correct material misstatements; &

i ' tUl Operation of intemal controls throughout the

: . Period'

\ Finol : On tlre basis of the results of the test of conlrols,I assessment of ; the auditor should evaluate whether thc

, control risk : preliminary assessment of control risk was

, correct or need to be revised. FIe lhcuki

i accordingl;, determine any modification in ihe

; NTE of audit procedures-

i : . The audi tor should make a combincd asscssment of the inherent and contro l r isks. fhrs is

l. . ' i , fJ[l t l{ and : because the management genera|ly reacts to inherent risk situations by designing suitable

r- : internal control system to ;;r'event or detect and correct material misstatement-;

r II

I

f

aIIaI

I

I

I

I(

(

(

I(

I

( ' haP^ - l,1u. / i l i1 t d ld 1 l \ \111' , t t ta( ' - - , - - - - - - ' -

52 ', ',-:,-- '-

U e t e c t t o r r R i s i < i , i r u t t i t t 1 4 - J c t e u i i t l r l r i - k i ' t i . . , , i s , . . i . u t t . t . ; t t t t i i r t r r . : s u i r s l a t l i i v t , | , i o t e d u r , c sI rvi l l not detcct a l l lateri i l l nl issiaterl lei l t '

' T h . . . i . s a n i n r ' c r s e r e | a t i o n s h i p b , . : t r v e e n c l e t e c t i o n r i s k i r n r l t } r e

colnbined lcvc l t l { - inherent 311d cr '11{1ol r isks '

. ' f11115, u,hcn i r t l tcrcnt and c0l l t r ( ) l r isks are h igh ' acceptable

d e t e c t i o n r i s k s l r t l t r l t i b e l c * ' t < , . r e c l i r c e t h c o v e r a l l a u d i t r i s k t o a n

Rclnliott w'illt otlt er

ri.rA.s

: : l i ' r Y : : ;

t lor i t l , r l r , : t t : t

Smal l Business

{-omrn t l ; l icat ion

of Wcnki lcsses

in Internal

{ .on t ro ls

acceptablY lou ' levei '. l{orvever, t lte assessed

be sufficientl l ' lorv tcr

proced trre s -

If detaction risk Cortt ' The auditor sirotrld express a

he retluced to oPlnloll '

uccePtubll ' Io*' level

AUDIT RISK

(Risk of Providing inaPProP

. 'fhere tl lav not bc suff icient segrcg:rtion of funetions atrl()l lg

rvho perfornt accotrntirtg procedtrrcs'

. Tlrus, atrclitor should perfomr more substantive procedures to

. Any rnaterial rn.ukn"t, irr the inter-rtal "ontrol

lroticecl by the auditor shtluld be

co rnmr rn i ca ted in rv r i t i ng to then lanagemer l t i na t i n re l y | l l an l l e r .. I{orvcvcr, lre shoulcl ntention in the comrnunication tlrat atrdit has not been condrrcted to

deternrine tlre adequacy of internal corltrols'

le', 'eis ttf i tr l ierettt and control risk cannot

c l i r t t i r t l l t e t l r c r r cc t l l ( ) pe r l o r l n s t t l r s t l t t t l i r c

quali l ic'cl opi,l ion or a clisclairnel f

a srnal l nuntber t l { -persons

tbrm his oPiniorr regarding

t Detection Risk (l)R)- l

I

, Detection Risk (D.R)

cir Risk tltat ertrclitor's substantive procedures

, rvil l not detect a Material Misstatement'

, Arises at auditor's level'

i Audit. ' ,t can frame this risk'

, auditor-

, DR slrould be inversely proportiortate to

' combined assessment of I R & CR':, DR a I/(IR+CR)

, lf tR & CR are high. DR should be kept at

r lorv level-

- . . , . J . -

Inherent Risk (IR) I

a Risk that Material

Misstatements nlaY occur'

Ar ises at level of Inat tagentent '

Atrd i tor can or l lY assess lh is

risk.

Risk of SYstem of management'

i i nls t$ generallY high'

However certain factors maY be

present due to which it can be

less than high-

Control Risk

Control Risk (C'R)

, @ Risk that l-C' fail to oPcrate as

: desi red.

Arises at level of managetnent'

Auditor can only assess this risk'

Risk of I .C. SYstem of

: trralry_e-mery__

' fnit is evaluated in s/ages (Sec

. chart below)"

::

T

St:rge l - Prcl iminary Assessment of Control r is l i

---t

___l

High

\n/i-, , ,ro l .C. system doesn't:r; r: . : f tO be goOd &

.,,,-r i tor doesn't want to check,' . , ' ,": t iveness of l .C. system.

HighHe needs to change his previous

Planning

Low

But to have evidence that l .Csystem is in fact good, aucj i toineeds to perform compliancen r n c o e l t t r o cv r v v v v v , v v

Stage - l l - Conrp l i : rncc pro t r : r l r r , ' - ' , J L -"-'- ; jLottt" t '

trqt *

To check dgsigninq. operat ingeffectiveness & continuitv of l.Csysjc-!0,

Based upon results o{' complianceprocedure, he finally assesses {^C'.

De- c'

Stage - l l l Final Assessment

* - . ." , ._ ' . -- . - ' ]Low I

He accordingly frames deteciion I.Ek I

I-__-_.-_ I

5-l

{ . \ .FV I ll.lTI]Ii.i.J.^..L AuDi'i'oii "i

.^,Ai ? - :t:.1,i ' l l '{G U i 'cl l i

t.I

aIaafJ

It

(){Slcps andObiectivcs of

I r t tcrnal Ar td i (I,'n n ction

Relat ionshiPbettve e nIntern: r l ar td

Fl . r i ' " * : r lArr t t i (ors

, \ { (dt t i t tg

Il dtpands ort

(-oteragc

l n tc rna l l r l r i l i t i s h l rs ica l l l a par t o l - l ' ( l svs te n r '

' l .o cl i , :ck t le: ir :r i i t r l : . . operating e{.t-cct ir 'crrcss and contirrtrrtr

r . r1 / r i r ; ' i i r t c r t t l l l co t t t t -o ls ' T )ec '

5 i z-c of cr l lan i ;rat ion lrr l i l rcqtt i rct l tents o f- t l tatt l t gentet l t '

. I{eviev' ' of accrlrrrrt i i lg at l t i t 'C sytt"t ' t t .

. l : . r i i t i i i i , c t l r l i t r rc i l r l l ro i l opera t ing i r i {b r r r la t io t t t ( ) r t l l a t tagetne t t i

"1!.st c uoi'Yvri\$-\z'vrtut-t' ii*L( ii*" cF.; { . - lli::"'

\ L'rrr tciit r('r r' ,insicD-l,t;,,.;\;4,!c\\oe- I,rrernal audit lirtcrnal a'dit

Appoiniii ient ll l ' Ntattagenrent: ' I),v- N11rnbe1s,

' Scopc ' I ly Nlanagetnent ' 81'Larv' ICAI '

' aircl contirruiry* of I.C' .S\ s l u l l )

, IIo* tr, n,se . Lrxte.r'al a'rl i tor sll()u.l lr irnself clreck l.c. (perform conrpliance

irttcrnul nudilrtr 's procedures)' l l te shoulcl tel!-1vork of internal auditor on whiclt hc

, *,ork intends to relY''

. l l e c a n d e t e r r r l i r l c h i s . N . I . E . b a s e d t r p o r t e v a l u a t i o n o f i n t e r n a l a r i d r l

ttrnction'

. F.rtemal atrditor l lone is- !:ei ' lgr-rsiblc lbr his reporl (Reliance or!

' in ternal audi tor doesr t ' t reduce l t ) '

.h intcrnal auditor his plarr at early stage'

:. ' Meeting should be condtrcted at regtrlar interval'

, ' Th-ere shoulcl

, organisatiottol . wt.,"ri ",

internal n,,.tito. reports directly to top management and is

. Scope of , ] Enq.,i," about natttre nna .r"ptr' of coverage of irrternal auditor,s work

; coveyoge, ; ; ; ; ; ; ; - I l4;u" 'nug'*" '11:9:: i9"*hlsre9'om1"l1d1l i9n':' . Tecltricsl Whether prol-essiorially trained persons arc perfornring internal audit

ttI

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C

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( lo-ordination

General[-]valuation of

internal auditF unction

Coynpete,yce

Drte Professionul Whethcr

Csre cloctttncnl

lnternal Atrclitor ptop"' ly plans' supervise' rcvicll ; l ttJ

h i s u o rk .

IlvaluatingSpecif ic internal

.nn-13 i . : r r ra l r ! . '

Conclusion

Consider if:

.. Work of intenral arrclitor is adequate tbr him'

. Work of interrral auciitors has been properly P-lanned a1d's-Ypervised'

. Conclusions by internal auditor appear to be lPProPtlt"'

. lnconsistency icientif ied ty internal audito;h;s been properly rcsolved by managentent'

1.lre statutory auclitor rnay relv on Intenral a,".ri iot, provided he exercises d"re skil l and carr:

and there is nothing tci cloubt'

L

r (.1e're.V-( i \) ? Lrrrht L

- 1\plrr'ccrhua ED? trrlt-tL .

1 ort+iti''u ,sLJI

Uutetr bI Cru&rori7.d fcrsO'vr O-tllr

- ait! [o'' [u"'yex-t'.

ry- {'1.cu')'t-u{") tl^ ,)o$uorri Crl uu:rrv)

- f ' ! t ' ! i i + . : . 1 5

5g$q*lr'v31rrslP

t.+X'1v*t--t Ddtl' 'i

D v\tel

1>f.e'uJd \a fUU.Ivl0llr-d . La.v q(

( r. LL\A-LI

t 'l.tul0 t:(\c-r' q'

E.D.P, Auti i t

Fl"l'F !I N A L CONTROLS I N tiD P IINV I ItO N i':! ii,NT

T'1,rr{.,, .,.': | .{'

Genetct . -+;f r " '

. { t l

d J - '

F 1.1"i .' t l : : . i , e . t { i o n

: 1r \1 overal l contro ls at - f 'ect ine [ ' . I )P cnvi rorrnrcrr t ( ( icneral EDp corr t rors) .(B) Speci f ic conl ro ls t - , r ,er spcci l lc appl icar io i is (F,DP Appl icat ion ( . iontr -6 ls) .

( : r ) Organizat ion und Mlrn: rgenrent ( -ontro ls : - - -' ' Designi r rg pol ic ies at tc l procedures re i i r t ing to contro l fLrrc t i r rns.

' Segregat iorr o l - inconrpat ib le f i rnct ic 'ns.

(b) S.vstcrn Sol ' tuare Conlro ls : -t Restrictecl acce ss ol-so{irvare to autirorised personnel only.' Authorization, approval. testing ancl inrplernentatiorr of rrew systelns soft.rr,are.

(c) Application System l)evelopment and i}{aintenance Controls.-

: - Restricted Access to system documentation.' Changes to appl icat ion systems should be author ised.' Acquisit ion of applicatiorr systems lionr third parlies shoLrld be carefully nlanrre<l

Test ing arrc l i rnplemerr tat ion cf r rerv svstems in a proper w.ar , .

. (d) Computer Opcr:rt ion Controls:-

: - Usc of only authoriz-ecl pgg31llls*g_1l.corlputers-.

i r Only autlrorised personnel should use computer. I

: ' Sy,stems shor,rld be used for authorised purpose. (

, . Processing errors are cletected and corrected on a timely basis. (

, (e) Data Entry and Progranr Controls:-. Restricted access to data and programs to authorised personnel only.

, . lnput should gt r througl t an author izat ion process.

i (a) Controls over Input:- to check whether:. Input is duly q!4!!:9d. '' Data input is egg_Unlq. .. Transactions are'19-l_!q!tgllL1?le-t::. Incorrect transactions are rejected or submifted after correction.

(b) Controls over I'roccssing and cornputer data files:- to check whether. Processing errors arc detected and corected on a timely basis.. Transactions are properly processed by the computers.

(a) Controls over Output:- to check whether:' Results of processjng are accurate. (

. Access to output is restricted to authorized pcrsonnel. {

: _o_g-tpu! !9 plovldgd ro qpttp{lql_e_au_!\o_trz_99 p_e-119!le1_qi u !i'"-ely !alq.\ /^i-:-:l '

t?

C'outrols -1,,. - r N r \ 1 1

1 r \ , ' , ' i ' L \ r { Y '

tI

58 Chap . 5;

TTt

tI

aIII

I

I

t n lFlfEIiN.AL C'iiir'i'R^oLS i l.l 5 r. k v lL l., ts tJ R!)A I i

I i 'sorr re arro l icat ic ls , l r f t i tc e l icr r t are carr ier l ( )ut at : r scrv ice t tureat t . thcrc shotr ld be a proper l l l ic r ! ia l cct t l tu !

s \ . .s tern. Thls is r r ' r lLr i red nra i : r lv t rccausc t la t . i r r rc . r ,cs oLr ts ide c l ien l cnt i t r ' . l r . r s t rch cases. f i r l lorv ing should be

ci-)nsidcred:

{.r) T.lrere SliOr-rld Lre ltrOPt:r i:r.ordittatic.n belu,ce tl trttrcatt and uscr. r

(b) Proper iest ing t '1 t l ic s) 's te rn s l roulc l be carr icr l o t t t . (

tc) I r ropcr f i le corrvcrs i , ' r r , . : l i i :ck i : lg pnrcc i i t t t t : ; s l r t l t r id be Lrscd l rv t l ie t lser ' ( -

i i l ) ' l

hcre s i roulc i bg corr t ro i , r |er the p l lv-s i t :a t ! I l ( )ve l l tent of data. '

(c) ' I

l rcrc should [s grr11t1-r . r l r . r 'e t ' the l I ]a i l l lc l l i l i l ( je o1 ' r taster l l les. r

( ' j ' l - l r e r cs l rou ldbec i l r t t l o l t . r . . ' c r t l t t t p t r t t l i s t r . i b t r t i l . r r t 0e | tSu rc tha to t r t pu t

i i r ) ' l - l rere

shcul t l be r r ranrra l c t . rnt ro ls to ver i fy ' t l tc acct l racy of cotnJr t r ter l ) r ( )ecs\ ing. t

(h) Appropriate rejcctiorr prt 'rcr:chrres sh,-ruld bc i idopted, in casc clata is {btrnd to be erroneous.f

5.3 TYPES OF I,DI' ACCOUNT SYSTENIS

tJ

I

tt

ttt

*+

-)-4

B-:rtc-h- i l'

pl'qgessing ' 2

systenrs l3 .1+ .

5

rr",rroli io,t, ur" o."unlulated ancl prclcessetl in grotrps'

Control totals (record count, f inancial total and haslr totals) arc derivecl to ellsure

coruplete attd accurate processing.

2 ty,'pes oifi les are nraintained: Master f i le and Batch ti le'

tJpclating doesn't take place as quickly as in On Line Real Time systems.-l 'his

is simple system, but now a day, it is rarcly iound due to availabil ity oi 'advanceii

and quick sy'stems:' l 'ransactions

are entcred atld processed at t lrc salrle tinle rvhen they occur'' l-here

is continuous updating of databases.

I-lorvevcr. this is ntore conrplex than batch processing'

Ordinarily. thel' 6ott ', provide audit trail.-fhus,

auditing in suclr s)'stems reqtrires spccial cotrsideration by auditor.

l-- gr ex_arn pl9, aj Jli qe r9_19rv1t i91s a1-d AT M' s

S l t , vc , . * . \ r \ ( dDals ]ti

(r t (^\\$t \

arot ' ( l ; ' :L ' r ' J'g '*{ l

On line real t ime(OLRT) SYstem

l .

2 .

:"3 ir1 d

5 .

6 .

AUDIT TRAIL IN EDP ENVIRONMENT5.4

I

II

I(

t(

t

Audit trai l-meanlnB ,Audit trail meatls tracing a transacttotl

It is a situation rvlrere it is possible to

rion.,sioni,tg i" ."J "^a

ti."re late the or ig inal inPut rv i th

versa.

the final orttPttt

Audit trail in EDP

How to compensateloss of audit trai!

on'one- to-one' basis .

Audi t t ra i l is general ly not avai lable in

(a) Direct data entry' irr to the system-

(b) Direct posting of transactions to master f l le'

(c) pliq!1atlgr of repo$ bg91u9e-info1ryation is proy!!9d-otl-ltn9'

Auditor may use follorving to compensate the loss of audit trial:

(a) CnAT(b) Programmed interrogation facil i t ies.

\-

tt\

\ i 5 r ! r ' ! ' l ( i ' ) ' \ {

\

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\ z r r i r r l u r i r . ' h r

\

\

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I L] . f ' . . lu, | i r 59

i I I -S' I 'O EL)I ' AT] DI ' I ' ING

g

- l he rnrd i t t t r - t lc lc t - r : r i r tcs h i : ; lLrc l i t J) l . , rccc l r r res rv i thout consic lcr i r rg t l rc thct c i . j r - , ] t

c l rnprr tcrs t i r r prr ie css ing of i r r lbrnrat ior i .

l 'h t l , \ . conlpulcr is ; uset l . iust as a tool o i ' thc audi tor to help h i ln i r r pcr fonning audi t .I t t t te i t t ts that arrc l i t i ; r carr ics or . l t the arrd i t nrore-or- less in thc sanre rnar ]ner as i r r r i r . r i r ! ra l

s-r':; lett l e\cep1 th;it instead ol' hanrl-rl 'r i tten books crl- uccourrl, lre exalnincs cr-rrtrtrrrferpr i r r t r i r r ts .

I l re uudi tc . r can usc l tu<l i t around t l ie cornpulcr when -

( i ) l ' l re svster t t is s i i lp ie ancj batc i r cr r ientcd and audi t t ra i l i -s a la i la t r lc . or( i i ) - f l re

sy 's tcrn i iscs gcneral ized uc l l - tcstet i so l iw 'are.' l

he pr i rnary ac lvurr iaL_le o{- th is approi rc l r is s inrp l ic iq- .

N{orcover . at tc l i t t t i 's l iav i r rg l i t t le tcchnicul knou' le i lqe of computers can be t ra ined easr ! , , . topcrlirrrr.r the nrrcl it

Ho*ever . i t is r rot su i table

I ; i rs t o f a l l . the audi tor rcv ieu 's t l re in ternal cor- r t ro ls re lat ing to DDP and on the basis , . . r i ' l { r i : rcvaltratiort deternrines the nature, t iming ancl extent of his substantive procedures.-l ' l . ttts.

cornputer is used as tlte target of atidit. Auditor examines processing reliabil i t,r ' arrdaccuracv of the corrputer progrant.

T'hc auditor ean use the conrputcr to test:--(a) The logic and contro ls ex is t ing u, i t l r i r r the s1,stem, and(b) The records produced bv the svstenr.

It requires usc of CAAT.It is required dr-re to:( l ) Onl ine data eni ry(.2) Real t i ine fi le updating (

( i ) Rcduc t i on c l - p r i n l ou {s ,

l lou'ever:(a) lt nray, ini 'olve high costs.(b) -Ihere

is rreeci for cxtensive technical e xpertise.

1- [3-r1,111 the

{ - l c ; " i . r j r

, l i

' , t l l i ; ; , i i ! t ( i i I

5"f-- (:{}Mi,U'fER ASSISTED AUDIT TBCHNIQUES (CAAT) -TYPES

-

\

\

\

\

-

\

-

\

\

\

\

\

\

DbD,FtrFFFFF\

fp

r r , f ; i i l l

,i*t'tw:rre

I-hesc arc computer prograrns used by auditor to process data from the entity's accounting systctn

Floweve r. Auclitor shoulcl use such programs only after he provi:s their validity for Audit purposes. Aq-dit Softwary rya), qe

"f !bt_"_",Upq.Packoga

, , .. '. Prttgrontsa:

r tqr ,*1 \ t ; 4 ?u-1;ose

i1 r, r i1lr1,rt,,r Y Lltrilten

, , . . ' . . . , , , Pntgrams' . i . - r ' - i '

. Utilitv) 'r 1{ t , [)}'rrfr ,; Progronr

J

, . ' Ihese

are generalised Computer Prograrns, that perform data processing l ikeselecting inforrnation and performing calculations etc.

. . These are Conrputer Programs to perforrn Audit tasks in specific circumstances.

, '

It nru nor be

1s_ed_.u rrlt clienls site, thu,scost effectiv_enes;;noutlUe_considered

, ' These urre prograrns for perForming cornmon data processing functions l ike sorting,, creating and printing fi les.

. Th9s9 are nq! _{-g{gry! spgc!fica!ly fo-r 4gd-i-!p_111pgge_.

r . { !

' I t ' s l ! ) i t t l l

\

IItIttC

C

t!

tteCI

r r, , l-r tr{. l l- r, '

l i

r . . / ; ' ; , , f ( i l 1 J . 4 . \ r 7 t t t , t t . L '- l I l u l : t ' 1 , \( hap .

- . l - l re , , \ r rd i t6 r cp ters a sc t ( ) l ' 1es t . la i l l i n to t l r t r c l l t i t ) - : ' c { } l l ' l pu tc i s } ' s te l r l a l ld co l l lparcs the rcsu l t : ;

.. ! tl r :..,,'i!,-' l,-'l-'lt i :le,l l*l:l l: I t:.

. ' l es r ( [a la a rc i l sed to tes t spcc i l rc c i t i r r i rc te r is t i cs i t l co l l lpL l tc r p rogra lns-

' I l rc tcst t lata are chosell bf ' t l ie .r \ t tcl i tr l r '

..r.cst p,rcr<. , ;):H,i:;"1']fi".J::,:iJli::,:ll[;1"::r',"]: "'criror'

i' rhe entitl''s svste'In'

I n1 t 'gr-ltt t1l ' tr 'r:stFaci l i t ) '

v i : ' '

, r r \

l lerc . audi tor cstabl ishes i i dunr l r tv r rn i l to u 'h ic l r test t rat tsact ions arc posted

durirtg 1he norrl lal processing cvcle of t lre cntity. [ lowever' later on, the drrrlrnly

cntries s6otrld be clinri 'ate,l frcti ' tt thc e't it1' 's accountittg records. These are ttsetl

nra in l ' . i t ' t case of ( )n [ , ine I {ca l ' l ' i rnc

svstet ' r ts 't * -

' ^ , 1 \ r r t r t * \t l- \ ,

a . I COIY'IPT]I-TI-IT ESSISTgD AUDIT T-CHNIQTJES (CAAT) _ADVANTAGES

I Le. .tiditor ca. clieck ioli,rni'.i is data i' less tirne b,' using CAAT .l . l ' ! , r r c ; r r v i t t g

2 ^ . : n . . r l l P l i l l g',

3 . Deta i l cde \ a l n i n : l { i o n

4 . T e s t i n g i t t t c r t t a l

con t ro ls

5 . Ana lYt ic : t l rcv ie \ r

procedures t .

6. ComPensate for '

l oss o f au( l i t t ra i l

7 - I,'or OLR'[systcms

G"n"riily, audit solirvnr" i ',", "tnt't"Ja"a

sampling tuuiin"t' ' itrtts, it is easy for the

auditor to choose appropriate sample as per stated criteria'

g*1,,,,,riiu. ;*;;;i,,"ti;,r oi "ii"ni's

iystern is poiiiUie Uy ttiing tit"it uO"t'i i"it

tcclrniques.

Vaiious inie.naf .oniroi, "ii,U"Oa"a

wit6in ihe systenr ca,.t be .fi"Cft"A-tuiift tt"tp "t

CIAAl-. Manual audit procedtlres are not etl-ective for this'

CAAI',s ir" u".l,effectire i' perfirnni,rg I'ni because tlle soli*'are can easily trace

unusual fluctuatigns ald hard copy cal) bc generated fcrr arrditor's ready referepce'

n,," to ios.i "f

nuait trail in mostly EDP s-vsterns'

irnpractical, making use of CIAAT indisperrsable'

r" iir", iriJ"t is using c)n Line Real tirne -y'ii.nit, iir"i" ii n""a

This is possible through IT'F.

manual aLrdit procedures becotne

a(

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{

AAS 29 _ AUDI'I' IN A COMP-Tfr INFORMATION SYSTEMS E'NVIRONMENT5.8

ComputerinformationSysterns (CIS)

Factors todetermine the

effect of CISenvironment on

.rudit

Skill and

CIS environment is one

ofaccounts ofc l ient .

' - -

r - ; - - - - -

rvhere otre or more computers are involved in the processing

These computers lnay bc operatccl by thc entit l ' or by a third party'

Thc exte l t to uhic f i CIS crrv i r . , l ln lc t r t is r lsc( l l ( ) recorc l and colnpi le the accourr t i i ig

:: .

t h e , 'I

:: t

inforrnation.

Internal Control Systenr in the enti$' rv'r ' t '

The availabil ity of'the audit trail in CIS'

the work of an exPert"

florv of corr"plete and correct data".' '

comPetence needed

in CIS envi ronmenta

a

th;;Ai6; ah;rid ii"r" i"ii"e"ir."oi"r"Jg" of ttri ciS t" pioii, ai.".t, supervise and

review the work Performed'

i" .6outA ccn-sider need for any specialiseci knowledge while conducting auditing'

In case, use of computer expeit is planned' the auditor should consider AAS-9 "Usirrg

\.

l : ' . f ) .J ' . , ,1ttdit

1r" . . . . ' f l ic ( ' lS i i t l l 'estnrct r r re (hat 'dwarc. ( )p! r r ( l t ing s- \ 's te lns) ant l lpp l icat ior i sr l { i . , r 'are i is , - - t lh ; - t l re c l ier r t

. S ign i l i cancc r rn l l co rnp l c r i t v t , f 'C lS i n cac l i accoL rn t i ng ap i r l i ca t i r t n .

" Organizat ional s t lLrcL,r re of the c l icnt 's CIS act iv i t ies. [ : . r lcnt o{ 'ccrr l ra l isat ion a l r t lc lecerr t ra l isat ior i o l ' { i l r r r tputer proccssi r r g l l r l i lughout the ent i t r .

, ' l ) e te r rn r i na t i on o l -av l i l ab i l i t y o f -da ta .'

. [ )o tent ia l f r - . r Ct ' i r r rpule r Assis te i l Audi t - l 'cchr t iques.

L o t' k of I r o ns o <-' t i r t t r slruils

Lruif onn processing tflrunsoctions

prograrnnr rlrg, errors rnay occrrr.

I t tck t tJ se l i regut i r t t t t tJ l l r r : cr tcr r r of .cgrcfat ior l o f funct i r )ns prc5cnl i r t rn , in t t . t l

,funt't iotts s)'stenls nrr\ ' rtot Lrc there in CIS environnrent. l-hus. :rrtind iv i t l r r l r l pcr f t r r rn i r tg n)any conlprr tcr rc l l r tc t l \ \orkr ; ' ! r . r ) : , -

in a position to perfoll iyrcolpatiblc ft lnction,

The potential for hurnan error in developnrent, mairrtertanecand executir)n ol- CIS may be greater than irr manual systcll l(due to tec l rn icr i l incompetence).

^T ' ) '

Autonnt ic Ir t i t iot int t t t r : CIS , , , r1 ini t i " i " . .*r i " i r ."ru. t iu". . r i , , ,nu, i .ol tu i i reexecutiott uf lronsoctiott : authorization of these transactions nlay not be docurnclte,,l

Dependence of otherconlrols over conrpute rprocassing

Po t e nt i al fo r incr eo :^ e rlnro n0gcrne rtt s upa rv i s i tt rr

t - al ) |

r \ : t r ,

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" ; 'X ro ii : , . . ; i l l

1 l cl - l

. f t r_ . Y ' '

Sonrc CIS i r r l r ' prov ide conrpletc t rarrsact ion t ra i l , houcvctsolnc l r lav r rot prcr ' idc i t (OLi f l ' ) . i { - t l ic rc is absence of tn t i l .t h c r i s k u i l l h e l r i g l r .

Urr i fbr rn processing of t ransact i t ) l l can e l i rn inate c le i i r , r ierrors rvlriclr are there rvith ntarrrral prcccssine. lJorvever,

( lor Eg - t ' .1{P) .

. Manual contnrl procedure may also be used uhile

: i rnplement i r rg CIS.

: If managcrnent uscs all the technologies & tools to revie'.r ' &

, supervisc the CIS department of errtit l , t lre risk rvil l be' reduced.

Errors o nd irreg ul or i I i csin tletelopment,tttointenance stttle-recutiort of CIS

Potential for usa ofCAAT

Due to peculiarit ics of some transaction and systet.us, auditornray, be requirecl to apply CAAT.

! i : r i [ t h e

rr r r l " r [ r r [ l t ] o f CIS

I'hese s1'stenrs shoulcl:

. Provide autirorized, correcl and corlpletc data to processittg cctttre.

- Pror,ide for detectiort of errrxs on tin.reh' [rasis.

. I lave data recovery arrangenrent so that in case ol irrterruption duc hr i-](lr ' !.1{)r,meclranical or processing failtrres. the system restarts lvithout loss ot' ir l! i i iei; 1,t

records.

. Eirsure that c-rutput is correct and conrplctc.

. Ensure that there is adequate data security against f ire and other calamities, wrong

processing and fratrd. etc.

. I lnsure that amendrnents to the prograrns are properly authorised-

- Ensure safe custody of the application softw'are anci the data fi les.

Chaptt l" *r

V*ue hirtg

' , 1 ' ! ' l c , l ' l oN

\ , ' l i u c l r i r ,t l r: lr n ing

l .? .3 .. 1 .

5 .o .

! , t , . ' ' I rr rc(l

Vouchinq lneans t l ic act of cxar t t i t t i t rg votrchers i .e . docrr r r rcntarv ev ic lencrs in

support oJ- a t r rnsact iou.

I t is r rscc l to e l tsur . : t l ra t rar io t rs l ransact i i t t ts f t r r the per ior l r re la i r ly ant i t r r - r l r

recorded in t l re books of accot t t t ts .

V r ' r r c l r e r i : p rope r l r da t c t l .

I t i s i n c l i e r r t ' s nan re .

I t is dul l , aut l ror ised.

Voucl rer is conrplete in a l l respects.

It clearly slrows naturr) and antourtt of reccipts and pa)'It le t lts.

After exarnination, vouclter shoulcl be starnpediinit iated.

:.', . OF CASH TRANSACTIONS

t j ( , r f s i t t | ; t ' i { l l t l lS

(o) n"ti"t" iit" : '

, I.C. system .i : r

(f) Disclosure infinalAccounts

: coul l t lng lnacnlnes.

. . Ensure that I.C. system periodically, reconcile tire physical assets;

' rvith their balances in books.:

{b) Ensrrre , . Record of transactions should be checked in details.

: correctness of , . Cltcck whether entries have been nrade in books o{';t ictiuttt ai; per, book keeping . consistent accountinu policy.

. records : r J'hus. different errors can be detected.' ' :

{c) Otrsen'ance Special attention slrould be given to follorving:

I of Accounting : - Distinction betrveen capital & revenue expeltditure/receipts"pr inc ip les r Accrual Basis of account ing.

t, t ' Method of DePreciatiott., ' ' Writ ins off of f lctit i t 'rus assets-

, - A<l justmenl of outst i r r rc l ing Assets & L iabi l i t ics '

{d) E,v i6encc of - Audi tor shoLr lc l chcck docurnentary ev idenc, . : ' i t r j ! i1 !p{r . i , - i f: Tr:rnsaction transactiotls.

; ' f ror eg; Payee's receipts, suppl ier 's invoicc t - ' tc '

: ' Auditor should get as maly extemaI evidetrces as i l1;l 'si]r lc :rs thesc

i i lre lnore reliable thatr internal evidences.i . . . -

{e) Validit l ' of , - FIe should check legal provisions, if any.

. Transactions I r Refer to internal rules & regulations.

: : ' Check copy ofcontract, lcase deed, agency contract etc.

Auditor should thoroughly sttrdy l.C. syslenr or, 'er cash lransactiotts

Carel i r l ly examine the aut l ror isat ion levels.

Check rvhcther any rnechanical equipntertt is r-ts{,i i , i i t ' ; r.;aslt

. Auditor should check grouping of differerrt items.

. Eg: Directors rernuneration should not be clubbed with empioyee's

salary.. For this , he should see relevant legal reqrrirentettts l ' i lsc-

\ , . - ,uCLi*q U\, ' )

, ' , . ! i n , ) ; \ r , r t

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. r \ i . - 1 11, ' t r ' j . r t \ i1 , - ; ' 61\ \ ' rn i l i I t ' n ' ' i n \4 i \

,612 .

A utl i t i tr g t t trd A ssin'unce

' l r: i ;t ls of caslt book alrci lci lgers shr'ruli l be

tr tri i t tt i t !t tcti rrtarrtraiiy')

c l ie :cke t l ( i r l case lv l r t : rc i rc ro l ln t ' i ! !

] . l r i s i s requ i r cd todc tcc t l i a t r c i sc loneb l , t r ve r to ta l l i r t g /unde r to ta l l i r r g .

Sprccial atle ntiotl shoultl lrc gii le rr to crasld/alterecl l igrrres,

Bl {S is pr"p"r" , l b1 'c l ier t t s taf 1 'at per iodical in terval '

Ar . rc l i t t r r s l rould keep a rccor<l o i i t in h is u 'ork ing paper l l le '

S i l ec i i r l a t t e l l t i onshou ldbeg i l e r l t o \ , ea re t t t | t r a t r s l t c t i t r t r s .

i:, i tsttrc atrcrtrt genuinettcss tl l i tetlts creatittg c|ifTercrrce betrvcen cash book & birrtk irt; i ' l1"

( ' us t i t t g o I '' l

o t : r l l i ng

3. f]:rnkre co t t c i l i l t t i on

st:l tellrttrts

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ATJI)IT OF }'A}'N{ E,NTS6.3

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1 . Purglgrsgj-Pgdi{ lrslx menro

.t,goods inrval'd book

+t l lass book

opurchlscs near B/s date

v. Advances to suPPliers

IlirYnEnt for

Acq-uilition of "\ssets(.Authorisat ion

v' lleceiPts '

vrBank Statentents

v' l)ntry in Asset Account

+, ' . Revenue ExPenses

v'

1 " l i l le of c l icnt

3. RcP-ag!.-to-A$9!gEstinrate

vrteceiPt

vCash Book

vRe Pair A/c

v

connection l.rave beetr properly accorrnted for'

l .2 .

J .

,+.

5

Clieci i iash tnutros issrrecl bv suppliers'

Goods ittu;ortl DooA slrould be chccked'

l1-payments ltave beetr made through cheque ' tracc entry in barlk statctncll l

Special attention is given to purchases made near the bslunce shpet dute a:

goods rnigltt not been received'

Ilnsure that advances paid to supplier for future purchases hsvc n(ll h') 'r ' '

includccl in current .vear's purchases'

; r . -eiimi"i

i"t "ir,.,

puy*t"ii' p'i''pttty ""tii"tii"a'2. Vouch receipt for the amount paid to the seller'

3. Trace the entry for payment in the bank statement'

4 . C h e c k c a p i t a l i s a t i o n e n t r y r n a d e i n t h e b o o k s o f a c c o u n t . S p e c i a l a t t e t r t t o n i l l

, b" given to..inri"ttotion.hurg", paid," to check whether same has been addetl

. tn the cost of fixed assets'

j s . c t ' " " t t h a t n o r l r r a l r e p a i r s e t c . h a v e b e e n t r e a t e d a S r e v e n u e e x p e t r s e s & n o t

. debit"d to asset account'

. 6 . l n c a s e o f n r o v e a b l e p r o p e r t y , c h e c k w h e t | r e r i n v o i c e h a s b e e r r n r a d e i r ' ', cl ient's name-,,

J i", u"*"r,"ble property, examine rvhether it is duly registered in client's

: name.

I . E,xanrine tlrt: paynrent for repairs wrttr ieference to estinrate submittcii bi '

contractor.

'l-,-) .l'it'.:

? v. ? r.i. \"

i'tr^)'\i;I0rv:'\'1 \

2 .l

A

Examine receipts issued by maintenalrce contractor' if any'

Trace relevant entry in cash book'

Check theer r t ry i r r .Repa i rsAJc ' toensure^ tha ta l l revenueexpend i tu re in th is

5. Ensure that heavy repairs' which increases the l ife of asset

shown as repairs but treated as capital expenditure'

have not beert

Capital ExPs.

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i r - : " r i . r l i h L t D e n $ c s

Arrihr;l rcation '

t t '

I ! . , : e " , . r . t l t i enCSS .

.tIliils .

+l lBI 's permiss ion.

rt

Srrn<ln 'cxpenses (

vF o, ' ! i rcs: tors. - ) i r i i ' r , 'J

tt \-li':' ' ''i r

Przss book.1,

i t i . j ' ! ! t i a C C O U n t '

+ARP

r . r : r ; r t i rn . F lxnensesllf !!r, ;igt'cenrent

vReceipt

.1,!t i :sri iution forreirnhursemetrt

.l,Pnrspectus

o{}nly preliminary exps.

vAS 26_-

' . r,':1-,ttigt4nd_Sale r!9!lnternal control

a,

Employee data .

v,,tritirmetical accuracy .

vAcknowledgements'

vf)eductions '

vE{r t[r6:d emPloYee '

vl lummy workman ,

vBank statement

v

L'::,:rt,,,,g -I . Ensurc that a l l i )avrner l ts w.r . t . t ravc l l ra le

proper offlcial.

2. Check reasclrrat. ' lencss of payrncnts as

been autiroi-izedi sanctiou,:ri rv

per c l ient 's i r r tcr r ra l ru l r : r i t r r r j

t ickets and hote l t r i l ls .

I{BI lras been obtained lbr cxpenditure in

.{r5

regulat ions.

3. Voucli copies of t lre airiraihvavs

4. Check rvhether perrnission ol-foreign currenc\'.

5 . Bnsure reasonablencss of suncl ry expenscs such as dai lv a l lo .vancecon \ c \ : u l cc l u t t l t i ps e l c .

, 6 .

f \

, " J ': 8 .:

9 .

For travell ing expenses clairned by directors, chcck r,t lretltr:r tf ie5e ', ' ir ir ' :

incurred by thcrn in the interest of t lre business.

Trircc relevant entn' in bank pass book.

Check posting irr travell ing expenses account.

Compare amounl of travell ing expenses rvith the previous year's f igurt;. r,rl,. i

inqui re in to abnormal changes, i f any.

: l. Various preiiminary expenses relating to the formalion of art entify sueh ,.r::

: registration fees, cost of printing of documents, legal fees etc., should be

r checked rvith reference to bil ls and agreements.

| 2. Check receipt issued by lawyer, accountant and printing house.

. :. Exanrine resolution of BOD and the power in AOA, in case such exp*lirr ': '

, ir l"utred by the promoters have been reimbursed to them.',4.

Cross check the amount of preliminary expenses rvith that disclosec! in the

prospectus.

5. Check tlrat no expense other than those constituting prelirninary expenses areincluded under this head e.g. brokerage, underwriting cornrnission.

; 6. Auditor should examine compliance rvith AS 26, rvith respect to acccltrlittrs, treatnrent of preliminary expenses.'

| . E*"mirrc intenral .ont.oir le lat ing to *og", and salar ies speci l ical lv onfolloiving areas:. Attendance record of employees' Appointment, promotion and transfer of cmployees. Disbursement of salaries and wages' Custody of wage records' Authorisation for disbursement of overtinte. Paytnent of advance to staff. Control over dummy worknren

Examine the etnployee data such aS name, wage rate, attcndancc nssil1:,1" 't)!.i1.

Check the arithmetical accuracy of the payroll function.

Examine the acknowledgements by employees.

Check deductions w.r.t. TDS and Provident fund etc.

Ensure that employees who have retired or otherwise left the senviet: of the

enterprise , lrave not been included in the pavroll.

Ensttre that no dummy workman has been paiC wages"

Check relevant entry in bank statement-

Pay special attention to unclaimed \\ 'ages.

, 2 .

i

: S .. 6 .

i. ' 7

: 8 .i

: 9 .Unclaimed wages

\

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66

7. !glveg!!5!llge3-! ExPenses '

1 c{rntrlct details.1,

r l i s l o - ' ' l { vc r i i semen(s

v.rrelated with clients i

v, lu thor isat ion

.l,( receiPts* "q

' t'tslt trook.,

< entrl in A/crt

,. ;r,is ,exps.

I

8" nci@3ag@s-!glinel! erpglggg

Aulhorisation-"vAs Per objects

vI)ocuments--v

v Cash book.t

, Accounting.l,

,. A5-26.1,

Write off-t

Aud it irtg owl, '1 :; s uronc e C h a P . 6

I . cl-,ccli co;tra;t ' ,r ; i l l i . i '-r "ising

alcricY '

2. obtain complete l ist cf advertisettlents. nreclia "vise

i.e- new:lpal)ci ' I V elc

l. Check that these relate to client's busir.ress ortly'

4. Exanrine authorisation ol payment ntade'

5. Check receipt for amoutrt paid'

6. -lrace

entry in tlre caslribank book'

1 . Check relevartt posting in relevattt account-

. 8. Examine that outstanding advertisement e.\per]Ses havc be':l: sltt ' lwn as

: l iab i t i tY.

. q Check- that advances paid w'r't ' same are show'n as assels'

; l

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:

;;;,".;,i",t,"u." ;;, ;;;;"; a a"u"roon'ent expenses

Checkwhethertheseareexpensedasperobjectsofent i ty 'sbusiness'

Examinerelevantdocumentssuchasexpenditureonmater ialcanbevcruchedby examining suppliers acknowledgement'

Trace entry in cash book / bank statement'

Ensure its proper accounting and disclosure in books of accounts'

Ensure comPliance u'ith AS-26'

Ensurethatrout ineresearcl tcosthasbeenwri t tenoff toP&l ' 'account"

C h e c k t h a t n o f a k e e x p e n s e h a s b e e n d e b i t e d t o r e s e a r c h & d e v e l r r p m e n lexpenses account'

Examinetherelevant lega|appl icabi | i tyoranycontract.enteredintobetweenemployer & employee to check requirement to pay gratulty'

Ensure that basis of computation of gratuity is valid and as per prevailing

laws, if any.

Check computatiott of gratuity with reference to number of years of service

rendered bY retiring emPloYees'

Trace the relevant payment entry in bank statement'

l fany insurancepo| icyhasbeentakento fundgra tu i ty l iab i l i t y .ensure tha tp."*iu* deposited has been taken to P&L Account'

check acknorvledgernent from employee who got gratuity in relevant

financial Year.

Ensure comPliance with AS-15

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F-ake exPenses i

9- Retirement gratuitv to I

emDloYees I

legal aPPlicabilitl" Z.v ,,-basis

V ,1 .t:heck comPutation

" t ' , 4 .

bank statementsv :5 '

insurance PolicYv

acknowledgement

6.

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l-

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i ( l I . Check the agrecrnertt eutered into *,ith tlre a,'ents.

2. F,nsure that sales and conrmission cornputation ha.s been mad,.', :r. :; 'agreernent and conrmi- .s ion is paid onlv to aulhor iser l agents.

3. E,xarnine sales report sent bv the agent during relcvant year-

,{. -Irace the entry' irr cash lnok / bank statement.

5. Trace the err t ry in c t ln tmiss ion accounl .

6. Obtain acknorvledgernent from agents.

vC-'ommission A/c

o.

4,r."|rr,tr l,trrt i i l trnen_t

I 1. t,e"{ tv -ql$-g.Ipens-es

. ' ' , ' i t

't

. : ' ! i ' l - i 1 l i i ) n

vS;'; lcs re 1,ut1

.t,( l : rsh hcok

b.=.- 32 l iRvnrent of income tax

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h : . . : . . r , i s ! r : pg f ro l

i+author isat ion

i+. . ' ,1

\ J . , 1 ' ' ; ' : ' l r t n i t s

.tb trunsfer trntry

\ ,nitts/*eipts

\ . , ,

\ reirsonableness

\ O l1 i entry in A./c

\- vbalance

\

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i. Crr".r. ifi" itrt".riut control over this area, its chances of tntsap1,,'.p:; r,r,rcash are high.

2. Check authorisation level of persons having custody and contl'ol ',;-v,;i

. , . i

i'i, I t'i'

cash.

3. Check the l imit of imprest rvith a particular employee.

4. Trace the transfer entry from cash book to petty caslr book io ascoriainamount given to petty cashier.

5. Check the relevant voucher, bil ls, receipts in support of the experii l ir ' i 'rt l

6. Examine whether the expenditure have been duly approved h1' ' ir ' ' ' '1F" t: ' : ir i

person. Check its reasonableness.

1 . Trace entry itrto notninal account.

8. Examine balance of petty cash in harrd.

' I ' \ ! i

i ' . , ' t '

1 \ \ ' ! , ' \ t . . ' ' , t ' i \ l I

l . Ascertain the computation of taxable incotne as per provisions l-.1' ih<; furi ' 'rrrre

Tax Act, for eg. Corttputation of depreciaticn as per Income fax .\ct '

2. Check Assessment order or demand notice issued by the tax autltorit ies"

3. Examine receipted challan to check that amount shown therein is the s;trir i;*:

shorvn in books of account.

4. Reconcile the due dates and actual dates of payrnent. Enquire anv'delay in

actual payment (as per provisions of CARO).

5. Trace the relevant entries made in cash book.

6. Trace entries irr income tax paid account.

1. Check rvhether panel interest clrarged on delayed payment of in.;t 'rt ' t .",. !r: i!

been shown as expenses in P&L account-

\ taxable income '

b,., qt' ou*"]u nore {, / t t ' l i

b t u^.u 't

i . r\. rcceipled challantl

lt , rtt dateofPaYmenti t , r *F

): r*t"

-

".0*,, ut,uK \

5ei entrY in A/c i

b.tI

b intglesl-"h1g:9,'

FbF\

-X^,'q'" d"ll

!8 {_ ___13. Custop duties

, Rill of entry.l,

. Computat iorr

- Agent Bil l

l .

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5 .

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8 .

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f :xanr ine ' 'B i l t r !

cluring the ;le ar.si i i r- i ' " l t l en!t lre that gt l t lc ls t t i rve been. t t l i irct irrrnorled

CIreck rvhe lhcr ca lc r l l r i i r { } l - !

appl icable rate in f i ' rr ' :e -

of r:ustont:. i l t r tr l tas beren lno(i() : l : j lc i i i t t

In case dut-v is paii l throtigh sonle clearint{ agt)nt' exarnlne agetll

Trace paytrtr:nt in cash llock/bank stateme 11t'

Chcck ackr lo* lcdgetn! l i i f r ( ) l l1 cuslo l l l a t t t l t t r r i l i ts '

-Irace entry itt cttstotl l dtrt l ' paid account-

Ve r i t \ , c l a i n r {o r r l t { - l , d r t t ' l ' h r ' r c l f b1 ' chcck ing acknc . r r v l c t Jge r r t ' : t i r l l r r t t t

authori ty.

Incascofd isp t r tc i -cgard i r tedr r r , " *payab lc 'c l rcckrv l re therpr i iY ls l { ) l ir lade for the sari te.

t r i l l

\

tGTCCtaItt

t

Bank Statententst { ,

Acklrou letlgenl€nt'+Bntry in Aic :

vDury* Drarvback :v

DisPutcfircisc dutv : I

rComputat ion.t

, .nttun

is pr,rlrc' lr

t . iI ' , { '

"\ , \ , l j

\ \

N ^ n { , ' \ t \

Vi;;; i;; ; Excise d'1."' is levied on tttartuf'acturing, it beconres pav'able ' 'rn

r"l""t" "f "tcisable

goui' froln goclorvn/factory of the manuftrcturer'

C h e c k t h e c o m p u t a t i o n o f d u t y p a i c l t O c n s u r e t h a t r a t e a p p l i e i i i s a i F s l .prevail ing rates.

Check payment w.r.t- du$ by examinirrg r:lrallans'

As it is levied on manuf-acturing, it is a martrtf itcturingexperlse^ i l ' i isureablr'. l t

correct accounting treatment'

Trace the relevant entry irr the nominal account'

Ensure that cENVAT credit has been correctly adjusted in the accounts'

Fo rexc i sab |egoodsmanu fac tu red ,wh ichhaven , tbeen re |eased t i l l l ] lSda te "check whetheiprovision for unpaid excise duty has been made'

Compare excise duty paicl in current year with that of preceding year'

Study the special Prcrvisionsi" frlOe and AOA w.r.t payment of dividcnd' if

.- l\l[an ufactu ri ng f, xP't .1,

,EntryvCENVET CREDIT"v

Provisionsv

ARP

,)

J -

.+-

:: ) .:i 6 .; 1

::,i 8

tCCIaaI

I

ls. Pai'ment ellDividell!V l

Provisions w.r.t dividendv

Board Resolutionv

Transfer to Reserve.t,

Shareholder's registerI

Calculationsv

PaYment with in timev

Unclaimed dividend.t

Bank Statementv

PaYment to NRI.,

l .

ii .

any.

Examine Board resolution regarding rate of dividend'

Ensure that provisiorr of the Cornpanies (Transfer of Profit to Reserve) Rules,

1975 have been adhered to'

4. Study the Shareholder's Register to ensure that payment is rnadc to all

registered shareholder'-

5. Calculation of dividend should be checked'

6. Check that dividend has been paid rvithin the time limit prescribed under {-he

ComPanies Act.

1 . Examine instances of unclaimed dividenri'

8. Trace relevant entries in bank statement'

g . F o r p a y m e n t o f d i v i d e n d t o n o n - r e s i d e n t s h a r e h o l d e r s ' e n s u r e t h a i R B l , spermission has been obtained'

10. Check whether Dividend Distribution Tar has been paid'

I

I

I

I

!I

I

I

:i

t

l-

Dividend n ttlfi,U.ltglTgl I --- -

( lha: I/otrc hing

Boarc l resolut ion is r reeded iL

. A d i rcctor .or

. l l is re lat ive. or

. A flrnr in rvhich directorirelative is a paft11cr, or

' Privatc compal]) of rvlt ich directol is a trtetrttrer,

E,nter into contri lct rvit lr t lrc contpatlv in clue stion. Atrdit,rt sl iarrldclreck rvhether resolution has been pas:;etl.

Moreover. i f companl ' .u , l . " i 'u . ,1 has paic l Lrp capi ta l o f Rs i ' - i ( ) ' rc i - i i t r l ( ) lc

evcn prior approval of CG is needed in adclit ion to l loard Rescir.rl:crr

Irvery director, wlto is interested,

. Directly or indirectly

- In contract rvit lr the cornpanv

Then, he must disclose his interest at board meeting

As per CARO, Aud itor should check reasonableness of price'; l l :, r

For public company. certain requirements of t lte cornpanies aci l i :r it: r<-' i-rt '

seen which are as follorvs;

(l) Specific provisions are required for re tnuiteration as per

. Articles or

' t:-'-9l"lio11 11GM

(l l) . It can be paid as

. Fee for attending meetings

' Monthlyiquarterly or annual salary for rvhole time directr-'r

(l l l) For director qther than rvhole time director, approval ci ' i .r i: i ,. ..r i1tri"i,. i

Thgs, Auditor should clreck tfte authorisatiol level to releaser ih-r-r Ct! r:! i.) l l t

Auditor should seek the attendance record frorn the company"

Check the confputation of director remuneration to ensure

compliance with requirement of The Companies Act (sec 309 & t98)

Elrsure that proper disclosure has been made in financial staternctl is rr '.r.1

same.

I 6 , ^ . . r . r . t . . " . , , r . r , r i . l l .

t loa rrl l . l t:solrrt ion

.{r

Appnrval o l CG

v

b lrlrarrre i .r i i :fest

.1,

2

I Price

At -

i :f ' :i,1 i: 1 | I .f il-ild.t{-Pa id

!9_ al-uggtqrs

( l )

{zt(3.)\(4)

(s)

70

\

I

ll

T6||

CCt

18. Payntent con!rol le! bvf h r . ( ' i r m t r : r n i l t i t c t '

1956

t , l r r i i r " { i

Pro' , is i .ns 6t ' t . t , t lpar i ieS A. t arc as { -cr i l t r rvs r r 'h ic l i s l rould be consi r icred b1

Aud i t t r :

l . ur rder sec 227( lA)(e) prc 's<lnal e xpetrses charged t t ) revc l l t te s i tor ' r I i i r r : i -e i ic t l ' . : i i

bY atrditors.

2. Urrc ler Sect i0n 29. ] , B()D oIa pt rb l ic cotnpa| ly rec lu i re col lSel l t . - . f . lhatc l t r t ldcr r r t

CM l'or follositr; ' ' :

. Sell ing,lertsing ,r disprsirtg lr l , r i,: .-\ . -,1t:e'" ' l

{

+ Whole / substantiallY rvhole ol'

t, + Undertaking o{'tlre company C

j , - . l l i . r i r 11 .v r i 1 . , , , R l l t i t l i r tg / l i i t ' i r tg t i rne f<r r re -payr t len to fan l 'deb t r j t - i t - 'L ry r r ' l i rec to t t

\ ^ , . : , ; ' - I t t v t s l i ngc ( ) t l r l ) c l l sa l i o t t r c ce i ve bv r r ay o f comp t l l t ' r l - \ t v - l { ! ' ! ' r ! ' ) t l

t' r . r ' ; I \ l o f anv

- { i . ; . r l { ; i i

:

es of tl-re undertaking C: -) Prerrrises or Propertl

. . - ---^ ^r.- . -^^. , ; f t:

. "forrowing

of rnoneY if',

, -) money already borrowed together with ntrlneYl; pr1)I-a{!f'.."ri 1i' t

( i r , ,1 " . ; ; \ , lK r '

, , , , , bebor rorved

d.-) ,. ,

- -1, I ' t __.:, ̂ -,^^-.t onnrcaeted of naicl uo caoital & fiee serve:s

-,,. :_, tii . ,. ,, . . r".,r .l

-) will exceed aggregated of paid up capital a1-f

:,rr :i -

, 1""r::,:,:," fund or I

t i r /

- ) \ - l ldr r tat ' rv

I:

,. ..|., 'i i\' ,i, l:t-;.T:;i:'J:#'ili:,:d

tobusinessof compirnv;'ltrI'_),'

" ' , ' r ' , , , ' ' ; ' r r l ' ^ < 1

a m o u n t r v h i c h e x c e e d s . I' ' 11 ' ' ' i ' { r ' i - ) amount rvhich exceeds '

i; -> Rs'50,000 or 5o/oof average not profit during l lrnrnediatel-v

I

, Preceding financial year ( rvhichever is grcaterl

. ' - l: l. UtiO"t section 293A

Ii -+ A governn'rent company or

I

i -> a company which is in existence for less theri ' l t irr, lrt: i : 'r l I

, y.oo I

' -+ Cannot contribute to any political purpose I

i - ?ffi::ffi;1:?jJ;"iff:lj;*"rontsd'lrrins'

,i - - :L . .+ :^ - + , , -o r inn ' r i

" ie t i rn . :e {

:4 .HcweveraSpersect ionzg3B,Boardcanmakecontr ibut ionternat ionai , i je t t : r iee. fund rvithout anY restriction' (

I-

I l L'rsuchirt! t l

tr.J AT]DI ' I 'OF RECTIIPTS

FFbSs

r l t

5 .

6 .

7 .

\

\

\

\

\

i

\

bi, 'ib\

\

\

\

\

\

\

FI

FrIb

FbbIDIbl

bIbb\

\

t.

; .r [r'.:;, ; t l t o l l t r o l

+, r ruthor isa l ion

vBi l ls

* t '

r. . :r .Ei ir rr: t les sul l lman't

trorrkv

{ .ar ;h nr*r t ros'+t ;ash l rook'v

! | : r .s1.. ! ; i : .r tur!t tCnt'+. A S - 9 i . : r l

. \ . \ \ . 'v

l l' \ \ , i r , \ ' l t ' . r i : ' ; t r t | /S dhtc.

* j

. i - ! i : r l t ' Iurrreccds of

lrlq[.r, r.tutttrials

. fnternal controlv

1&teecle'els.!

Production recordsa,

ARP.l,

Rate

"t,{ lash book

o! {r1 co q ry {!qs !Le_9_t!94

l .

I' 2 .

: l .::' 4 .

: -, b .

:J .

:l

. 9 .

.r i r t i

t i ': ':,

l .

: 2 .: 3 .1 4

I , ,xar l ine lhe in terr ra l cr rnt rc , - l over receipts l lo tn salcr [ ;xarn i r rc r ru lhor iszr l iL ' l

levc l for rnakin{ : cusl r : ;a1, . - -s & receiv ing anroul l t t l t t rc l l l r r ' : .- l -cst

check the le* b i i ls f i r r ascenai t r i r tg accur i lc \ o t - rate. r r ] r ( )unt . d isct t r in t &Sa lcs ' l ' aV VA I ' c t c

In casc i r large uunrt rcr o1 'cash sales arc a l - lected. chcck casl r sa les surr i rnarvbook nra i r r ta ined b1 t l rc c l ient . ; r , , ' l - . r ' .^ " ) \ I ' i \

i " , i ' \ ' ,

[ l xan r i necop ieso1 .c -es | t n t c t l r 0S . , l . i ' . r . t l 4' l ' race

the re levant cntr l i r r cash book rv i t l r re lc lurrcc to t l l tc orr casl r lncntos.

In case, dai lY casl r co l lect ion are bankeci on nc\ t dar ' . t racc i l re sur l rc in t - 'ur , i i

statenrent on subsetltrent i lar'.

I lnsure that reventre has been rccognised as pt:r recluircrrrents of AS-!) - ' l levenut:

I {ecogni t ion" .

Cash sales dur i r rg t l re ycar should be recognised evcr t i t 'ph1 s ica l 11 '1 '11 ' t :q11gpt r ' i

s tock has not taken p lace. T l r is point is spccia l l ; * lo be considcrcd wi th respr{ j ito sales near the balarrce slreet date.

1 ) r ) .

Evaluatc the i r r tcr r r i t l cot t l ro l ; i ; . g ; ; . - ' t ; t i ( ) r r . s tor . rgc & t l isposal uf jurk

material.

Check the records for sale & disposal ofjunk rnaterials.

Check the production rccords to determine quantit-r ' of junk material.

Compare u;rits of junk materials in current ) 'ear rvit lr that of preccdinl; feri 'years.

Check the rate a1 rvlrich diff-erent junk nratcrials have been soltl.

Examine corresponding entry in cash book.

E,xarnine whether it has been shown as sales r>r redrrced fionr cost o{-proiluc:t.

Ki ' I '

l .

2 .

3 .A

i 5 .

, 6 .:, J .:

. 8 .:, 9 .

: 1 0 .

vRecords

..t, Calculation

.t. Receipt'o

,{:onfirmationv

Accrued rento

Disputedv

Cash booko

-4.",trv- !! 41q --

Study various terms & conditions of agreetttettts entered into rvith tenants.

E,xarnine records of propcrties let out.

I lnsu.e that calculaticln of rent has been tttade as per tcrrns.

Check copy of rc'ceipts issucd to tenant.

Obtain confirmation lrctm tcuants regarding all loutlt paid by thern.

For rent accnled but not received, check proper ness of accounting trcerinri:ni.

If any outstandirrg rent is under dispute, exarnine whether provision rrci:rir lo be

made,

frace relevant entry in cash book.

Check cor-rectness of accountirlg treatnlcnt in nontinal account.

Ensure that TDS been properlv adjustnteni.

1 ),4ttclirmg qyl-,4,syt1t t111-c,,- -.:-- :L14. i'

St r r r l . u t t r t : l e : ' l n s o f con i r t i t ' l h r ' t \ \ ' r " ' r r i - i i . n t / 3 ' 1 t ! 11 ; 8 : t he p ' ' l b l i : h : l '

check 1-reri t tcl ical staternents receivetJ fronr publ ishcrs regarding t iutrt t t t ;1

hooks s t l l c l .

Check r :o t l rp t t ta t io l l o f roYa l l \ t t t c l l s r t te tha t i t i s as p t : r te r l l l s '

l : xa l r t inc acknt l * ledgemet i t i ss t rcd to the pub i ishers '

- l ' ra ic c t l t rv i r r cash book '

E,nsurc c{)r l-ect l iess of postin! l i t t tronri tral A' ic-:(-rt l l l t '

Check at l i rrstn'rent regarding rovaltv dtte bi i t not receivcd'

Study the ternls of contract r 'r ' i th principal'

Cl rcck corr rputat ion of conrr l r iss ion '

Usua l l yagen t (C I i en t )p rov i t - | espc r i od i ca l sa |ess ta temer l t t op r i nc ipa l , hns t : r l i l t .which commission is calculated' Examine the statemel'rt as well '

Examine copy of receipts isstred'

Trace cntry in cash book & relevant account'

Ensure cornpliance with AS-9 "revenue recognition"'

C h e c k a d j u s t m e n t w ' r . t a d v a n c e r e c e i r , e d e n s u r e t h a t i t h a s b e e n s h i t r v n a sf i"Uifi,v aid not booked as income irr tlre reiejvant year'

Test check computation w'r't interest income'

check due clates for interest & dividend & compare with actual date of receipi

check relevaut entry in cash book with copy of receipt issued'

Ensu re tha t f -u l | amoun to f i n te res t / d i v i dendhasbeen taken toP&Lacc r tun t .

Ensu re tha tacc rued income in th i s respgc thasbeenaccoun ted fo ras l ' r e r ' \S9

\

I

!

saItIttt!

teIII(

I

I

I

{

I

(

I

I' I!ttY,tI*'!$sr'-t:-cil

. ' l ' r . r r l : 15

{.'

Periodical stalenrt:nt'v, ConrPutat ion'o

,\cknor'+'ledgente nt.'

( ' lash buok.i,

i ' - t i t rY in atcl lul l t

.t' '.1:t

f u.:ri t'.-rylllt,1

5" Commissionreccived

'['erms

vComPutat ion

.tIleritxlical statemenl

.t,RcceiPt

+t,ntry in a/c

vAS-9v

Advance

I

L

i .

$ .

1

t .

2.

3

+ .

6.

1

(6) Income from obta i r rscheduleof investnrent&deposi tsmadefromthecl ientandana|ysei t

investment /interest .

& dividend iSchedule'r,\ ' ir ' 't;

vL. . * t . . . r l ,ComPutatton l1

.tDatesv

r ; . a ^ i - " ' r r ., - . . t , . . ,

v:Cashbook

vEntrYv

l .

2 .

3 .

4 .. l : ' , 1- , . i

s

().

Accrued incoine

Ar" ' r rLr I ' . l . , ' , , , . ' .f t i t . l i ) f \ \ . ' 1 ; " ; i r

'l

r'i i..1,^'I

L

I ^ . ,t) I r''r '-;'

' \ ' i : ' i ' ' I ' ' \ ' ' r ' \ ' 'q ' ' ' r,; .,, f if .,[

l'oucitiit.g

i . , l

.tii{ r

rt

Curnputat ion

+Profit/ loss

-*

AS- I3..t

! , r ; . t t " l r

Lrl-Ule-ql-a$eE

I

a

' . l . \ ' , '

l .

l .

3 .

4 .

5 .

: 6 .::l:i

i

1

i L .

:: ?:!: A

:i 6 .

o f !Lct , ierv thc in tcrnal contro ls r ' , rcr Salc ot ' i r tvestn icr i ts .

/ - i . : : :cr : ! ! r l , i : : ' , 's : t l i rc ; r ' .s a; 'c sc l l l i l ; ; . ; ' . ig l t ; io .k ' . ; r . ,Lu i . i l rus n-rxdrr r i r rs ! t ' , , i 'c i ' . : ;r1()te.. [ 'est

chcck thc cornputat iorr o l -anror .n] t receivcc l on sale as s l rown i t r hroker 's

luote i rs rve l l as net i . l l ( ) t l t t t fccc ived f ror t i l ' r . t ' i - ter ( i .e . l l ier ' l t : iJ t i r . i . i1 '1 ; '1 f

brokera!!e and other chargcs)

( 'ornprr tc pro l i t / [oss as s l tout t i r r [ '&L Aic b i t l tc c l icr r t .

Ensure cornpl iar tcc rv i th AS- l3 ' - , \ccour t t ing fbr l t i r e s t t t tc t l t ' ' .

' l race re lcvant entrv in cash bor.'k , 'bartk statettlellt.

' A l r

Review the i r r ternal contro ls over l l r is area inc l t r r l ing aut l r t i r is l l t t r , , f i i ' , , - ' r

rnaking the sale.

If asset has been sold through agent, examine correspondence *' ith him.

Check the arnount received with ref'erence to cop)'of receipt issued.

Examine reasonableness of price by enquiring tl.re nlanagement.

Ensure that sale proceeds have been fully accounted fbr.

E,xanrine computation as regards profiVloss on sale and ensure that ;eme

been properly accounted for.

Exan-rine the bad debts appearing in client's accounts- tr\ i ' \ ' :r ttr ' ,Nf

Examine that all recoveries against this have been slrorvn in books. r

Exermine ackntirvledgement issucd to debtors.

ln case receipt of bankruprtcl,dividends, check correspondence with official

receiver.

Note : when a debtor is sued for bankruptcy, entity has to prove to thc ofl l i : ial

receiver that debt is due from him. Subsequetttly, antouttt is received generally

in parts, which is known as bankruptcy dividend-

Trace relevant entry in cash book.

Ensure proper treatment in Proflt and loss aceount as income. lr A fl l-: l ' i 'g

:1.

5 .

6 .

i " , Li ' rF:;{ l eqlrt trol i

*

;:0,rt'rtrspondancet

rt'( t ipv of rcceipt '

v!tt,ar;onutrleness of ,

price

vAccounting

'

rl,

llrofiU loss on sale (

i,lt--..-.-"llad--d*bts : l.

l{rr

i i as

f'ec(rYcred

Bed debts

.1,Recovery r

vAeknowledgemcnt

.1,rianhruptcy dividend

oCash book

vAlL treatment

" - ^ |I , ' , ' ,

- f \ l

7t ,4 ti, i i t i ; t g cni d lss r.tri t n c' e Cha1l . t r

Exar i i ! t tc i l tc reasot t l i t r crr t :h t ' i ' f i t r r i l [ ]n. e <r ' - i r 9. : . . ) l - . t , - ! ' , :c 1. , t p l :1 ic, ' l l l l icc l l l . l l

bl: ( ' It-.

E,xarn i r re i r r :Lrr i i r tce pol icy ' docurne r r ts .

Chei :k corrcsporrc lence wi t l r ( i lC l inc luding advice b1, GIC to c l ient .

Cl rec l< re lcvant cr i in in c i rsh book lbank staternent

l l l 1g r r r g t r l r r ' i t t i i s p t "o i ) c r acco l | | | I i r l l l t r en l rne l l t .

Chcck u ' l rc t l re l c la i rn is receivcd u. r . t f ixed assets or current i lssets

Exanr ine t l re cop; ' o f insurance c la i rn lodged wi th the GIC.

Exarnine corrcspondence wi th GIC and agent .

Check report of surveyor to ascertain the valuation of krss.

Check acknorvleclgelnent receipt issued to the insurance cornpan)'"

Trace entry in cash book/ bank statement.

If clairn rece ived from GIC is less than actual loss suffered, ensure thaldift-erence has bcen debited to P&L account.

tIttCCtC

ttt!

tC

C

C

Iat

I

i

I

t

I

I

I

I

I!

I

II

II

II

II

Ii

(.10) Refirnd ofgen er:lL. -_._i n-su fj]l ncq

l[lllr:llJl,Lii!i(ll i t r r . i o r t

vI ' o l i ( ; d o c u t t t c t t l

uC'orrcspondence

.t( ' : ish Lrook

oAccoun t i r r g

t l j ) . . - l n q u r a n c e l. ' t . r in ts

:N a l u r e

vt i la im lodgcd :

.t, '( 'or respondence .

oSurweyor's report :

{ , ,

, \ckrtowledgement

oCash book

v,Loss taken to P&L

account

l .

l

-)

I

5

l .

2 .

J "

4 .

6 .

1 .

f t2)lDtrequn!9d-E/R , l.dishonoured :

Schedule , ,

2 .

o.Bankstatement . : : .

v '4 '{ } rnk advice r 5"vl iebi t entry \ 6.

vBank commission I

v

Client usually prepare schedule of discounted bil ls receivable dishonoured.

Auditor should study it to knorv amount of bil l etc.

Check entry in bank statenrent to see that bank has debited account of client rvith

appropriate amount.

Examine bank's advice w.r.t same.

Check that drawer has been debited in client books.

Examine r,vlrether bank comnrission charged by bank lras been recoveretl from

drawee.

Check subsequent receipts frorn parry, if any.

r' 'r

f i l I

! . 1 : I

\-

Subsequent recovery i

?: ' r , l " , . '

l ' r , i t t i t i : t { . / 5{ lh l r r r . I 't F ; : . . . ^ : - . * . . ' . . - " ' ' . . * - , . .

t).:t r\i-rtll I OF SAI-E,AS

. t ' ' - . '

' : t : : l t l t ' o l s

.t

; , i i i i r c l ' i s t l i < l t i

v: i : r lurr i of grl0ds

v. ; l l ! . t r : , i n v i . r i cq

.t. , r r i i : i , t r ; r f ( ; i . t r { l t l [C

.ti i our (8 documcnts

.tp(,st! lrg

vi f r ( r r r f d iscount

oconfirmation I

{;,r1.$.,ott 'Sale or

Rglg;tl_U4sis'.{}ption with buyer

vl tequires approval

o' \4cmcrandunr day

book

vFlntry in accounts

vl 'rc)vision

..1,

status. ._v

included in closingstock

l .

? .

3 .

4 .

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9 .

Aui i i t r - r s l r t ru ld exaur inc t i rc in tcrr ra l con{ro l s \ 's tdni in th is area.

l :xarn i r rc u l rc ther sales has i r r :er t t a t t thor ised b; - a re: ; r ; t t t ts ib le of l rc ia l .

Ensurc that goods are thosc u,h ic l r arc t tormal lv t lea l t in b1 'c l ient .

i \ r r r l i tor s l r t . ru ld exarr t i t tc copies o l ' sa les inr 'o iccs.

[ i r rsurc th l r t each i tem of sa lcs actLra l lv re late-s t r r the vear conccr t red i .e . erar t r i t tecrrt oll prr.rccdures.

I - ,x l r rn ine l l rc sotr rce dr lc t t t t rc : r t1s (s i r lcs ordcrs. sa l r :s i r - r ' " t t ices) qener: i ted * i th in

the organiz.at io t t

[ ]xar . r r i r rc err t ry in SaleS acc()uI i t as \ \e ! l aS in c i ts t r ) t t ic . i S i iCCoUrl t t0 e l lSr l re t l l ( ] i l '

cL)rrect pc-rstirrg.

Author i ty for grant i r rg specia l d iscot t r t ls should l . 'e c : ra in ined"

Conf i r r r rat ion f iorn thc custonrers shot l ld be obta ined.

t !

I t rneans t l ra t customer lb i ryer) has the opl iorr e i l l ter to accept f he goods or to

retum them rvith in a specified period of t ime.

Thus, it perlains to sales pending approval from cusiomer'

The auditor should check Memorandum day Book"

Exarnine u,hether on the receipt of acceptance from the customer' proper entries

have been tnade in sales book and customer's account.

The auditor should check that a provision for sales retums has been made

agailst all the transactions fbr rvhich the customer has the option to return the

goods as on balance slreet date.

Clreck the status of goods sent on approval.

All such goods should be irrclLrded in closing stock. However' these should be

shorvn as sales if :-

. ( loods have been forrnally accepted by customers; or

. The time period for returning the goods has expired or rvhere no time

limit has been fixed, a reasonable time period has elapsed-

l .

2 .aJ .

4 .

5

6 .

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s rg J,:!l!,:lg::::!.L!i1.,,"!1'--- -:Lltl'l

11r Goodr on NO.I -E: l t rc icr , , , i . r goor is t i r ; t i ar t : :u i r l h , t l rc pr inc ipel l i t h is agent- to be s i r ld at

\ * L# : - - - - : : - ' : - l _ ' . r i l r ' i n ! ' " . t r t . d .

{$lfglt::'.:ltltrl\tl- r' ' r"!rr Jr "

I . c t ' I t l l " t i r : t i n r ' o i c cs . I - l t e

pc r s t l r l r r ' i . . . i r l t t s i g l r s t l r e goo i i s i s r . : a ! i ed c t l ns i gno r and l l r e o t l e t o r vhon t t he goo t i s l

1 i i i t ( o l l s r l l t r t ' ' t l i : t l r l l e ' l c c ' t t s i g r t t ' cv

r rr, nreirt salc book shoulcl be checked lvith copies o1'

\rc,rrrnt S,rrcs I tu:l ; l : ; , , , :1,, i ' l : . . : : : ] : : l i l , , c(\.\ ; ! . ' ,cc

vSalepr i ce2 ' : ; * : l : l i ' : l ; : , 1 ' l i : " ' ' " t l i ca ls ra te rner t l s i ' e ' 'Accor tn tSa les 'havebeenrece ived

.J,I

. l l rc . rcc, , t r ' t sa lcs s l roulc l be vcr i f led to check sale pr icc of goods sold and

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, ! i tvnr t : ! l i o [comrniss ion 6. Ve r i f_v t l rc l la l ,n tent ot 'co lnrn iss ions.

*".onl,,u,,on , i ' :::ll'i; i[:.lillXl'::::J:::il]rration

between the goods sent' goods sord and

{ ' g. i.,,r,,r" t l iat no profit is b,:,okecl on goods remaining in the lrands of consignee at

l l i ffercnce betn'ccn :

t " os t & i nvo i cc P r i t c, 4 .

\y

Commission

tl,, 5

No profit on stock in

hand

(4) Packages and

Emnties

Returnable 1 2

.l,

IVlclnorand ullr system

rt

Stock rvith cuslotncr

.[,

' provision for loss

g);pCt lSi ) r i r rc t r r rc i l bv l l ie c< ' r t is igr lee '

[ :nsrr rc th: r f t l re d i l tereDcc l re l rvcetr t l re cost & invoice pr ice l ras been proper l l

arl. i usl,- ' i l i tt l tcctlttuls-

C' l re<;k r r l tc t l ter cotnt r t iss iot t drre to consrgl lee

ag,re c l l te l l ts .

is as prrr the consignrnent

: the Ycar encl '

l . Sorr rc t i r r rcs. rhe conta i r rcr i r r * l r ic l r a producl is s t rppl icd to the custonler is

returnable to tlte seller-

Ivlernorarrcla system should be adopted if customers pay for the containers and

returns thenr rvit lt in a stiprrlated i ime as per agreement' At the..t ime of issue'

cristorner's accorlnt is clebiied u'ith tlre cost of containers and credited when they

a r e r e t t t r n e d . s t r c h , . " t ' ' ' t n " O c o n t a i n e r s s h o u l d b e v a l r r e d a t c o s t o r N R V '',1'hichevcr is lor'ver'

3. corrrairrers lbr rvhich periotl specified for returning them has not expired' should

be t rea tedass tockw i t l r t hecus tomera l rda reca r r i ed fo rward tonex taccoun t i ngyear at depreciated value along rvit lt stock in hand of containers'

4 . T h e a t l d i t o r s h o u l d s e e t l r a t a p r o v i s i o n h a s b e e r r m a d e f o r c o n t a i n e r s n o treturned b.v cttstomers within tirne'

e.^*ir" ;^i;; ,;i*;., t;"k ,;i,il ';f.;;; ;; copies of credit notes issued to I(5)Sales returns

Sales return book

vCredit notes

vI lt';ettiorY records

vOther documents

vlintrY in accounts

l .

L

3 .

^

custotrters and inrvard returl l t lotes'

Errsure that credit notes are properly numbered' Missing credit note numbers

should be dul l 'enquired in to '

E n s u r e t h a t r e t u n r e d g o o d s a r e s e n t t o s t o r e s i m m e d i a t e l y . A l l i n w a r d r e t u r nnotes should be entered in irrventory records'

T'he auditor should also examine other records suclr as Retum

and Stores recorrls.

Examine corresponding entry for return of goods in customer's account

inward register I

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-!:Y u i t i t ; ; { } F P U R C I I A S E S

. --.. :, li:ll; l c r : l * t r t l l s

\& -

i u1 ! i , i r r i sa t i { } n 'I'+/

I ' rv re l t : lsc invoice

vRel:rtes tt l vear

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gl1lr; rv.r.{- g<iotls. t ,

!{} : l }{ j t 's i , i r t l l useI

post ing

rl,

r ' u *d i i ' n l ; t I i on

a

A r r < l i i , l t s l r . r r r l r l c l l n t i r r c l i r c i r r t c r n a l c t i t t t t r . r l s v s l c , l t i n l i i i s i t r c a . A i : ; t r c x a r t l l n c

, . , 1 rc t l rc r i i re s r r l l r i ' c t re t : r r l t t l cc | i l t te l t a t t t l to r i sc r l .

Erar r r i r re rc ia tcc l purc l rasc i r r i t , i , : c & pu tch l rse orc lc rs . A lso chcck * ' l re t l i c r : t t l

i r i vo icc l r rs l :e , - -n se t t t t t l thc c t ie r r t a t l t i s r rc r r t t la l b i l s i r r t : ss a r ld ress .

I t s l ro r r ld be checked tha t i t l i r i i : : u i th i r r thc per . i i - . i l t r t t c lc r a ld i t -

Ens t r re t l r r r t p t r rchascs o t - chp , i i l i i : t ssc ts l t rc t -cc t t rc lc t l i l r . i t t t r rna l l r t t c l t t t t in

pttrcl tasc bci ' tk.

C l rs l i l rg .s . . l r ) .1 .a i r - \ l i ' ru i l l . t i r i i i i i i i t ' c l tasc l took i tnd l tos t ings to ledgcrs shc lu ld bcr

carc l i r l l v c l rcckcd.

[ ]1 .surc t l t l t ( io ( t ( !s p r r l c l ruscd r i r ' c t l t ca t r l l i , r t l t t : p t r rposc o f c l ie r r t i t t t t l n t r t l i r r

pers r - r l la l t l : , c ( l l ( l i r cc to r : ; ( r l ( - ) ! t l cc rs .

Exanr ine , en t r f in sa les accour r i as rve l l l t s i t t c t ts t t t t t i c r ' s acco t t t t t to e r ls t t re t l te i r

cor re c1 J , 'os t i r lg .

C.o i r l r rn ra t i t t t t l i r t . t t s t rpp l i c r s l lo r r ld bc i lb ta ine t l -

'E*u,1rin" purit lor" refurrt book t"it l , r. l-"."ttce to copies olclebir ttotes issued

to suppl iers.

Enstrre that a debit t lote has ireen sent to the supplier or credit note from thc

suppl ier has been ieceived.

Quantity returned as per the returrr note lrlust be checked with storekeeper's

record and retttrn outlvard register.

I lxamine correspoltcli l lg ctltr) ' for ptrrchase return in supplicr's accotlt lt-

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2 . I ' r l r " l r t se r c l t r r ns

I ! " r . r :hr :+se ! 'e furn book

.tI lcirit notes

t l ' C r i

Invcu{rtry records

rt'

Entry in irccounts

, l .:: 2 .

1: \\ 0^/,,1't rS9. j

4 .

i). ? TOSSIB[,EST{ARPLY1 'Y-AR

REASONSINCREASES

PROFITTO THE

ON SALESPREVIOUS

WHEN THE RATE OF' GROSS/ DECREASES IN COMPARISON

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I , ' r ictons u'hich . ' l .

increasc gross . ,2.

prof i t , q' r \ 1 , 3 \ ' ' , ' -

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, , r l ( . \ l c \ ' l r ' . 4 .r i

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. j r \ t ' t r \ ' " t " t i l ' t t . 1 ,. ' ( t , l ,

Jr ' , , , ' , , \ 1 i t r , ' ' t \ t ] o

[Jndervaluat ion of opening stock.

Overval t rat ion of c los ing st t )ck.

Change in t l re basis of l 'a l t rat ion of c los i r rg s tock. E.g. where the opening stock

was valueci at cost or ntarkct rate rvlriclrevcr w:ts lower, valuing the closing stock

at the ntarkct price lvhich is higher than cost'

Inclusicln of gootls receivecl on a consisnnrent basis. in the closing stock'

Treatment of goods sent ouI for sale on consigntnent basis as regular basis i 'e'

a f ter at ld ing prof i t margi r r .

wrong allocation oi expenses, e .g freight irrrvard nray be rvrongll ' taken to the

profit and loss account.

No provision or under-provision in the

Account.

expenses account included in the Trading

; r i , .1u cl i t i t t g utr cl ,1.ss ur tut r ' t Ch:1il:- tr

{b) Fa-etors n'hiclrdccreasc i i rcgross prortl :

L t [ ' r ' , - " ' . , r , . { ? ' , , . ' l ; \ \ ' .

, a . . ' J - ' ,

z : .- _ .Mr . . l f , ' : " - t U (

b { n \ . t * \ v ' { . * , , ( i r t l r , , ' { r /

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L) ' " 'e r r a luat ion o i - t l ie t ipcrr ing stock.

Unr ler v i r l t ra t i r :n of ' c los ing stock.

Change in basis o1- valuat ion o{ 'c lo :s ing stock. For exarnple where the c i r ' l i rn i rs tock *as valued at cost or rnarkct ratc *h ichever was lo lver , r ,a lu ing the openingstock at t l re nrarket pr ice wlr ich is h ighcr than cost .

Antotr t t t o f 'got tc ls pt r rc l rasecl in the previous vcar . which rvere phvsical ly receivcdin t l r is tcar . inc l r r t led in the purchases of current year .

Rcversii l of the fictit ious sale erttries recorded in the orevior.ls vear to bor.rsf itrepro l i ts .

Excessivc provision macle fbr wages and other direct expenses"

Fai lure to accourr t lbr goods sold .

Fai lure to take c ledi t for the amount of an i r rsurance c la i rn in respectof good: d, . r l r

in transit ol clcstroyed by the fire.

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4 .

5

6 .

1 .

I t .

5.8 VOUCHTNG OF LEDGERS - Summary of procedureq

l Bought ledger

tr.r,, LL"':. ,r

2" Sales ledger

; - ; ; ; ; ; ; ;

l . I lxamine the internal control system in this area" .I (

2. Trace the balances ofcreditors' account. \

3 . ob ta in con f i nna t i on f r o r r c rec l i t o r s . f 7 f ; 1 r ' 11 r '

1 i 11n 'd l rD r4

4. Examine various transactions of purclrases and purchase returns.*) I.,,.1f ' 'p no tc .r< ' J

5. Examine transfer entries arnong ledger to ensure their correctness.

6. Examine accounts, lraving debit balance as it utay be due to advances given to suppliers"

. l . Exanr ine t l te in ternal contro l system in th is area. X L:: 2. Trace the balancc of debtors' account. DeLtl 'r n\ le

, ;. OUtuln confirn.ration frtxr debtors. trt*"1"'t 'r l {or'\ t *- ' i6\istn

, 4. Exarnine various transactions of sales and sales ,"tu.r,r.-t C-lx*$,t 'nC ,l.e.ra \ev' ,!5'., cJ

, 5. Assess the adequacy 'of ba{debts prov is ion-

i 6. Exanrine accoulrts havirrg credit balance i.c uhen advance has been received front; cr-tstomers.:: l. Exarnine whether balances fi 'ont cash book an<l other subsidiary books have heen

, transferred.

I 2. Examine all these books to ensure about their correctness.i

: 3. Trace the balance of ledger accounts and examine their arithmetical accuracy"

. a. Anulyr" the balance at the 1'ear- end.:, 5 . Ensure cotnpl iarrce u ' i t l r recognised account ing pr inc ip les.

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Chapter ! 0

ContpanyAudit * I t

i,ocnuoN oF- RooKS oF Accloiii'ir lSec. 209( l ) and (2) l10 .1

tIflaCdJCJ

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ConditiortsLocstion

l . l {e gisteredoffice

?. Anl ' other place

3. Branch office

eir trr" toott,rf i iccottttt Juii ft itpf tt tlri registered office

itiri in tnit, '

All.,r. o'ly of rit" books rlray be kept at any other place in lndia'

Boartl . .I.he

Btlarci nlust paSS ir |esoiution acccrrding approval to keep the:',

resolttlion books at such other place'

: nniii,rr"or"nt, ' ' ihe Board resolutiorr rtrust specify -

1 of 'Board

(i) the nature of books to be kept at such other placc; nnd' resoluliott ( ii) the tull addrcss ol'sut'h other pf ace,;- -.-.... ,....-. :, Notice to : - irl"

"onlpu"y shall give a notice to the registrar.

1 ,"girtru, . *:,il:::

shall be given within 7 dctvs of passing the Hoard

, , 1 - - ' :' : Natureof books, Alt ttre Uooit of account iri respect of branch office may be kept at

I , SUch branch office'

, Duties of the . t"l ift" t'i"""tt oiit"" ittuit prepare up-to-date summarised returns'

i ",;;;;;, ior

:i;,;',;:;,,:t,:::i;:i,X;;iaration or a'v two su'|nn'1arized retu'lns

: :' , (c) The summarised returns shall be sent to the company (at the

, '-'

re gistcred ofTice or at such other place where t'e books are kept)

i t"itl ' ' in a reasonable tinre of compilation of the returns'

ISec. 209(l)]io.z coNTENTS oF BooKS oF AccouNT

Natttre of books to

be kePt

er"f .o*pany shall keep books of accoutrt u'ith respect to -

(a) receiPts and exPenditures;

(b) sale and Purchase of goods;

(c) assets and liabil i t ies;

(d) prescribed particuIars relating to cost incurred

items if-

on nraterials. labour and other

manufacturing or rninirrg;(i) the company is engaged in production or processing or

and

(ii) an order for maintenance of cos*' records is made by CG'

t-

1 1 4

I 1 5

.} 'H.(,[ 'ER IX)OKS OF ACCOTIN'I ' ' [Sec. 209(3) ilL).3

i l

l i . '

2t,9(r)

' I rue t t t t t l - f i t i r t ' i t 'x ' ' I hc huokr t t l t t r t t ) ( ' l s t lpnrcss an ' , l r r r ts lc l i , r r r .

. The hot lks r l t rs t n() t cot ) ta in anr . f lc l i t ious t ransact io l l .

Accruul hasis oJ C--ash basis an,.l IJrlhrid systern ofl rnaintenance of books istuccounting prolribited

Double entry Single entn,s)stcr t r o f 'nra intenancc of borrks is prohib i ted.syr^lenr :

' l : t i l r lRVATION OF BOOKS OF ACCOT-rN] ' ISec. 209(aA)l

. hJot ,ks r r l accourr t t i , r S yc i r rs inr rner . l ia t , r l r f r " . .J ing th. l . r , r r . , ' t ve i r r s l ta l l h" nra inta in"J.

," ' l-!1i , r ' i :: ' , ' ;nt vcluche rs shall also be pre sen'ed.

t{}.5 ANN[IAL ACCOUNTS - LEGAL REQUIREMENTS (Sec . 210 and 2 l l )

L,rr'] r11l{ {ii ', Duty of loying of lt is the duty of the Board of direclors

ankriln! accounts , unnual accounts every AGM.

; r i . i t r 4 C M Meoning of annual . (l') B/SgccounlS ( i i ) P&L A/c

to lay the annual accounts at

Reqttrrements of : B/S

!3/S:rerd I '&L iliit: :

{ i) The B/S shallbe in tlre sarne form as set out in Part I of ScheduleV I .

(i i) The B/S must comply rvith the 'Notes' given at the end of Part I

o f Schedule Vl .

P&L A/c (i) No form has been prescribed for F&L A/c.

(ii) P&L A/c must comply with the requirements of Part Il ofSchedule VI.

B/S trnd P&L A/c B/S and P&L Alc must sive a true and fair vreu'.

Er' iy lanq: ial year ' Meoning of FY

Msximum periodof FY

- The period for which P&L A/c is prepared is called as FY.

. lt may be more or less than a calendar year.

i ' FY shall not exceed a period of l5 months.

:: r But, it may exceed upto 18 months with the special permission of, resistrar.

Cn""g," tj iifrom year to year

. The Board is empowered to decide the period covered in a FY.

. The period covered in a FY may be different from the period

n"'pforiniiity

, i covered in the Preceding FY(s).:: Same persons {rE responsible for preparation of B/S and P&L A./c as are responsible for

i maintenance of books of account.

Chap. tD..ltrliting ond At.t ut :ttut

l1 ' . . }

(Sec, ?1tr tnd22i1r t l II U . r r ACCCf l ' l '1 ' l l l { l

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hle;rning of

i tcc0untingst:rndart ls

Duties of the

c{inlJ}ai ly regat.( l ing

AS

(Sec .211 )

Dut ies of the audi tor

rcgarding AS (Sec'

22',7\

' Reasotrs for cleviaiion:

. F inancinl ei ct due to deviation

. iS, nrcalls t lre stanclards of accourlt it l !- l rccoitlmended bv l(lAl' as rnay be.prescribed

by. C(i "f i..

.uu.r,,t i .t iun * ittr Nitic,rral Ailvisory (l.nrr' i ttce on Accounttng

Stalrdarils' "--:r-^'r 1-' ' r-rl thc sl; specified by the ICAI

' [- lnri l hS are prcscribed b}' CCi' t lrc standards of accounttng

sha l l bc AS .

Cotrwliuttc'e n'ith Evea'colnpally slrall cornplv u'ith AS'

j.t

Disciostrrc itr clse ' Deviation ticlnl AS:

of non-complfunce

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ift" ou,i,ro. ,f.l"f f ""i"

n' tt) *'tt"ttt"r the P&L A/c and B/S comply with AS'

l f t h e P & L A / c o r B / S d o e s r r o t c o r n p l y r v i t h A S , t h e a u d i t o r s h a l l q u a l i f o t h e a u d i treport

(Sec. 217)

TO.7 CONTENTS OF BOARD'S RE'PORT

Contentsspecified u/s

2r7(r)

i (a) The state of the company's affairs

; (b) Profits proposed to be transferred to reserves

I (") Dividencl recommended by the Board

(d) Material changes subsequent to close of FY'

Disclosuresrelating to

conservation of

energy etc.

Changes during

the financialy€ar

Conservatio n of energlt

TechnologY absorPlion

Foreign exchange earnings sttl' oulgo

Nature ofdisclosurerequired

i Nature of, disclosure, required

,

bisclosure of

particulars of

certainemployees

: Change in -

(a) natttre of the colnpulny's business;

. (b) comPanY's subsicliaries'

: i"l nature of business carried on by subsidiaries of the (olnparry;

i (d) generaily, in lle

cllslet "T,":]Ttt,r1 whlch cor"r'1"v hl* "n

t"lol-*

- - a * - - - - - - ' -

, Designation, Remuneration' Nature of duties' Qualifications and

, experience, Age' i"ti "-Of"Vment'

Nature of employment' Other terms

. and conditlon', p"iJ"ntufJoi"quity shares held' Whether the employee is

i a rerative of any di;";;;. *unug"r. This is required for those employees

: getting ,ul^ry *o'" than specitic amount as described in The cornpalrles

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(. ' r t : ' t i ; r t t t l ' r l tr , i i i - i I

- f l tc c l i rector .s shl l l : j {a tc as to r l l te t l ler thc i 'havo cornpl icd rv i th AS

irr ea-cc t, i tt i t i i ,criai t icP:trtttrcs- t irc t i irectors silaii givc proper

e xplarration fbr l l tc sii l l le.

T l rc c l i rcct t r rs shal l s ta ie as t i i n l tc thcr t l rc rccpt t t t t i r lg pt l l ic ies -

. havc been consistent ly appl iec l . r r i t r l

. ttse.tl hv thern arc rea-sortalrle.'I 'he

clirectt,rs shall state its tt l tvltctl ier 1hc jttt lgnlents antl cstimates rnade bY

thetn arc -

. rCitS()l l lblC rnd prttt lt. i l i . rrrt l

' u ivc a t r t re at td f t i r ' "

icr ' r .

i 'hei elirec,t.rs shall stutc as io tvhether tltel had take' pr.l lcr care for -

. ttrc mitinlenancc of a,Jeqtraic' accounting records in accordance rvith

thc prov is ions o l ' t l r is Act '

. salegtrartl ing the assets of the company; tzzd

. prevcnting and detecting fraud 1nd othel i1e-gllarit ies,

t '- -_ . : '

Going concent i The Jir;;tor, ,ttoit ,tote as to ,vhether theV hlve aclopted the assumption of

l l7( _ [ : r p - ! '

l ) isclcqt i rs i ' t

i ;rl: 'q

! i i t ' ; . ; i i l r iY* ' i . : J , . r \ 1

[Sec" ?1?{24{ ) ]

I {s : , , r ' l . : i * ; '

lt(!!! .rr cr ilr. p'ttltion

of bt rvFrack

cot l i r , 1 . : t [ ts on

agditt,l]:1 IeI)9JI

;lct:tttttttittg n

- - . - - . - - t - - , r , -. ' . r . , . ( | . . ' . r ' '

AccotuttitrgpoIic'ies

Judgmants urd

est inrutes

I'roper ond

sufficicnt care

:, Assritption tgoing concem l'lr]!eqenatlnq :'nlllll 1-t"9!".tt::-. -,--. : .-j .--E;;t buy_bnc[ should be complered vt' i thin ]2 ntonths front the date of Passing

every reservatlon,

lh;

resolution for buY-back', If a buy-back could not be complcted r.vitlrin the specified period of 12 months' the

i Board shall disclose the reasons for the same'

. 'fn" g;"iO ,nutt giu" frfi"ii infot*ution ancl expla'ations in respect of

, qualification or adverse remark contained in the auditors' repofi'i .

i:incur,nTloN oF ANNUAL AccouNTS, ETC' (Sec.219)10.8

N*t - i ; l t : t t l

dtlcsttnentsrequir lngcircul*tion

: (a) Balance sheet

: (b) Profit and loss accounl

Persous cntit led to

receive annualaccounts, etc.

SnpplYing of

annual accounts'etc. $n dcmand

(c) Auditor's rePort

(d) Every other docuntent required to bc annexed or attached to B/S

The above documents have been refened to as 'annual accounts etc'' u/s 219 and220.

(a) Every member

(b) Every debenture trustee

(c )A l lpersonsu, l roareent i t led torece i r ,e t l renot iceo fGN4,e .g . ' theaud i to rs .

Who can demqnel the . (a) A member

annuol sccounts, etc- (b) A debenttrre lrolder

(c) Any dePositor-

iti; ";;.il;y

iii.ri i'pptv the annual accounts' etc'

: - free ofcost

: - 'tvithin 7 da,}'s of demand'

, Consequences of . aLU il direct the company to furnish the annual accounts' etc'

Duties of thecompany

de1auft

lut{it i ttg (nd Assurlncc - -{.!9:-Ll1 l t t

tioll , \T IN ITORS WHI I .F - F',XAMININf: C[',RTi\Ii\,i1 i i . {) ( , ' { )NSTnERAT'tr{}NS

IiOCUMEN'I'S

( l ) &It : i i torandttmof Associat iort

;i;i' iil;;;;;^t' i' i"i*"J. rfd"il',;; ti'" po"'"ii oiit'"( i t l t conta ins the ot r jects lbr

coll lpan)'.l i i )

N(

( iv )(r')(v i)

.:.P.

( i i i )

I t shal i conta i t t f t r l los ' ing c lauses:

. Nat t re c lat tsc

. Si t t rat ior t c lat rse' Obiect c lat rse. l - iab i l i ty c lause' C,api ta l c lausc. Associat iorr (Strbscr ipt ion) c lause

I t shal l be. Pr intcd,. Divided into Iltrt lbered paragraplr &

' S igned bY st rbscr ibers '

Auditor sho'ld clreck rvhether MoA contains all the required intarmaiiorr

I les l rouldcaref t r l lystudyvar iouspowersofconrpanyenl is tedi r r lv l i . . )A '

while checking transactions/ contracts entered into by the conrpany, he should

ensrre himself that tlTSTry !I3:n!15:(1,":: 1-"!!-911"! !y"-Y9n )

(2) Articles ofAssociation(AoA)

(3) ProsPectus

( i )( i i )( i i i )

AoA ;;ri;iiN iiir".i a i"drutions framed by rhe company for its Qrvtt g,overitanu{

AOA rnust be signecl by the person who have signed the MOA '

For example it contains the following:

' VotinB rights of trtembers;

r PowerS of Directors;. Qualif ications of Directors;

' Conditions for making the call;

' Provisions regarcling maintenance of accounts'

( i v ) A u d i t o r s h o u l t i " o . " t u t t y s t u d y t h e A o A & n o t e i t s i m p o r t a n t c o n t e n t s i n h i swork ing papc rs . r : . - - . r r - . - . . r ^+^ t -

(v) He should pay special attention to its contents which directly / indirectly relate tt'

books of accounts and financial statements'_ - _ _ _ _ - _ _ - ^ , -

- - , . - , - - ; r . : - - - . , - - - ^ - . : ^ : . . ; : ; ; ; ; - ^ ,'

comPanY's sharss orlit ii ;";;t un in"iioiioir to- the pubtic for subscription to

debentures' '^^"i 'orl r^ ic.re nros l ie' <lf 'prtlspectus

A public colnpany is required to issue prospectus/ statements ln

beiore rnaking allotrnent of shares'

It contains tenrts & conditions rv'r 't ' issue of capital '

I t r r s t ra l lY co t t t a i t t s :. Details of atrthorisecl' issued, subscribed & paid up capital '

. Whether issue is at par / DiscounV Premiunr'

.Pa r t i cu la rs rega rd i r rgunde rwr i t i ngcommiss ione tc .

' Up coming projects of the company-

(v) Auditor should carefully study all relevant conditions listed in the prospectus"

(vi) He should also check ,"q.-.i."*"nt of CARo (End use of money raiscri by i:ublic

( i i )

( i i i )( i v )

issue) .

t

( - -h lp. t r { l L' (,ttr!tttrt\,,'i bL! i | - | l i l9

! {}, ! O ,, ' " 'ryIT' A F SFTARE CAPITAL

\ 4 " 1 Ki* r t $ f shgre

cap i ta l

Ccne ra li ' r I , ' ' i | : t i : l : :dt ions

* , i i t , ' : t ie l i t ing

shre e { :api tal

t i t Ar i t l i { of shares

iss**d for cash

( i ) l ' rc fercnce s l rare having pr .c fcrcnt ia i r ig l t ts i rs to-' Pal 'ment ot ' t i iv idend &. Repavrnent of capi ta l

(i i) [quitl share i.e., share others tlrarr prefercnce share

( i ) Au t l t o r i sed / ' ' M . * i , t , , , , t t , , n ,u r , i t u t ' . " p i t , , 1 .Regislercd sharc ' Set out in lr lOA.

' r 'opitrt l . Wlrich can be issuetl by thg sqrrrrpany.

(i i) Iss ued & s ubscrihed ' ' [ l tat part ol- authorised capital,

shure coJtitrt! . Which has L'cen actually allotted by thc contpan),.

(i i i) Paid up slture copital , ' - l ' lrat part of strbscribt:d capital,

. For which rnone-v / o ther considerat ion,

. ' I las bee n received by the cornpany.

!

: ( i) Authorisecl capital should be verif ied bv examining N4OA & audited financials tatcrnents of I l te prer ious \ car .

:1ii; lssued & subscribed capital shoulcl also tre exarnined by referring to last years

: audited financial statements. MRL should be obtained regarding non-issuance of

: capital in year concerned.

I (i i i) In case fresh issue of capital is made in current year, following should be considered:

' . Conditions w.r.t power of cornpany to make fresh issue & compliance of same.

. . Corrditions rv.r.t minirnurn subscription (909'. ' of sltares offered to public). If

. minimurn subscription is not received u,ithin 120 days of issue of prospcctus,

money received has to be refunded to applicants.. Wlrether apolication money received by company has been

bank account.

i ' Whether application money payable on each share is not

: nominal value of a sha.re.: r Paynrent of brokerage as per rates stated in prospectus.

. Special provision for share issued at premium or at discount.

. Compliance with guidelines issued by SEBI in this regard.

I. Stage-I ; (a) Test check a few r:riginal applications received rv.r.t entries in

Application : application & allotment register.

. (b) Examine noney received with corresponding entries in cash book.

, (c) Examine letter of regret in case sum is refunded to unsuccessful

aPpl icants.

. (d) Check correctness of accounting treatment in share capital

account.

; (e) Examine arithmetical accuracy of totals in application & allotment, Resister.

(3)

kept in separatc

less thatr 5o/o of

-l u, I i t i rt 1: t urcl4 s stu' qnr: e Chap. 10I l { }

tI

J

tCCC||

eCt

tCC!CC

CCttI

I

t

I

aI

I

I

tI

I

I

II

I

I

Stnge-lI, I I Iotttttttrt

Stuge-IIICalls

(a I F.xar.irre ,,, ir.rut. Ul,rf, "i

,t i ..,,,r., i ;. ' ;;; i"g * . i "ri,.t,- '"nt .,f

shares.

(b) txanr i i tc le t ter of a l lo t rnent sent to successfu l l appl icants '

{c) chcck rvlrether mone}' received on allotnlent has been

appropriately credited to sharc capital account.

(d) 'f 'racc

relevant entries in caslt book /bank statements'

(e) EnsLrre appropriateness of accounting treatment on allotrnent.

(f) Ascertl in u'hether sltare certif icates ltave been dclivered within l

ntottt lts of al lotment-

(g) Ensure t!1at return of l l lotment h,as be3n lled

wlth ROC:

ia) Exanrine minute book of director's rneeting to check resolrtttqrn

r r rak i r t ! r 0 ca l l .

tb) Test clrcck sorne call letters rvith reference to calls register.

, (c) Exanrine amount received on calls with copies of rcceipt issued t,;

, shareholders.

. (O) tro"" rclevant entries in cashbook / Bank statements'

, (e) fr*on.,ine rvhether share capital accounthas been properly credited

t D In casc o l 'ca l ls in arrears. exant ine appropr iateness of d isc losure in

r balancc sheet.

, (g) Examine calculations of interest charged on calls in arrears.

, (t ' ,) g*"n.ti.e schedule of calls received in advance to ensure its

, accuracy oftreatment in books ofaccounts'

(s)

I

- : -Audit s15h21s5 ; (a)

issued for

,1! _lxaline c{9ut1tion oi tu1":! P3.1d 91-:{Eil1dya1c1Sfrr."i *"y 6" itiu"O io iinJ"t*titers towards payntent of underwriting commission

or to promoters for sen'ices rendered by them''nrus.

auditor should exanrine relevant contract entered into with such parties'

l lxarnine Board resolttt ion to issue such shares for non- cash consideration-

Ensure appropriateness of accounting treatment on allotment of such shares"

considerationother thancash

(b)

(c)

(d)

(e)

NUOTT OF SECURITIES ISSUED AT PREMIUM (Sec.78)10.11

No condit ion for

issue of securit ies at

Drenr ium

Ut i l isat ion ofpremium

N; t;r;;i;;i i, i"q,,ii"J i;;h" ;ni"t;; io ir','" rhe securities at premium.I

I The Cornpanies Act does not prescribe any restriction or condition regarding issue

of securi t ies at Prelnluln.

Auditor should "n.ui"

that ihe premiunt is tratrsferred to the'securities Premium

Account'. Further he will also ensure that the 'securities Pretnium Accourtt' is r-rscd only

for the following Purposes:(a) lssuing fulll 'paid bonus shares'

(b) Writing off the preliminary expenses of the company'

( c ) W r i t i n g o f f t h e c o r r r r r r i s s i o n p a i d o r d i s c o u n t a | l o w e d o n i s s u e o f s h a r e s o rdebentures of the contPanY.

providing for the premium payable on the redemption of any redeemable

preference shares or debent'.rres of the company'(d)

i

; (e)

\

For buy back of sltares-

( ' r t t r t J t 11 t11 ,1 u r l i t - I I 121

{Sec .79 )

,t \. i l :tres ' l 'he

sharcs to be issrrcd at a discount rrrust tre lottg to a class of shares already issued bl thc

, \ r r t l i t . ' r s l to t r ld ensulc t l r r l ( ) rc l i r r rn l icsolut iorr is passe. l in Certer l r l Mcet ing i r l . l i t

specif ie s the rate ol-cliscotrnt at t"hlcf the sll i l '-s sltall be issuecl.

Audi tor should ensure t l ta t approval of the Cl-B has been obta ined'

F1 { : { run t

iua;to. shoulcl ",,r,,r*

that rhe sha,.s l laie becn issued vt' i thin

sanct iorr of t l re Cl-B. l lorvever , the Cl-B rnay extend such t ime.

i,,ditor rno"fa.fi""i that the marirnt,,,, ioi".rf cl iscount cloes not exgegel-L0?6. Howeler.

Cl , [J r lav sanct ion isst re of shares at a d iscotrnt exceeding l0%o considcr ing the specia l

circunrstances of the case.

Auditor should cfieck that at the date of the issue. at least I year has elapsed since

the date on which the cotnpany was ent i t led to commence business.

ri inourJ uiio u" "*ui.r,in"J

tr-r"i tir; p;;;lr;;aut ."ntnini pu.ti"r'tiu.i of the discount allowedon the issue ofthe shares.

i '

; l ir t ' ,..

i ea r

Disc '

$ i ; i \T]DIT OF ISSUE OF SWEAT EQUITY SHARES : (Sec.79A)

r l " t t i : l c l i 'sweat

r i r t l { , t ! {y snares

\ : , i x i . . ' t "r f shares

' \ r ; , ' 1 . ,1 ; "g : Of

r i lr* lu{ion required

' i iNr l lany must'i :(lmpleted I

'Sweat equity shares' means equity sharesissued by the company to the

: enrployees or directors -

, (a) at a discount; or

. (b) for consideratior.r other than cash

, for providing know-how or making available rights in the nature of intellectual property

, rishts or value additions, by whatever name called-

I Auditor should verify that the srveat equity shares belong to a class of shares

ar 19ady jpeg! _L)11f19 corl, pa n)'.. It should be ensured that Special Resolutlgn in this regard is passed in General

Meeting.

Further ensure whether Special Resolution passed by the company specifies the

[o l lowing par t icu lars:

(a) Nurnber of shares

(b) Current r r terkct Pr icc '

(c) Considerat ion.

(!_) _ lhe 9la::_ "1-giry-:jo.:- 9. :llqjov"es 19 1.!rom l'-! -"q-'g 'Ef: :E!!-b:j:":l:d,

. - *qr l f r l iance of

Rules

nrJii.i-*iil t;;if-y tlrat at the date of issue of sweat equity shares, at least I year has

elapsed since the date on rvllich the company rvas entitled to commence business'

Listed companies

Anllsted co;nfanies

- n"J,t"iirit"iJ "tii"i"

tr,"t ttt" *gtr"tio"t "-r"G uv segl i;

th is behal f have been compl ied wi th.

Auditor slrould ensure compliance rvith the rules prescribed

by_ Cenly I G 9n " Il1_T"nt

Auelitins artd Assurance Lhap- tu

tI

Auelitirtg and Assurqnce -=-- Chap' t0 ;122 _

i_i"l*--l l"i ' : ' " ' ""' ^-'^- ;i 0 " i+ i r . t , r r i l -OF t t u Y - i tALK u [ SHa t tES (*" t t -) C

Srrrf rcr,s r,i tl,ro back "r'li:,::::,,::::'X!,li''i'"

, i - lrree rcserve, t

' 2. Securities Pretniutn account ;

, l. Proceeds of freslr issue of shares I

I lorvever, the buy-back shal l not be made out ofthc proceeds olan earl icr issue

'oryer in articles : i,,ai;;; ;i l i l ensure rhat the buy-back is authorised by the articles of the contpany I

,$p, , 'c i : r i , *nu, l . , t ion i i . ;sp"" i " in" | . i " . i " - " " i i , " ; i ,Gih; ; ; ; ; " ;k ' , l . ;

Linrits 'n buy-back by : , iuJiiur. should verify rhat the buy-back doesn't exceecl 25o/' of aggregate of paid f

passing SpecialResolution

,, . Auditor should also ensure that the buy-back of equity shares in any FfY dries nctl C

, exceed 25o/o of its total paid up equiry capital in that F/Y' !

Debt_equity ratio I auditor should check that the ratio of debt owed by the comparty must not be morq a

, t h a n N v i c e r t t " u g g r " g u t e o f p a i d u p c a p i t a l a n d f r e e r e s e r v e s a f t e r s u c h b u y - b a c t c ' E

St ur"* *,,rt n" f"n' .i;*;l,t;;;;;ft;;;tii"iir'"'t'"'";ilil1;"r' "'" i"irv p"iil;' -

C

, . ; ; ; - r i * i t ro , : . ' ' n "J i i * ;h ; |d ; ; ; " k ; l * .h " ' ;F ; ; k ; ' ; " ; ; i ; ;w i th i r tcompletion of buy- . date of passing the Resolution'

tlack i r If buy-back is not completed within the specified period of 12 rnonths' the Boarc! t

Declaration of : AuditoruftouiO cnsure that the "otpuny

files with the Registrar a declaration of

solvency , solvency .ru,ing ir,ui it *itr not be ,"nd"r"i insorvert within nixt r vear. I

Extinction of shares ; Auditor should ertsure that the company extinguishes and physically destrc

bought back

rES ' ,no.", u""ghrback within 7 days of compretion of buy-back. e

Prohibition of furthe. A-uditor rvill also ensure that the "";p;;y

does not rnake further issue of the same kind I

Register of shares i A;Jti;, *iit "n.ur"

that the "o*funy

mainrain a register conraining the foll.wing

hought-back ' particulars"t

"""tto '. '". "', t

. (u) The shares bought back; I

, (b) The consideration paid for the shares bought-back; I

:] ;::::::::::i:H,l"l*,,"a,,v des,r.ving.f shares r

il\ * ?otoce w RtlcuE t5t lorv"^91 fu\V*d{r

lF ilLL,s,r^'x) li[&- **\:":'/;tDobr 1.4:

2 LcnoftN\'ar lTh;:l:"**hc*t l>:W^ont

it i.. ?nr,nn o,:,

ir,... | ?t" E ̂ n* ''

on-i-\ ch :b {),ro*rar \b*s\ru L r (l I

-l

{ ' o ntytt t t t l ' , ludit - I I r 2J

, r . . i ,e :1 r t ca l l s

1 t ' i ; r 1 ' ; r ; ; i i \ a n c e

r r { i i l t . . r i g i r i r

Audi tor should c l rcck *hether po\ \ ,cr is sp<:c i f ied in the ar t ic les tn " l .epfthc uncal led a lnount orr s l t l res.

' A conrpanY mav pav interest on calls paicl in advance.' I-he intcrest shall tre paid at such rate as ntay be specified in the articles' A colpalll can pay- ilterest (@ 60/0 per annunr.

A t t t cmber i s t r o t e t t l i t l cd t o an r vo t i r r g r i g l t t s i r i i " i p " . t o f ' c l l l s i n adv l rncc)

)\ , ' - [ i I . } I . I "OF CALLS IN ARRtrARS

Verify the amount ol 'calls in arrears tiom tlrc share register

' i r i ! - r

[ ) i :c iosure

[]:<amine AOA to ascertain tlre company's powers regarding:

(a) Interest chargeable on calls in arrears.

(b) Forfeiture of slrares for non payrneiit o{'calls.

Vcr i l -y compl iance wi t l r AOA for rhe in lerest chaiged.

- E.r rs t r re that ca l ls in arrears havc been d isc losed as a deduct ion l ronrcapi ta l on the l iab i l i t ies s ide.

. Ensure that separate disclosure has been made in regard to calls due(a) Directors and(b) Others

the total paid up

lrom:

ir i . r '7 ATJDIT OF REDEEMABLE PREFERENCE SHARES (Sec.80)

)

)

)

)

)

)

I)

)

)

)

)

If,III

l r

t .' i l

i ,

r!' preference : Auditor should ensure that the terrn of preference shares shall not exceed 20 years.

Ensure that the articles of a company authorise it to issue the preference shares.t ' r in art icles

,a id shares nuJitor rfio"iO "tr""[

whether the preference shares to be redeemed are fully paid up.

\ i ; . t ' i t s O f

r c t l e nr ption

I ' r ' r n r i um payab le onr- r t lentpt ion

, E,nsure that Company has uti l ised:

Auditor should clreck that these have been redeemed

(a) out of the profits;(b) Out of a fresh isstre of slrares

; (a) Profits of the conrparry

)

T)

tI5bb

(b) Securit ies premium account

, . r r t r t ! l l . - i {R . (a) Creation of CRR is mandatory, if preference slrares are redeemed out of profits.

1 (b) Amount to be transferred to CRR : Nominal amount of preference shares redeemed

: by the company. Auditor should check adequacy of CRR.

\ , , t i ce to reg i s t ra r Auditor should ensure whether Company has given notice to the registrar within 30duys of redernption ofpreference shares

C \ , . . \ . .

olQt'r

pvu".ir.trtr,kt|'tu^hu tu-A'vb*^5S'Y

AO A

-rgL'.tWn;u\cr ) ft"lit

[t.I*.Slt*

f,,-f c K.2 Now\\ai*4fu

ft. nayf."n

t 2 { ,1ud ilirtg ontl Assw'ancc

' jAd h r\1 elr'\ T,lttr.l'.*ilt'ltv tlr,'rtr,''llii

IO IR , { I ] I ) IT OF ALTERATION OF'SI{AITE C,{PITAL

AOA

OR

I\€inutes of Meeting

Certi f ic:rtes

[;rt imation to IIOC

Disclosure

, Ver i fy . t f ia t t f te a l tcrat ion is aut f tor ised by Ar t ic les of Associ t t t ion,

. frlr1,." t l lat the altlration

1, t l '

"n Ordinary

lesoltlf on at a General N'lecting

' Inspect the minutes of shareholders authorizing alteration'

. Inspect t lre rninutes of Board nreetings for Director's Resolution oll allotntent

. corisolidatign, conversion or sLrbdivision passed ptlrsttallt to the resolutiorr of lncnrbers: -. t *nnrin" the canceiied cefi if icates, if any, and agree tlre satne with qounterfi i i ls ol"ncr*'

cer t i f icatcs issucd.

, A,irrur" tf iat necessary intimatiop [.ras beel sent to l{egistrirr of Compenres.

. V.i ifv thoi ih" share capital, as altered, is correctly disclosed in the Balance Sheet.

1t,.19 AUDIT oF REDUCTION oF SHARE CAPITAL D l-,

(

(Sec. 100 - 104)

Power in articles Sp""if," piovisiou in articles is required for effecting rcductionof share caprtal. Thrr:

Spcciat resoltrt ion

Auditor should studY AOA.

Ci'""r.,"t'"ti "i sn il;b;; t;;;J ut ;il'lo*punv'

sanction of court , gnru." that Conhrniuiion oi court has been obtained before effecting the re<Juction of

r;o*", oic;;;, -_ ;t#.5x,"*lg;1y:H#a::*,.x* ;;;;;d'ai'lr'e "'a n*r'o 'o*"

Registration

-.-E;;i;e wh_ether company has delivered to the ROC:-

I tul a certified copy of the order of the Court' and

(b) a ccrtified copy of the minute f!Pf!""-9,P=lF 9tt-{: -

Ilfiilil; ,l;;;i- -"

: A;d;i;; triJr [""o,ne effective oniv on registratio' of the order and mirtute ' Thtes

, examine whether ROC has registered the same'reduction : "^-"""-

10.20 AUDIT OF FORFEITURB OF SHARES

;--n,,aito. iL"rrJ "h*r.in"t

rp""in" pr*iilon in the articles is given for this purpose't . Authorisation

f_or lorfeily19Legalrequirementsfor forfeiture

. Also the articles must be studied to check grounds for forfeiture of shares"

, Groundsfor , . b;;";"iit; foii"itut" is rnade on the ground of non-paytrrt:ni *f a

, forfeiture cal l .. However, forfeiture is also possible on any bonofide groun'-l

: contained in the articles'. - , - * ^ l ^ L , , r L , ,

Cull made A;J,t"r.f;id check that a valid call have been made by rhe company.

O" fV i f theca l l remainsunpa id , thecompanyproceedfor fo r fe i tu reo f: i shares.=

N;i"" i" -

i n"OGi should ensure that norice of forfeiture to the defaulting

, forfeirure , shareholder is given before effecting forfeiture-

1-R"*t;ii;;i;;.ih" th;"t ituJ fotfeited only rvhen the Board passes a resolution

t forfeiture , effecting forfeiture' Auditor should examine the same";:- --:--..

t l ! : ' rp . I i ( ' r tniy;11ry .4 tkl i l - I I

! 0 .11 { ' r " : ' { r ' }1 \ ] oN sHARn, CAPITAL

! \ i r ; : . l i . r 4

I r l : ; t l 1 l - '

! t , " r r , , : r , ' - t : r ( ; i

:, An optiop oil shares arises u,lrerr a person has acqrrired a right under an agreernetrt ri i th

lhe cornparry i t 'hc so chooscs.

' Option on share capital generall,v arises tlnder the [ollolving circumstances:-

, (a) tJlder the promoter's agreenrents. subsecltrentlv rati{led by the corltpany:

1 (b) Col laborat ion agrcenlc l l ts ,i

. (c) Loan agreetnerrts:

i (d) Debenture deeds:i

, (e) An agrcernent for convcrtible preference shares;

' (f) Employee stock option schcmes'

,; ir ;-"p";t ;rror"s "-iigr,i

ni,rptio" i" '"tp".t ;f i;";;;; J"u""t"i"i, it slic'Lrla, obtain:-:. (ui APProvalof CC and

; (b) Special resoluiion in a general nteeting.:r. Ensure compliance with the Schedule VI of the conrpanies Act.

i I I . ' r 'tAllE TRANSFER AUDIT (Sec.80)

Not ice A;";;;i;;dh";;ti;"s \^,ere sent to the transferors and, in case of joint -holders, to

each of the holders and the objections, i l any' raised by them, u'ere taken into

consideration before the transfer were registered'

r*p""t tn" ",ti;l;r;4";;;liution unJ ";i" ih;';;;iti"'ii"i"ii[i; ;h;;;;;";'i;; ;'s

, for- of transfer, time limits by articles or by law, issue of share certificates etc'

Revierv the intemal controls relating to recording of share trans

i E;t";;""*pf i"""" *ittl ttt" provisions of section 108 to section l08F of the Companies

i Act.

Examine each share transfer form and consider whether:

. application for transfer has been made in the prescribed form.

i . prescribecl authority, ' has stamped the date on rvhich it was presented.

:

, ' each transfer form is dated, signed and properly witnessed'

: ' name and address ol-the transferee have been given in full '

. . transfer deed has been accompanied by the related share certificates or letter of

' allotment.

i . the amount of consideration is correctly stated in figure and in words-

i . in case of the transferee being a firm, the transfer is recorded in the individual

, narnes ofthe partners.

AOA

Intr ln l : l t :ontrols

Rer , * ! , 'q :n len t o f(lr,i,r, tr* nric,s ACt

( l r , r r i i " a n s f e r

f ,{ ; l ' l : .

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Special Audit

Cirapter'

t2. l AUDIT OF I 'DUCATIONAI, INSTiTUTION /COLLEGE

tr'reli rn in a nyrvc r li

Receipts

( l ) St t rc iy ' the provis ior is of appl icable statute o i p. , th" t "gut s tatus of t6e i r i r t i t , , t " .(2) l i .ranrirre the trrrst dectl or regrriaticrr.

( 3 ) S tudy ' t he rn i r t t r t cso fn rec t i ngso fgove rn ingbody - / t r us lee toga inkno rv ledgeo fany in rpo r tan fdecision rvhiclr rnay' aflcct t i ie accounts firr e.g.. purchase of compurer erc

(4) E''aluatc the sy,sterr.r of internal control.

(5) obta in l is t o f accounr i r rg records & account ing pol icy adopte i l by them.

Feefrom (i) Check the admission fee to confirm rviretlrer amount has beerr crediter-lsludenls . to a separate account . Refundable mone\ / is shcwrr as l iab i l i t ies.

(i i) Chcck rvlrether dernands for fee are raised against all students.

' ( i i i) Ascertain rvhether the amourrts demancled fiorn student are as per.r.ates: specified according to their course.:

1iv; verify the fee received by cornparing fee collection register and copy cf', receipts issued to students, For cheque received, exarnine passbook altd

for cash received, check entries in cashbook.

, (v) Check authorisation for fee concessions.

: (vi) Ensure that in case of late payment of fee, f ine has been properly. inrposed, collected & accounted for.

. (vii) Ascenain accounting & authorisation for fee received in advance.

: (vii i) ln case hostel facil i ty is also granted to students, check whether hostel, dues are properly dernanded & collected on timely, basis. Also ascertain, whether all hostel dues ltave been properly accounted for.:: ( i) Exarnine agreement rvit lr tenants to knorv rates of rent & their due datcs

( i i ) Vcr i fy ' rent received by compar ing counter fo i l 's of receipts issued iv i thtlre bank pass book.

(i) Verify investment registers to check rvlretlrer interest rv.r.t. same hasbeen duly accounted for.

, (i i) Intcrest and dividend received should be checked with reference !<r' entries in bank pass book.:

a ,(i) Donations rriay be of two types, for specific use or fbr general use,: Check recording of such amount in separate accounts.

. (i i) Vouch counterfoils of receipts issued to donors.

: (i i i) Verifo grant from government or any local authority with reference tcsanct ion le t ter .

Rent

i;;o;;,Investment

, Donstions; gr&nls::

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154

Trty:urds sttulents

I-o*,urds stoff

( ' l reck tht- t rasis r i rr pr i ' r ' id inu si t rc ' , iarsrr ips t ; , tuJ"nt !er i tvi iC \n ( ) \ \ ' t ( ]dqerncnt l c t t r t l r . , - r l r r s tudcn ls .

( i i ) t , rarr r inc i )oyrnenl , * . 1 .1. 1-r r iz , , . r t l is t r ibut io ' ccrcr 'on ies.( i i i ) I rxanr i 'e r 'hethcr cxpcrscs o l r br ioks i . i ibrar l ,& -spor ts

pnrperll ' authoriserl & accourrtcrl fcrr.

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I : l rar ' ine the tsrms ancr c . r i i r i t i .ns of iarar ; , i . eacl r category of s taf f .( .hcck the calculat io l t \ \ . r - t . or , r r r r .n , , , , , ' . rar . i , :n payable & deduct ionsthercr lrorn.

(i i i) \r,trclr paYlnellt tnaclc tc, teraclrcrs & other pcrsonrrel rvith r€ference r.brrnk pass book

()tmmo:.t . ( i l Votrc-l i p.,r,r 'eni igai'st clccrr icitr, & *atcr U;f l Lic.

Expenditule . (i i) l lxatnirte payrnelrts tor.r,ards rrraintenance of i iostel.(i) l-xar' ine wltether all 1l.rcd assets are p.o1,,"i ly

"..uu,., i.d iur-

( i i ) Ver i ly orvncrship & ex is terrce c i f f ixcd asscls [n 'cxamirr i r rg r t -cords & conduct i .g p l rys ica lr e l i f lcat ion rcspect ivc l_r(i i i) Vcrify whether dc:prccialion has been prope rly calculatccl u,.r.t caclr class of f ixcd assets.( !y) Obta in MRL u ' . r . t er isrencc.or11e{r ip c t va luat ion of assets.1ij

-Veiii/co.puii Cnrriiii i.,,',t ''iir, ip".i,ir nti.,,ti,,i, i;Ati;t;,

" il ii,; .u,,ie urio*pared rothat ofprevious year.

( i i ) check that any deposi t paid b1 ' the stu<ienr c .n adrr r iss iorr . i f re f t i i rdable, is shorvn as a I iab i l i ty& 1o-t !i31sf91ed to p&t_ accounr.

i -l

t ' . !t \ i Y- -1,

' l F ! I- OF HOSPITALS

Ite i.:,1" i,..

(i) nospiiiis can b" tu" ";

t;i; p;;t;i;..;Auditor should ascertain the legal status & study applicable statute, if any.

(ii) Examine the trust or partnership deed or N'IEMoRANDUM, ARTICLES as per the starus oflospitq!,-(o_th91 prints rsqlJle r1s !I Eelious ropic)

From Putients : (i) Check copies oruitti i;i i ';a 1" 11'll- piti#.ir i;iah ."i"ien.e-io reeister ofpatients to ensure tlrat all patients have been billecl properly.

: ( i i ) Check calculat ion of ferv bi l ls.

From grqnts .

(i i i) Examine whether bil ls are raised properly bifurcating into rent charges,services charges & payments regarding medicine.

(iv) Check internal contro! & authorisation for bil ls raised at concessionalrates.

(v) check cash col lectcc l s l io* , r r i^ cash b.ok rv i t l r dupl icate copies ofrccejpts issued to thern.

(i) check copies of cor-rcsponcleirce u,rth tire gnu".,inr.,-,t oi ioCal bodies toensr l re the purpose o l 'grant-

(i i) Ensure rvhether grant or donations receive<i 1br specific purpose havcbeen proper ly appl ied_

( i i i ) Clbta in MRL regarding usc of grants.(iv) Examine accounting for grants rvith special attention to classiflcation into

capital & rcvenue.Income frontInvestntenl

( i ) Examine investment ' "gist"r .( i i ) Vouch interest, div iderrd etc.

accounted for.( i i i ) Check col lect ion

rclcrelrce to entrv in

to ensure w,hether same has been properly

ol varlous nrcoqles received on investment ."vithcash book.

1 5 6

ttt

Assetsl iab i l i t ies

'1 i,l it ing und Asstl'ttn ce Llh:rp. l2

I I ' i t l t . r i , . : ! t p ( . ! n : ( i ' r I . r r s r r r - , ' e r t l hn r i s r t i on n l r , : r : - i r - r r l r p r r . , " * , t ] " n t " S1 .9c i r l l . , , ' : r r r i t r l o *p * , f ; i , , , - Spur i ' l t r r ' s t ' : : ' { { i i , t 6 ' . , , , , , , . , , c ra r i o i . r s i l en rso1 -expcn< i i t u re l v i t h thoseo l -p rev iousyea r (A I t l ' ) . -

" vuritttr 's d'\frtttdr (i i i) t,hcck ferv calculation-s rv.r,t sraff salarv to clreck r,,,hether these are irr

G

i . rcct ln lance rv i th the pav ru les. t

( i r ' ) S l rec i r i i a t tent ion s l roulJ be g i rcn to purchase of h ig l r va lue medic ines &iri icctions. Also check *'hetlrc-r tfrere is strict control over their purclrases tarrc i issrres.

l 'c - t t r t i t t t t ( i ) I t - ranr ine calculat iou & accourr t ing of prov is ion fcr r taxat ion. { !

& (i) I ' .r.anrine u'hetircr all l lrci l i lssets are properll 'accoutrtcd for.

( r i ) [ ] l reck ownership & e. r is tence of f ixed asscts bv ver i fy ing recorc ls & conduct ing physical !

r cr i f icat iorr rcspect ivc l r .

( i i i ) \ /cr i t . , ' ivhether dcplcc iat ion has been proper ly calculated on each c lass of f ixed assets"

( i i ' ) Obta in MRL for ex is tence. orvnership & valuat ion of assets.

: (v) Verily corpusi capital f irnd u,ith special atlcnticrn tL\ any increase in the same as comparcd io

, that ofprev ious year .

I (r, i) lrxarnine aricqrracl of intenral controls ovcr purclrasc and issue of stock.

. (r, i i1 Examine rvhether anl,clain.r against 1fis fts*spital has been properly accounted for.

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CI2.3 AUDIT OF CINEMA HALL

Prelinrinary ( i ) Stud_v" the provision of applicable statutc as per tlre legal status of t lre cinema hall" 11(2) F,xamine the trust dced or regulatiotrs.

(3) Study the minutes of irreetings of goverrring body / trustee to gain knowledge of any I

irnporlant decision u,hich may affect the ar:counts, for e.g., purchasc of projector etc. I

(4) Evaluate the system of internal control.

(5) Obtain l ist of accounting records & accotrttt itrg pclicy adopted by thenr. I

P-rom slnws (i) Check that t ickets issued are serially nurnbered & kept rnproper custody.

(i i) Perform compliance procedures to clreck ,uvhether there is

strict internal corrtrol on entry to citterrta lrall rvhich should t- 'e

only against shorv o{ ' the t icket .

(i i i) Clreck internal cotrtrol rv.r.t. issuattce ttf free passes"

( iv) Check col lect iorr shorvn in casl r book rv i th number o{ ' t ickets

sold for each sl.tttr.v.

(u) Check internallt, generated dail l, report , 'vith number of

tickets sold fbr eaclr category ( balcony , f irst class etc.).

(vi) For advance booking. ensure that dilferent series of t ickets

are issued.

(vii) Reconcile total entertainment tax collecte.J rvith total number

of t ickets sold lbr eaclr category.

Rit:eipts tI

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Assc l r & l i ah i l i t i e . ' ( i l

;. ( i i )

liront

,,ldvert$etrtent

(I) TowardsE-rpentliture

(iv)

(v)

Restoururi Irtcrtnte

(i i) Advonce Paid , (1)' - : - - '

o nnii : (r\ Clheck whether all advancerdvance paid relating to fihns alreacll ' rtrn

lo Distributor has been proPerlY adjustcd.

(ii i) Obtain MIIL & confirmation front distributors'

E;i;; ,"ii"trr"i all fixed assets are properly accourrted for.

Ensure about orvnership & existence of f ired assets by verifying recortls &

cor tduct ing physical ver i f icat ion respect ivc ly '

Verify whether depreciation has been properll ' calcutatec on eaclt class of f ixed

assets.

Spet' iul - l t t ' : . i ; : t 5 7

{ i ) S l r t t l , r ' r tgrc,c t l lc t t l c t r Icr t t l in to l i ' r a t lver t isct t ic t l t '

( i i ) i \scer la i r r $ ,hcth, : r incontc ' , r ' . r .1 s l ic ie -s s l r i l r ts erh ib i tc t l l tas

t rccr t propcr l t ' rccogt l ise i l & col lerctet l '

( i i i . t ( l l reck c l r lcu lat iorrs o l i t rv i th refcrc l rce to agrcc ln_ent

(i) Strrch the i irreernent ente recl in1ti l ' ,r ' cincnla hall i i i th

rcsti lttrallt r i i i l in lhe prenlisets.

1 i i ) Chcck scr l lgc i ior t o1 'share i t t re s t l t t t r i t t t t i l re cr t l le '

( i i i t Sta l l p tay i - .c ru l t l ty c inet t ta hal l . l r r t l r is casc. e l ls t t re : thot t t

rccogr i i t ic ln & account ing 0f 's ta l l incotnes, a lso cc ' r t ts idc ' r

control Or,cr sttrck of footl lrttrff . cold drit lks. ice creatns ctc.

( I) [:xarnine .,vl.,ether e xpenditure inctlrred has bee n propcrly

c lass i f ied i r r to Capi ta l & I {evct t t te '

(i i) Vouch tl ie i lavntettt nrade fcrr repairs artd rnaintenatlce l l l

infiastruct'.rre .

i ( i i i ) Examine expendi ture i l rcurrec l on ar lver t ise lnents or an] '

prot t t t ' l io t ta l c i t t t t P i t i tn .

l ( i v ) V o u c h p a y n l e n t s t o l v a r d s t l l r n l r i r e w i t h t h e c o p i e s o f ' b i l l s

, g iven b1 'c i is t r ibutors '

(u) Check agreernent entered into with distributors'

Obtain MRL rv.r.t existence, ownership &

Verif l corpus/ capital l lnd lvith special

compared to that of prev ious ycar '

valuation of assets.

attention to any itrcrease in tlre same as

12.4 NUUN OF CHARITABLE INSTITUTIONS

i l j St"Jiifr" fiouiri"n-oi uflf i.uUfe statute as per the legal stattrs of the irrstitution'Prelirr i lnan\YOrk- (2) Examine the trust deed or regulation'

I (3) Study the minutes of meetings of governing body / trustee to gain knorvledge of any

, ' -

i*pottant decision which may affect the :rccounts'

(4)

i (5)

i ( r )

Evaluate the system of internal control'

obtain list of accounting records & accounting policy adcpted by them'

List the act iv i t ies r trn by chari table inst i tutc '

i:sq - lytllyttg t:rttl Asstrrottt'e Chap" t?

I

tt

Pa;'rnent

I tt c 0tttes

Exltenses

T'trxoliott

( i ) [ ] : . :arn i r rc dt r r rat iorrs rec l ivcr i as s l rorvn i i . r ca: ,h !x ;ok * i t i r trclircnce to copies ol- rcct-ipts issuecl.

( i i ) I l r rsure t l ra t a l l donat ions rccc ived has becn taken into i lccourr t . C

( i i i ) ( , .heck per iodic i r r rcr r ra l r .porr w.r . t . donat ions rcceived dur i 'g tt l r l r t pcr iod ( rnonth l l , or quar tcr ly) .

(iv) D.nati.n nia' alsc'r be rccei'ed irr kincl. ensure their proper Irecogni t ion in books of account .

(v) lf anv grant lras lreerr rcceived for sorre particurar purposecr ; rnr i r rc rvhcther t l re sanre l ras been ut i l ised for designated use ]orr l\..

( i) Vouch income fror. irrvcstr',r"nt i o . Jivit i ln.t. inrcn:sr t,., "i,rur"

t

t lrat l lrese are prolterly accounted for. G

( i i ) L-heck calculat ion of in tercst incomc.

( i i i ) I 'here may be incourc on account of rent . Examine agreementrv i th tenants to c l reck ternts & condi t ions thereol .

( iv) c l reck subscr ipt io ' deta i ls to ensure thei r proper recogni t ion"

(ii iiou.i, "tt ""p"ir."r,

ip".i,,iiy i" .ir".r. i"ri"tr,", ".p"iiirr

huu": been ntade torvards object ofthe trust.

; (i i) Check payment to staff torvards salary etc.

. (i i i) Verif l, that all paynrent arc made after

i Otoper authoritv.

, (iv) Cornpare other expenses l ike stationery, those of previotrs year (ARI)).

(i) Examine rvhether tlre trust e'joys income tax exemption undert l re Inconre Tax Act 196 I .

(i i) check whether p.yrne't of tax has been made, if circumstancesrequire so.

proper sanction by

telephone etc. with

tCCCCtCtI

ASSetS a1111 : Inveslnrenl

Liabil i t ies

i oti,i, ii'iti' Liohilities

(i) Check authorisation of purchase & ;l;;f I;;;;i l; i "

(ii) I '}hvsically check tlre investment certificate.

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12.5 AUDIT OF CLUBSIq

Preliminarv i i i(2 )

( 3 )

Study the provision of applicable statute as per the legal status of the clrrb

Exanr ine in terr ra l nr les & rcgulat ions o lc lub.

Study the minutes of rleetings of governing body to gain knowle<Ige of anyimportant decision. rvhich may affect the accounts. For e.g., purchase of sportsequipment etc.

(.1) Evaluate the syslem of intemal controls.

(-5) Obtain l ist of accounting records & accounting policy adopted by them

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.- l I ttr ission .fee

Suhst'ription (i)

f'ront Servicesprovided tcntenthers

' r 'oLrc i r a t l t r iss ion icc * i th tnel l t t )c ls l is t & copies of casl t

, r . c i 1 , i 5 r : s t i t J t t , i i r c r r r .

( l l reck the accotut ing pol icv of c lu i r regardi r lg rccogni t io l l o l '

a t l rn iss ion iee, as i t is r rormal ly t reatcd as a capi ta l receipt .

i r . , a r r r i r t c : t r t ' s c r i p t i o r r I c : . i s t c r * i t l t r t r t ' t t t be rs l i s t & cop ie ' o l -

rcce ip ts issrred to thcr t r .

l lect rnc i le tota l s t rbscr int ior l due u ' i th col lect ions and arrcars

\ \ , . f .1 sarnc.

Clreck suhscription irr arrcArs to etlsurc rvhether alr(\ ltt l t

irrecoveritble l ias becrl *'r itten off.

C heck adjLrstnrent 'u l . r . t . s t tbscr ipt ion received i r r ac lvance.

l lxarn ine t l re ia te cr i rcr ia enl is ted in ru les lbr d i t fcrcnt serv iccs

likc sporls. su'itr inting pool rtnd reslatlrant etc-

l lrantinc rvhethcr clrzrrgcs has been recovcred fornt menlbcrs

u.r . t . specia l serv ic t :s prov ided to thenl .

Vc'ruch revenue fortn sale of cigars, rvines etc.

E,xanrine u'hethcr pa)' lncllt rv.r-t. different sports items &

firrniture etc. has becn nrade after proper sanction'

Errsure that bulk ptrrchases of food itenrs. sports rnaterial etc.

have becn made fronr approved verrdor.

check entries in cash book regarding payrnents on accoullt of

purglrases,

E,nsure rvhether salaryaccounted for.

to staff has been properly calculated &

check pavments towarcls phone & electricity etc. rvith copies of

b i l l s r ecc i vcd bv c l r r b .

C--ompare various expenses rvith t!1t ofprevious ytl l

Attend ph-vsical verif ication of stock conducted by the

nlanagernetlt.

( i i )

( i i i ). ' .t r )Purchuses

Adntinistrative ,expenses I

Other asse/s &lisbilities

( i )

( i i ) Fxatn ine stock rcgis lcr .

( i i i ) Check val t rat ion of c los ing stock a lso '

(Same as i n t oP i c 12 .3 )

l 2 "6 AUDIT OF HOTELS

Prcliminary St"Jv iii" pi""iii"iioiapplicable statute as per the

E,xamine the internal rules & regulation of hotel'

Study the minutes of meetings of governing bodl' to gain knowledge of any important

decii ion, which may affect the accounts' For e'g- purchase of cars etc'

Evaluate the system of internal controls'

obta in l is tofaccount ingrecords&account ingpol icyadoptedbythent .

( l )

(2)

(3)

(4)

r5 \

i 6 0 1 ud i t ing tu t d ..1.ssur un{: a Chap" 1 l

Slrr r i r t l l r i l r , \c( ' t r l ) i tnc\ rcpor t prcp.r rc t l hy t l rc mapl t tcrn,Jr . ! rI : r rsure prorrcnrecs of b i l l ing. Arso 'er i lv whether appr l rpr i l tc : . ! r r : :harc bee n c l rurgecl accorc l ing to catcgorr .of rooms-c l reck rvhcr l rer b i l ls l rave bcen ra ised to a l l par t ies l is ted i r r guestrcgis ter . ln case i t is r rot so, obta in I leconci l ia t ion-

(i. ') l f receipts are in fbrcis. currenc),! ., nsure compliance rvith lrt.N,lA.(r') Vorich reccipts l}orn roorn rents. .,\ lso ensure their correct posting

in re levarr t accounts.

( r ' i ) Specia l at lcr r t ion is g i ren to rcceipts accepted through crec. l i t cards.(i) Iliarni^e a tc* ultti issired rc, ci,storne.s to

""rii" tt.,"i,]iir...rr,r,,,",,,

( i i ) Per for ' conrpl ia l rce procedures to check in te rnal c .n l r r , i r , , i ,restaurant.

( i i i ) Check a { -cv, ' b i l ls u ' i th ordcr books to ensure thei r cor lecr l r t :ss.( i ) ln .ot . , hote l pro ' ides ba,rq i ,c t r ra i l l f i va i iou, lun. t ior rs- s tudv

lari ff strrrc t r r re

( i i ) Ensure corrcctness bf b i l l ing For le t r i r rg out banquet hal l .( i i i) In case spaces have bee. let out to shopkeepers or travel agencies

etc., check agreelnent entered into rvith them.(iv) vouch collectio.s from above and cnsure their correct postings.

iij c,""[ uuu'o'.i'uti"; i;; il;;M;; ..,i,i;;i ;;;ii;; f;irJ, r,.u*,og"u,l inens, crockery etc.

(itl v_9:'_.1paymcnt w-r-t. sanre rvith copies of bills issued by vendors.(i) Test Cneck r"* r"r".y ;"yn-,;'r;; ,iiuJ" ;; pil;;;"i iLrr l"itn

entries in cashbook.

(i i) Regarding casual labour, check attendance records & rvagepayment registers. Also ensure adequacy of internal controls overthis area to rule out possibil i ty of durnrny labour.

(i i i) comq1ry paynrerr to staff rvith th:rt nrade in previous period (ARp).

(i) Hotets ;h;;s" uu'iori i;;t li;; .rrto"i"., i;;il;; i;.;*l*.scrv ice tax ctc

(i i) Ensure tlrar same has been deposited to authorit ies on tirnely basis.(i) Nornrally hrtels pay cor.mission to various travel age'ts for

bookings reccived through them.

( i i ) lnspect the agreenrent ente led in to rv i t l r t l rem.(i i i) Check rvhetlrer pii)nrents ha'e bee' made as per agreeine't.(iv) Ensure appropriateness of accour.rting of commissir:rn irr coryect

account and period.

(i) Ensure 'ut,"tn". roo'ii uJJiiiori ;rt;;;;; / -";.. "Joilionu

to r,orcibuildings (cci'struction of new health club etc.) have been properly

. ( i i )i

l

: ( i i i )

capitalised.

Horvever, redecoration & daily maintenance expenses should becharged lo revenue.

Vouch pay.nrents r.,,ith respect to it. Trace entries in relevantu!!oul'lr-

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Olltcr Irtcomes

L Purchqse ,rfVarious ilenLs

J. Tares

4. Commissiorr

5. ExpansiottExpenses

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As:rets

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Caslr und foreigncurreilc_l'

2. OtherIiabilities

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Ci r - ;k , i l t : t l r " , u . i . , . . i i t , , r r r rc i i rods at e corrs is tet r t iv appi ieo.

z\ttcnd plr;- 'sical stock taking.

Ensurc that s tocks are kept under appropr iatc author ih ' .

l ' l r - r s icr l l - r c l rcck t l rc casl i .

[:nsurc application o{- proper conlersiorr rate in case of foreigncurrenc\'.

Obta in Barrk reconci l ia t ion statenrent .

l r r casc l rote l l ras ruf .n nny fong t " in , loan f rorr r ba, ,k . inrpeci ihe-lclan agreernent.

Chcck regularity of pa1,1ne1t ol interell chalges,

Clhock u'hether all l iabil i t ies have been taken into account.

Fnsure whether outstancling expenditures has been properly shorvnas l i ab i l i t i es .

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e2.3 ATJDIT OF PUBLISHERS

As usual

Incontesale

__. -(iu)Income from 1()advertisement .

. ( i i )

V"ii.ri tn" ."."iptr *...t ""*u"i.iu""t

i"ia.Ensure that books sold on approval are properly adjusted & not shown

as sales.

ln case books have bcen distributed free of cost (Sample copies), check

authorisation.

Sirnilarly clteck authorisation for discount on sold copies.

In case of publication of magazines & newspapers, a major source of

income is through advertisentent.

E,xarnine bil ls raised w'ith subsequent receipts.

lnspect agreement entered into w.r.t. mode of computations & payment

of royalties.

Vouch payments made to author's rv.r.t. royahies.

Trace corresponding entries in cashbook.

Auditor ma1'seek confirmation from authors as well.

If any advance has been made to the authors, examine rvhether these are

properly ad-iusted in accounts.

Attend phy'sical stock taking conducted by management w.r.t. stock of

books.

check rvhetlier these are shown in financial statements at a proper value.

Special atterrtion should bc given to internal controls w.r.t. movement

of books.

To Autlrcrs

A ssefsI ia tr i l i t ies

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( iv)

(v)

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Others i In usual waY-

titttittes ; fil If any case has been filed against client for breach of copyright as at Bis

date, check adequacy of disclosure in financial statements.

( i i ) In this case, he may seek expert's opinion as well.

r62 Audi t irtg and,4 s suru r tc a t., f ixp" ! 2

12.8 ,.\ U IItrT' OF HIRE PURCIIASE COMPAI.]Y

I l r c i r i * i t r ' r t "

Examine

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; !g rce lnen t

Purchase of Asset

hire . ( i)( i l )

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( iv)

( i ) Obta in knowlcdge of business in usual rva; , .

(i i) Special attention is giverr to the provisions statetl in MOA and AC),,\.

(i i i) Understarrd the nature of l l ire purclrase trzrnsaction as well as the accr.'untirrgtreatrlent adopted by client fbr the sanre.

(iv) Note: - Hire purchase transaction is one u'here

- Possession of goods is transl'erred to purchaser,

- On paylnent ofjust a parl of'tt ' tal price

- But t i t le is passed to h inr .

- Onlv orr fu l l Davmenl of balance insta lments.

Whether these are properly dated & signed by conccrned parties.

Ensure the terms & conditions specil ied thcrein specifically rv.r.t

- the asset in question

- hire purchase price

- no. of insta lments

- amount of instalrnents

Check rvhether purchase of assets is properly authorised.

Vouch payment made for the same.

Trace entries in relevant ledger.

Ensure that client has valid tit le over the said asset.

Examineprlr{:hasetransaction

Hire ( i )i ( i i )

Check u,hether payments are regularly received from the hire purchaser'.

E,xamine whether instalnrents have been properly apportioned between -

(a) Principal &

(b) lnterest

Examine accounting policy adopted by the client to ensure whether these are in

accordance with generally accepted accotrnt i ng principles.

Check adequacy of provision for doubttul dcbts.

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Repossessiongoods

of I (i) Sometimes, due to non-payment of instalrnents by hire purchaser, the elient may

, t"possess the goods as per agreernent.

; (i i) Check valuation of goods repossessed, if anl'-

: ( i i i ) Ver i ly second sale of the goods, so reposscssed.

12.9 AUDIT OF LOCAL BODIES

. t . A rnunicipality can be de fined as a unit ol ' local self-government in an urban area.',

2 ' local self-government' ordinarily means the adrninistration of a locality * a vil lage,. a town, a city or any other area smaller than a state.

, :. It raises its revenue through local taxation and spends its incorne on local servrces.

Speciol ,,ltalit

:J;flil:T:Iilff..|"1"'"'n'in;ng ir'e t""ers ori^"or-,i ,",., nnJ tr,"' I 'he

objectives of local bodies buclgetan, procedure arc:. F i r rancia l , iccountabi l i ry , .

. Conlrol ol-expe,nditure. ancll o c t ts r r r c t l ra l l l r r t , Js a re r r i sn . l r - . t , *^ . - ._ .u'iih rlre nrics rncrr.*.]i;,ti i:"0

and rnonef is spent in accordance

N'tatlers of regurar revenues. an<l expendiru.", or" g"n".^rry a"tesuredto the executi,r,cs lor exarnple, .o,u*irrinn"rs. Thus, it sh'uld bJseenrvhether expenditurc is w, i thin l imits.tv,tunicipal accounrirrg,yii", i; ;;;"tit k"pi ;; i; i1,"

"urir ryrt.rn.

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Budgetaryn - _ - - ,t t a rL<taa l r a :

p r.,.l,tr.| - ^ . ry\'frtu t 11i' | .E{pt'nditttre

' (itnlrol

.

. Accourtting, Systenr

: Understqntl, jinancial, qdministration

-,11dit , 1"lre imporr",ii"t,i""ti".sof ",,.lit o,e,

fl :::::::::j::"1T::ss:lf rhc ccnrent arrd preserrtarion of nnanciarsraremenrs;r r c r r ! l d t s u r t e m e

i3 ::::::: ::::lr::-ngrrrs and weaknesses orsysterns of nnanciar contror;

i: l ::::::: on rtre adherence to tegat and/or administrarive requiremenrs;l u u s l t t E l l l s ;

. )i] .,"^:.::::: upon rvhether vatue is be ing fuuy received on money spenr; and(e) detection oferror, fraud and rnisuse ofresources.

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local bodv-

.' Srim surn.;"ni r.n"*r"Jg""il;;,,r'"a b"ds",;il-;;;G

. The auditor should obtain. complete knowledge about thebudger as it is .an important ioii or n*".i"i prl",ii"g ""Acontrol for urban local bodies.

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Vouch incomeand etcpenditure

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The revenue iterns ;;tl";i;J;public places, grants, etc.

The,cxpenditure may include salaryemployees, rent, pr int ing and'ntarntenance. etc.

properfy tax, collection

and wages, allorvances tostationery, repairs and

expenditure account in the usual

machinery,

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VeriJicalion of , .ns.rets ond ;

,tig,(itities

- IJe should vouch incorne and) manner.

Assers rnay consisr oi lo,.o, ;;iilidr, ;i;;; ;,,;vehic les. of f ice cquipmenr, furn i lu . " un 'd f in ings. etc .

\ , ' ' . \ ,

. Reserves, long_term and short_term loans and unutil ised grantsare i r rc luded in the l iab i t i t ies s ide.- : : ' verification of assets and liabilities should also be carried out in_ __ : ; usual lnanner.ruciir reporr

--T Fr""rr1F";;;;;ei"i." on nnun"ilr ;t;i;;;r. H" ,h;;iJ;k; .;;;;;;," ,h"__,l.olp..tto_ns of budgeted and actua! figures.

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r2.10 AUDI'I Ots LEASING CON{PANIES

IVIe:rning

r ypes

Audi t procedure

l-""t" i i n.o,lt,, i . l i f.rctrveen the'Lessor'*'ho is legal ttu'ne'r rt i-t i tc asset ancl t lre -l.essct."

rvh<t acquircs the r ight to use the qreci f ic asset on pa1' t rent o l ' l rxed renta ls .

(u) Operutittg Ietrsc: lt is a lease arrangenlcllt uherc. ir i retrtnt o1'rcttl. the lessr'rr lr l lous

the lessec- to ttse the asset fbr a ceflait l pe riod-

(b) I-inun<:iol leasc: FIcrc, t lre onncrslrip of assct is retainecl *' i t lr l l te lessor bttt in

strbst:rpce. all the risks and reu'ards trl- olvncrship of thc zlsset are transferrcd tt l lhc

lessce.

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Ensurc that prov is ions of 'Cornpanies . ' \c t , I956' and 'Rcser ' " 'e Bar lk of Inc l ia Act

have beeu contpiled rvith.

Exarni r te cornpl iance rv i th Acct l t rnt i r rg Standard i9-

Stud1, t f ie MOA & AOA of leasing conrpar t ics to k t t t t * thc k i r td of 'asscts t l c i l t l

leasc-out .

Stucly lcase agreernents to conllrrn i lctails sttch as arnottttt of lease-rentals, i.cnttre i lf

leasc, dates of payntent etc.

Exanrine tlre Iease proposal lbrrn subntitted b1'the lcssec.

Check the board rcsolution autlrorizing the lcase agrse l l le nt.

Copies of thc insurance pol ic ies shotr ld a lso bc exanr incd '

Exanrile the invoices for the purchirses of assets givetl on lease and check rvhethcr

the leasing colrtpany has proper tit le over assct-

Exarnine rvhether the lease-rcntals reccived frorn lessees havc beelr propcr l l

accounted for.

t lnsure tltat transaction in regard to 'Sale and Lcase back' have been propcrlv

identif icd artd disclosed in Accounts-

Examine tfte accounts ol lessees to identifu those from rvhom lease rcntals are:

overcluc. Revierv the action taken b1, t lre company to recove: the dues.

Ascertain tlre adequacy of provisiotls for doubtful debts against lessees.

Examine the cases where the items given on financial lcase ltave bcen rc-possessed-

Vcrify t lre second lease or outright sale olt lrese itelns'

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l 2 . l l AUDIT OF NON-GOVERNMBNTAL ORGAi\ISATIONS (NGO'S)

Background l . NGOs can be defined as non-profit nraking orgartisntions rvhich raise

members, donors or contributors

2- They a lso receive dbnat ion of t ime, cnerg) ' and sk i l ls lor ac l r iev ing

obj ectivcs l i l<e i rnparting eclrrcirt iotr, prov idi rr g rnecl ic:a l { trci l i t ics etc.

firnds from

their scl<: rat

3. NGO woulcl include religious organisations, voluntarY health and rvelf 'are agetrciers.

hospitals, okl age homes, research foundations etc'

4. Sonre examples of NGOs operat ing in lnd ia inc lude Clh i ld Rel ie f and You ( ( lRY).

UNICEF, VidYa, etc-

Non-Co"".nmental Organisations are generally incorporated as societies or as a

trust.NGOs can also beAct. 1955.

Legal form

incorporated as a company under section 25 of the Companies

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4II

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C h a r Special Audit 165

The rnain sources of iurrds include grants atrd dottations, fund raising progmmmes.

aovertlsernents, subscnptlol)s, gltts, sale ot product or publications, etc.

Donations and grants received in the nature of capital receipts are shown as

l iabi l i t ies in the Balance Sl tcet of NCO.

Thcse rnay either be in the forrn of corpus contritrution or a contribution torvards

reyglving.fund.

A contribution nrade torvards the capital or the corpus of an NCO is kt',orvn as

corpus contribution.

The grant towards a Revolving Fund is trsed to rotate the amount b1' gil ' irrg

temporary loans from thc fund to other NGO or beneficiaries lor their projects.

. Donations and grants are also receivetl for acquisit ion of specific t-ixecl assets or for

runnir.rg sorne specific projcct. For example, it nray be received for running flood

rel ie f camp in cer la i r r -are l r , . , r , , ' ' { _ 0_ r / c j r /: C : F ' ' L Q l \ u \ r ' \

Balance sheet': . 9p:Bub llund: The contributions/ grants received torvards corpus

items : ihould be examined with reference to the letters tiorn the donor.

. tne intercst income should be checked rvith Investment Register.

. ' Reserves: Examine board resolutions of J'IGO.

:i . Ear-marked Funds. check requirements of donors, boardi resolution of NGO and ruies and regulations of the schemes of'

i the ear-marked funtis.i

i ' Loans: Examine loans rvith loan agreements"

; . fr*gO Assets: Vouch all acquisitions I sale or disposal of assets

: including depreciation in usual rvay'

. Investments: Check lnvestment Register and the investments

physically. Also examine that investments are in the name of the

NGO.

. Cash in Hand: Physically verifo the cash in hand'

' Bank Balancc: Check the bank reconcil iation statements.

. stock in Flantl: Attend physical verif ication of stock in hand and

obtain adequate MRL for the qtrantit ies artcl valuation of the

same.

; Expenses ' ' Programnrc ond Project Expenses: Verify agreement with

I '

. ..t, ,, ', l l"u donor/contributor supporting the particular programtne or project.

.b hul t' l ', '^i t . Vouch various disbursements w-r.t. same.

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g\t '{ n Other Expenses: Verifo that provident fund, l i fe insurancer$u' \,

premiurn, employee's state insurance and other administrative

, charges are properly accounted for'

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166 .1u l i t ing t tn< l . .1s .s t t i ' L t i t , ' { . . h a p " f i

Receipls (i) Conlribuliotts tttrrl (irants Jrtr pntjccts and progrununes: Clreck: l g f e e f X C n ! S r . ' i r l r r i , r t r , r . c r t r r i r r r r r r l c l r ' l t P r s t ( r r ' r l S i l ! - e t h a t i l r n t l c

receivecl hal 'e hccn accounte( l for Exar t r ine rc le\ ,ant cntry rn [ ;ns:book.

(.ii) Receipts from ./uttd raisirtl; prollrilmnrlr: Vcrifi, in clctail tlrrintenral colltrol svstcrn ancl obtairr confirnrations l ionr the persor.r.rvho are re spollsiblc lbr collectiorr ol- funcls and nlLrde ttf rccei6rt.

(iii) Lternbership I'cts'. (lhcck fees rcccived *,ith lv,lernber,shir_,Register . I {ccol rc i le fccs r t -cc ivcd r r i t l i f 'ces t<. be rcceived dur iugthe ycar.

( iv) Suhs<' r ip t iun.s: l :xanr ine t l rer t r * i th subscr ipt ion regis ter i r r r r ireceipts issuecl .

(v) Interest onrl Dividcnrls: C'lreck Ihe irrtcrest and dividends reLr.;r.,,..{ j

and receivable u i th inr cstntents hc: ld t lur inq the vear .

12j2 ,{UDI'T OF A PARTNERSHIP FIRM

l las ics , ( i ) l - l rc i r t tc l i tor is t rsual l .v appoir r ter l b- r l l te p l r r lners c i thcr on l l rc hai is o l : r t lcc is iorr

ta AUUOir,\ed \l F, JtUrl ,, . taken by thern or to conrply rvith a conditiorr in tlte partnership aereemerrt.

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^ r . . n J , ( i i ) l l i s r c n r u r r c r a t i o r r i s a l s o f i x c r l b r t l r c p a r t r r c r s .l) RW *

\r"Y.J \;1 p'"1'ntj/" i i i i t The teltcr o{'appointment sl 'rotrlcl cle.rrly,state tlre nature and scope of audit.

t > t r Jn l qy ,as l t 0 f ' u t ' i t t ' ( i u ) ' f l r e l nd ianPar tne rsh ipAc t ,

l 9 - i 2doesn t ' r t p resc r i bcaud i t o fapa r tne rsh ip f i rm .v'- . "

. (v) Before starti irg the audit, auditor should examine thc partnership agreement anli

. notc the provisions therein.

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Y1r ( iv)

Auditecl accounts provide a reliable means of settling a;;il i; U"t*""ri-partners and thus, the possitril ity of occurrence of a dispute among thellrmit igated.On the rctirenrent or death of a parlner. ar-rdited accounts constitute a nr;l i :rbkrevidence for cornputing tlre anlc)unts clue to the retiring partner or tr: l i :srepresentative of the deceased parlner in respect of his share of capital, profits andgood rv i l l .The audited accounts are generally accepted by the Income Tax Department as tlrebasis for computing tlte assessable income of the paftners.Audited staternents of accounts are relied upon bv the banks when advancingloarrs.Auclited statements of account can be helpful in the negotiations to admit a persorras a padnerAn audit is an efl 'ective safcguard against an1, undue advantage beinq taken by arvorking parln_el:

+ 7 m( 1ot t"os, y ,'di'aloo*0 l r

(v)

(v i)

Considerations (i) Confirming that the letter of appointrnent. signecl by a partner, duly authorised,cle arly states the nature and scope of audit.

(i i) Stud;"ing the nrinute book.(i i i) Verifr, ' ing that the business in rvhich the partuership is engaged is authorir;eiJ bv

the partnership agreenrent.(iv) Examining rvhether books of account appear to be reasonable.(u) Verifying generally that the intercst of rro parlner has suff-ered prejudiciallv [r1. an

activ ity en gaged partner.(vi) Confirming that a provision for the finn's tax payable by the partnership has been

made in the accounts at proper value.(vii) Verifoirrg that the profits and losscs have been divided among the partners in their

II

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C h ; , r . l i ,Speciol Audir t61

l 2 . l t r " . r r l ) [ ' l '0I, ' SNIALL C0il lP;\NIES

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i , , t i . r l g f rr A , . r i r , r . i . ' r . i r ' i r ( ' t l ' 1 , : l ' \

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A t t c l i l r r r s s l t ou l c l l ake ca rc l o [ 11 , , * t r r l l r e d i r cc to rS ' a l t ( l l t i ( ) r r t l t c i r l l , r t l i l r us r r r r l l r r .systenl of - in ternal contro l .Shortcorn ings in in tcrnal contro l ar ise becausc o1-srnal l r r t r r r rber of cnrgr l r . r r ,ees.T ' l r is rv i l l reqtr i re thern to increase the arnount of test ing of t ransact igrrs ancl 16extend the procedures for the verif icatiorr of l iabirit ies ancl assets.

L-etter of-rcpreserrtation on tlte conrpanl"s lettcr head aclclressecl to tlre rrrdit,-rr:;should bc obta ined.

T'he ptrrpose of such lettcr is to place on record representation o1- nranagerllent onsignificant nratters affecting the accountFor example, it can be obtained for orvnerslrip of asset and basis of valrratiorr ancld isg lo lgrg o l$r .q, l i lb i l i t ies and conr ingent l iab i l i t ies.

3. Le{. ier oi ' I

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t2 14 AI'DIT OF INCOMPLETE RECORDS

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ine*rnplete at.: l icl l{ ' :- : site.

Those accountins records which do not satisfy 1he requ'irernerrts of being proper books ofaccount-

I accounting records kept by the entity on single entry system, or' accounting records nray have been destroyed by fire, flood, etc. or seized by

Government author i l ies.

l. Request the , ' l f books of account have been maintainea o,i sinste e,lt;management : system, the auditor should request the client to copv-crt themto convert it to , to double entry basis.ttouble entry : ' In case, books of account are not available for audit, hc6asrs ' should make sure that management reconstnrcts the records

, from available documents in hand.i

: . For example, trading transactions can be accounted on the

: b3til gf ti,-ll9p_ary',.W9!IXgJigs_a1d bal1l statements.Check opening , Ensure that statenrent of af'fairs at the beginri i"g of the year is

{a!e of affairs , prepared and all the accounts are opened irr the ledger.Vouch j

E*, t " . r t i r l ev idence s l rorr ld be obta ined to c l reck arr thent ic i rv o l 'lrnnssclions various transactions.

: ' Examine the relevant docurnents and perforrn analytical'

orocedures' r Confirmation lrom debtors and lenders should also be. obtained.:: . To vouch expenses, bank statements can be used.' : o Same ways, income can be traced from bank statements.

3.

1 6 8 . I i t.i i ; i t i :: t u t t i .'1,\.\ t tr ail r' ( t - hap . l i J

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o.r.tc/.f tt tt t!

\ : c . i j l ca t i t r r o1 ' asse t : ; : . rnd l iab i l i t i c , ; { la l l l t , : d t ine i : r

pcr ' l i rr t t i i t tu l l l lpro;.r l i l r1' . : l l r( )ccd t lrcs.

licbiliries " l ; t ) r e , . .an tp le . to rc r i l - r i r r . , cn to r1 . thc : i i r t l i l c r c ; rn r t l i se r ' ,e t i r i r

l r l r r : , i ca l vc l i f l ca l io r r c l r t - r - i cd o t l t t r \ ' th ' t i r t i t t r l t i l . t ' t t to t l t , t )b t : t i tL

stock register att t l l l lat lascnlcl l t re pl ' r :sr: l l lat ion lctte r-

. \n r r l v t i ca l p t -occrd t t r .c ' s t : l i l t a ls< t be t rscd t r i r c r i l ' , ' i t r ve r t t c r )

. , \ ; ( 'up i ta i cnn t t . : e r .a t t t i i t cc l on the l las is t l f - l l re I io r ts 1car " : ' r\ l r t r r l i l c c l b a l r r t r c t s l t c e t . i l ' i i r l r i l a b l t .

. l l l r r k l g l r t t c a t t t t c c x r i t t t i r t c c l t 1 ' g b t a i r r i t t g c i r t r l l l t t t r l t i t t n f r , : t r '

l l l r r k . '

On the t tas is t - .1 - ev i t l c r rc :e cc r l l cc tcc l tu t l c r t r rc l t t : . i i l t i s t i r i t v l t t t l te re f l ' , r rn . t l t c a t td '1 r , ,

s l r o r r l t l f g l r r r r r l : r t t ' l 1 j : 1 ' p i r t i o t t .

l f [ c ca1 l lo t gc t s t r f f i c ie r r t an( l ap l ] ro ] ) r ta tc ev i ( le t rces e r c t t l t l te t i l c r l , r r i l i t i :1 :

p rocedures as abor .e , l rc nnr p rov i t le a q r ra l i l i ed a t ld i t repor t t t r i ss t te I i l i sc l : r in re r ; - ;1

opinion. r) F${!. N,1 '1; 'K

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4. Audi t op in io l r

96 May

96 Nov

97 May

97 Nov

98 May

98 Nov

99 iVtay

99 Nov

00 May

00 Nov

03 May

04 Nov

05 MaY

il llor

THEORETICAL QUESTIONS

Mention the irnporlant items to be exarll irrecl by the auditor in tlte i l trt l i t of a Ilospital.

What consii lerations are to be kept in rnind u,hilc conductirrg auclit of t lte leasing trans:rction of a. Leastrrl ' ,

Company?

Ment ion lhe i r1 lpor tnnt l l ta t ters requi r ing the at tent ion of t l re arrd i tor in thc audi t o l 'a char i tahle inst i tu t ror t -

Br ie{1y statc the specia l s teps involved in at rd i t o f a c lub '

Me'tio1 the inrporlant iterns to lrc erarnined by the auclitor in the nudit of a t{ospital-

Statc tlre special points that you as an autl itor r.vil l consicler rvhile coitducting the audit of'a cinettra hall-

Mention the special points to be cxarninccl by the auditor in the audit of a Charitablc Institutiort runnirlg ti

dispensary i1 a srnali vi l lage rvhich charges Re. I per patient per visit irrespective of t lre disease.

iVle ' t ion br ief l l ,e ight specia l points 1,orr as an audi tor wor. r ld consider in conduct ing thc audi t o f a c lub"

Ment ion the specia l s tcps involved in the aur l i t t t f an EdLrcat ional I r . rs t i t r r t ion.

Menti.rn the special points to be exarnined by the auditor in tlre audit of a charitable institution runnirtg

hostel fbr stLrdents pursuing the Charterecl Accountancv Clourse and rvhich cltarges orrly l ls. 500 per

motrth front a stuclent for his lodgirrg/boardirrg'

Ment ion a 'y e ight specia l points, u l r ich vou as an aucl i tor rvou k l look in to u 'h i le aucl i t i r tg the br tok l ' r f : r

parlnership firrn.

WSat are the specia l s teps in t ,o lved in conduct ing the audi t o f an Bdt tcat ional lnst i t t r t ion '?

What specia l s teps rv i l l you take in to considerat ion i r t a t rd i t i r rg t l lc accounts o1 3 l lo te: l '?

R/hat spccial steps wil l yoLr takc into consicleratic'rn in auclit ing the receipts fiorn entry fees of an

amr-rsement park'? Mention An\/ four points specific to the issuc'

qIqII

Chapier 13Government Autlit

t - ? I INTRODU(]TION

f ,rrr 'r ' , ' rrrtr*nt, ' !"rqr! i t .Meaning

l . Goverr t rnent aut l i t tneat ts

. the systernat ic and independent examinat ion,

' o f l lnancia l . adnr in is t rat ive and other operat ions of i r publ ic cnt i t r ' .

. for evalual ing and ver i fu ing thern.

3 .

Its objective is to ensure the accorrntabil ity of the governrtrent entit l in resp';ct ot

public revenue and expenditure. '

Alri i i tor presetlts a report containing audit l indings along with recon.rrnendati ' , 'ns for

future actions.

In India. t lre {unction of governnrent audit is perlbrrned by Comptroller and Auc'l itor

General . r ' n f l 1

4 .

C-OMPTROLLER & AUDITOR GENERAL _ CCTtAiN PTOViSiOTTS

t I i , i r i r t r t {n let r t

Itemoval ori t " : , r l i t ln t iOn

/ ' . V L ' ' i t ' ) , t '

:r i .: ,,/c\ ' i .

!dernunerati; ;

' [ * t ' i g t : '

gioni*,"u oit lomptrol ler &Audi tor Genera l

, . He carr be removed from the office only on the ground of proven mis-behavitlur or

i t rcapaci ty .: . Moreover, he can be removed fiom office only when each house of parliarnent

. decides to do so by a majority of at least two third of members present and voting-

, . He can resign any time through a resignation letter addressed to the President of lndia.

- . H" tr-,^ri u" p"lo " i"l"'v ;a;i;;i;;;i" tn"t of" j"ae" .itr'" S"p'"'; '';'; r The parliarnent is competent to make laws to determine salary and other corldit ions of

serylce.

H" ,t "ii ['rJ ;ffi;" a;; ;i; t;;;; ;.;p t' "e" "ibl v"u'i, *r'i"n"'"i is "u'ri"i'iiiitti trntl . l-le shall cornpile the accounts of the Uniorr/State/Union

'I'erritory and

,unitt accou,tts , submit those acsounts to the Presi&nvGo'iernor/Adniinistrator. resPectivelY.

1 '

To autlit receipls : l-te shall audit all rcceipts and

and expentliture r beerl substantially financed, lndia/State/Union Tenitory'

Note: A body or authority shall be treated as substantially f inanced if

the amount of a grant or loan itl one year is greater than;

( i ) Rs.25 lakhs, and

ltr) ls-o! 2ille tota] exnenlltu1 9!th1----------------t b9t/

169

".p""Jitrl. of ony body, *hich

l ionr the Consolidated Fundlras

of

ttI1 7 0 ,4ud i I ir g t t n t! :1.s.s u r rr n c e ( . h a p . i J

t 0 uuQrr NruilISurril !ouns

To uudit rcc(iptsrll ttttiott or slules

71t uutlittt((()tttrts 0Jstrlres uttt l stock

7'o audiltt<'t:ottttts ofGttvernntenl(,'orrtpttnies ondCorporuliotts

To uurtil undreport

i l e s i i a i i a r r< i i r , s l ) ec i l j c pu rJ ) ( ) sc i ( r i r r r t ) r g ra r r r u i r c l l [ ( ) i i i r \ b l i l v c t i , , : ithan a fore icrr s lutc ( ) r i r r t r : rnrr t ional organizal i ,n . or ! r . r , . f i l r r - "( 'onstr l id : r tc i l Fui id r '1 ' I nc l i l r r ' St at er ' t I n ion

- I cr r i ton, .

F Ie sha l l a i r d i t a l l r ecc iP t ' Pa r ab l c i r r t o t hc ( . o r r s r i l i t l a t c t l F r rnd o lI r rd ia, / State ' lJ r r ion l -err i ton .

H c s l r ; r l l l r r r < l i ( l l r e i r c c o u n l s 1 , 1 i l . 1 g ; : r r r t l : l t r c l . k r ' p r i r r : r r r 1 r , l l i c e , r lc lepar l rncrr t t l { ' i l re uniorr ( ) t ' s t i t l r .

( 'A ( i s l r t r l l ( ' \ ( r c i sc suc l r 1 , , ) \ \ ' ( , r ' ) an ( l t r l r 5g11 , . su r . l l r l u t i ( ) s x . s ! ) e r 1 ! l (pror . ' is io t rs of t l re C'orr rparr ies Aet . 1956 in re lat iorr to tht l ( i r )v t - : r r r r i r r r r ' !

c o t t t P a t t i . : 1 r 1 ( 1 r 1 ' J r r r 1 ; 1 1 i 1 r 1 1 ' ' .

t 'A i ; s l r a l l auc l i t a r r t l r L ' l ) r ) r t

( l ) A l l expendi ture f iorn Corrsol idated l . -und o l ' lnd iC StaIe/Unic ' r r1-erritory.

(2 ) A l l t r ansac t i ons o f t , J r r i o r r S ta t r ' r e l a t i ng t o t hc ' { , ' c rn t i ngenc rF 'urrds and [ 'ub l ic accoulr ts . '

(3) Al l ' l ' rad ing,

Manufhctur ing, Prof i t and [ -oss account and BalanccSheet and other subsidiary accounts kept in any deparlment cf ihc

: lJn ion/ State.

(a) He can inspect " " i ' " in

- n i o l .nrr i r t ur rdcr t l re contro l o f t l rc l jn icr r , r r - I , t r t r

Government.

(b) I le may lequire that any accounts. booi<s, papers arrd otlrer docrrrnenls. which arercievant to tlre transactions under autl it, lre sent to specified places.

(c) He can put such questions. as he nray consider necessary, to the person i 'r,:har:le"

(d) He can call for sucl-r inforrnation as he nray require for the preparation of any'accountor report.

(e) Supplementary Audit

CAG rna1. corrnrent upon or supplernent the report submitted bv tlrc professionalaud itor.

. CAC may issue d i rect ives to the audi tors in regard to the per l i r r r r rance of thei rfunction.

' Persor.r so authorized rnay well be the atrclitor of the cornpany.

. The form and content of supplenrent:rry arri l i t report rnay be specified by CAG.

. Supplementary Auditor rna)'concentratc l ltore on efficienc-v aspects

The person so authorized is lravirrg satne powers as auditor.

Horvever, the directors are not required to conrment on any adverse rentark

contained in the supplementary audit report.

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Pou'ers ofComptroller &Auditor GeneralScc. 619(3) and (4)

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SutrmissionAccounts

of , !- le shall submit his reporl relatingto the accounts of the Union or States to the President/

: Cotet-nor who rvil l subsequently lay them before the ParliamerrVstate L,egislature.

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( i otc rnnr t ' r t t Au{l i l . \! 1 tl ! t

A ' i } ' I ' ! 'OF VARIOUS ITEMS

, r r . audi tor oxanr i r res the l i r l t l lnrent of concl i t i r - r r rs l i r r incurr ing g.ovcr t l tnct l t cxpendi t t r r ' , : . i i

i \ 'o lvcs exanr inat ion of l t r l lou ins: -

rat Aut l i t o f ru les ant l orc lers

( l r / , \ t rd i l o f sar tc t ions

(c) Audi t against prov is ion o l ' l i r r r t ls

(d) Propriery atrdit

ic) I 'erfo1ntancc l lt l i tAu t t i t o f ' 1 . I t sob - i ec t i r , c i s toe l r su rcu 'he lhc r t l i e expen i i i t t r r e i s i nacco rdance rv i t h :' t t t les ancl ' (a) re lerarr t prov is ions o1 ' t i re Corrst i tu t ion and of the la ' " r 's at td r t t les.

i lrders/tludil ' ( l-,) t lrc rtrlqs. rcgtrl lt ions issued bv CAG.

crl Regularity ,.ond LegalitY i, . tx i ' l f { i ;

I ,A i ' ' i ' * ; ' ' I

. , . l '

.

b vw gtr,

{,u1,r;t

(c) t lre orcicrs of, or rules tnaclc br'- any higher authoritt ' '

2 . ln t l r is connect ion, aucl i tor s l rould have sout tc l knorv ledge o l ru lcs and

ordcrs u . r .1 . fo l lorv i r tg :

(a) T5c porvers to incur arrd sarrction expenditure tiorn the Consolidater-l

( Ftrncl/ contingency fund of India / State;

(b) I ' lre rno<Je of presentatiolt of claims agairtst govertttnent. rvithdrarving

Inoncys frorn the Clorlstl l iclated Fund, Contingency Fund and the

flnancial rules prescribing tlte proccclure to be followed by'

goverttt ltent; andr ' ' l

. . , t ' . ( c ) I { e g u l a t i n g t l . r e c o n d i t i o t r s o f s e r v i c e . p a l , a n d a | l o w a n c e s , a r r d' : pensions of govemment seryants': I " ' b " ' - - ' - - - - - ' - '

, au,iii oj,, f. i is ob-iecrive is to ensure wherher the expenditure is:'

Soncliotts , (a) Properly covered by a sanction, either general or special't.

(b) Sarrctionecl by authoriry). which is authoriz_ed to do so.

, ' 2 Thus atrclitor sltould consider follorving:

(a) I-{e should lrave knorvleclge of the sanctiotring porvers of various

' autlrorities-' i (b) Hc should examine rvhether all sanctions are adequately noted in the

; \ " , - - _ _

. , t - :

: . Prescribed register'

, : (c) For petty expencliture, the signature of the competent authority on a

i bil l can be regarded as a sanction': ' .. ' . ' :'

Au,i it ,rg,i; i i , i l , Its objecrive is r. cnsure rvlrethcr r6e expenditure:

, provisiitr of , @) ls made for the purpose to rvlt iclr the grant and appropriation has been

. funds providccl

: ' (b) Does rtot exceed the appropri'

pr:i ir inty -.

, i . alloiJi,,g io piopti"t" au<lit, t lre atrditor examines the cases of improper or

Auttit : wasteful experrditur" Lu"n thoue,ir the expenditure has been incurred as per

. i the ex is t ing ru les and regulat ior ts 't . , t ri,ttt i z. A transacrion may satisry all the requirements of regular audit, but nray stil l

*rt l ltr'1t; be highly rvasteful.

For e.g. a building may be constrttcted for running a school but may not

used for t lre same purpose, resulting in wasteful expenditure

I

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I t tti i / i ; t :: Lrn il -.!.\.\ lrru ii, i

.1 ' ' f ' : i ' t ' ; / & ' " l l { " -

] ' o

, ' , ' f t l l , n . i, . . t .

f , r .L r , t l i r ' l ,Pcrf i r r rn: r r rce l .

, Audi( / I iu l lScopc A r r r l i t 2 .

. l .L , i [ l .

: ,t ' { l

' i . Arrd i tor shotr l r r t r . . ' to exarni r is sr1; l - i i r f l r ia i rc ia l moral i rv t . . ' r , lo .k ing i r r r i : {heu' isdorn. t l i t ir 1ir I ncss a ntl econr..; r rr.,. rrl ' tr.ansact iclns.

-5. No l rar t i ar r t l l ' : rs t ru lcs eun I 'c l l , i , . i c ipr , . r r regarc l ing the 5t l r r rdar t l : ; c i f l r rarr . ia iproprictl .

, 6 . l l e re . t he i r r r c l i { o r s l l r - r r i l d e r ; r r r i i r r c t l u r t :L " , - ( a ) ' f hc

: r L r t l r t r r i t i c s l r t r e rn ; r , l c i l r e| ! / '

, o f - l r i s o* n n r { ) l i c r .(b) - f l tc

cxPcrrc l i t , , tc is t t r ' l p t . i t t l ; r l l rc ic i i i , ; re than t i re ( )cc i ts i ( , . r1 dcnranr- ls ._(c) No aui l rot . i t r e \cru i : t .s i [ , 1- , , . ,11 g1- of sanct ioning expsl id i lurs to pass i l r i. , . cr ( lcr . r ' i ' i r ich u ' r l l d i rcct l r t , r i r rd i rec l i -v accnlL. to i ts l r r , r r ; re. l rantagt(d ) P r rb l i c l ' o r c ' i s no t u t i r i s cc r rb r t i r c be 'e f i t o f a l x r . r i c ' r . r De ' r r i , r ," /sect iorr o l ' t l re conlnurr i i r .l l c re ' a t r t l i t t t r - t I i es t o c r r su rc t h l t . l r r \ c rnn rcn t p rog r i nnn r ( : s l r ave ac l t i e r c , i r l , ,desi red ob. ject i 'e-s at the lc* 'est cosr arrd g i*en the in ten<ir : i r benetr rs .I )er fornrarrce r ru<i i t iuc lut les ef f ic ie 'c1, , econorny. and c l1 'cct i 'e ness audrrPerforma'cc audi t is an .b. jcct i 'c exarninat io* o l the f inancia l . r r i r ioperatiortal Jterfrrrnrance. It sr:cks tg i, jentify oppoilr. i l ;t ie"- {.er qrr;rt:riecononly arrd cffectivcness.

expencliture * i1h :;arrre degrce tt ipr i i t lc t tcc \ \ 'o1 l l i l c rer . r ise in rcspe cr

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Audi t o fStorcs AndStocks

. 4 . Ef f ic icncy audi tI t exarn inLs rv l rc l l rcr :

: . The various sclremes/projects are executed, arrd

i i l 'heir operations are carried out in cfficienr manltcr. j!rr{1

, . They are y ie ld ing the expected resul ts .

. 5 . Econonrv arrd i ti I t examines rv l rether :

: The government has acqrrirecl the financial, lrrrrnan and ph,v:;rcai

! resources in an econonrical rnanner, andi r Tlte sarlctioning and spendirrg authoriiv have obsel,ed er:orror'y.; 6. Effectiveness autlit

: I t examines whether :

: , Progranrmes and projects are performing well.

j *_. _9y".1f lgrge19! 9bj99!iyes ar9 bei1g aghieved.I' Auditor should ascertain whether the interna! controls ou.r fri.trui., ."""ipt, un,Jlrru",,r

stores are well designed .nd propeily carried ..t d.ring the year.2. Ae shoulct bring to the notice of the government any deficiencies in the system of control.3.

' l-he audit of purchase of stores is conducted in tlre sarnc rnanner as aud!t gf expenriitur'tr

4. The auditor has to ensure that trre prices paid are reasorrabrc.5' C:rses of uneconomical purchasc of stores ancl losses due to defective r-rr inferiorqiralit.v of

. stores are specifically exarnined.6. J'he certif icates of quality and quantiry given by expert should be exanrincr_|,7. Accounts of receipts, issues and balances are checked regarding aocuracy. correclness ancl

reasonableness of balances in stocks.Any excess or idle stocks should be specifically rnentioned in the reporrAuditor should ensure their existence by attending physical verif icatiorr of stock"The valuation of the stocks is also examined properly.

8 "9 .t 0 .

tI

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q!d

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I

Chapter 14

Miscellaneous

14 . I COM Pl LA'I ' lON l lN Gi\G ENt IIN'I

Otr jcct i r .e ofConrp i l i r t io l tI i r rgagcrucnt

P r inc i l r l es o f aCorn t l i l u t i onI I tg l l gr '1 is1 ' P1

Managenlent 'sRcsponsib i l i t l '

Defining termsof eng:rgement

a

Proceduresand evidences

GenerulProced urcs

. I o c o l l c c t . c i a s s i l l ' a t t d s t t t t t t t t a r i e s l i n a n c i a l i r t l i r r r l l a t i o t t ,

. [ ] i ' r ,rsing nccottrr l iag erperl ise.

Cornpulsor,l, . ln tegt i t \ ' ;

. Ob jec t i v i t ) ;

. Professional cornpetence attd due care;

. Conf idcnt ia l i ty ;

. [ 'rofessional condtrct; attt l

. ' f e c l : n i c a l s t a n d a r d s .

Oplittnol ' Indepe nde'trce

, But if he's not inde perdelt, he slrould refer

lt in Accolntattt 's l{cport"

. I lnsrrring correctness. cornpleteness and ieliabil i t l ' of f inancial information gentrrateci tn

thc ent i ty .

. i \4a iuta in ing Account ing l lecords and Internal Contro ls .

' Select ing and apply ing appropr iate account ing pol ic ies '

' Establishing controls for saf'eguarding the assets and detecting frauds.

. Ensttring conrpliance lvit lr larvs and regulation-

' Complete disclosure of all material ancl relevant information to the accountattt"

Accorrntsrrt slrould send an engagenrent letter l isting the key terms of appoinfments to avt-rid

nr isr r r r r lcrs l l t l td i r tq .

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tCCCCICCttI

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!!IIII

I(

l ' l te accotr t r lant shorr ld -

. Obtain tie general knor.vleclge of business and operations of the entrty

' Be fanril iar . ivith Accoutrting principles and practices of industry in

wlrich entity operates.

Understand form and content of f inancial statements

Request management representltt ion lefter on significant nlatters'

l '74

I

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! L

i:.! ;. .; li €

l f in l i i rnrat i r in l ) rov ided bv nr i inagerncnt appears to i re

( i ) i r tcor rcct -

( i i ) incor ; r1; ie tc- t i r

{ i i i ) unsa t i s {uc ton ' .

Jthen accout t tant s l rould '

( i) obtairr N'l It l ..

( i i ) pcr l i r r rn cornpl iance procedures.

( i i i ) vcr i f l , ar )y n lat ters and explanat ions

Jl tequesl lnanagernent to prov idc addi t ionai in f t i r rnat i t 'n

J

I l- nrarragc rnent relitse to p rov i cle adci it i t init i irr fbrrrrat ion

.f! Accounta, , t shorr ld rv i thdraw f i 'or r r engagernent in fbrr r r ing ent i ly of the

(a) 'f

i t le : "Accountant's Report orr Compilation of Un-zrrrditecl [: inancial Statettrents"

(b) Addressee: addressed to the appointing authority.

(c) Identit ' ication of the financial inforrnation stating that it is based on the infbrmatir.ri

provided by the nlaltagel.nellt.

(d) When relevant, a statement that the accountant is not independent of the entity.

(e) A statement that the lnanagemellt is responsible for:

. Completeness and accrrracy of data and cornpletc disclosure of all rnatcrial and

relcvant information to the accountant'-

Maintaining adequate accounting records and internal controls arrd selecting and

apply ing appropr iate accoutr t ing pol ic ies;

Preparation and presentation of f inancial staternents as per the applicable laws attd

regulations. if any;

Establishing controls to safegr,rard the assets of the entiry and preventing and detecting

frauds or other irregularit ies;

. Eltablishing controls lor ensuring that the activit ies of the entity are carried out as per

the applicable larvs and regulations and prcventing and detecting itny nolt-colnpliarlce.

A staternent that the eugirgernerlt r.vas perlbrtrted in accordance tvith standard on

compi lation engagernetrts.

A statetnent that peither arr audit rrcir a review has beerr carried out and that accdrdingly

no assurance is expressed on the financiaI i l l forrnation-

A paragraph, when considered necessary, drawing attetrtion to the disclosure of material

departures from the identified financial reporting framework.

Date of report.

Place.

Accountant's signature.

It rocc,tl u rcs i nercepti<ln:ric i rcunrs la ncts

. (t)

: (g)

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I r rvest iqat i ( ) r r i r r i l t l ies s- l ,s l . l tn l i { . t , t t ( lspeci l rc pt tpo. \ ( . - l ' l rc

speci t ic pur . f ) ( \scgrant loan to l rn appl icurr t ) .

t' r i ti t'rr I e-ru nr i rt rr t i rt rtn l a i l r e e ta l t r a t i o r r o l

t r f - accounls arrd rccorc ls o i . a business cnl r : r i r i , | . :s t i i te o l .a l fa i rs o i - cstabl is l r ing of a fact 1eg: r , r , t retner i , ,

t--- -I Inves t ig : r t ion

s ta tencnti tc. esrablish a specific firctI I u t :srar) r rs t t a specr f rc f i- - i - - - -

I Bt , t " . , t , r o f engagemcnr

I

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Evidences [ 'crsuas ir e

Cit:r1s1x1 Purpose

Approach No ioubtful approach

Bv u,horn

Cor r f i den r i a l

0

7 .

8 .

9 . Chartererl AcccluntarXDoubtful approach

r4.3 GUIDANCE NOTE ON REVISIONOF AUDIT REPORT

Revision-When

Revision-Why

E;t[Revision- condit ion

i f r onug"n len tdoesn' t ensureAuditor

If Auditor 'oecomes ";r;

;;ar;ui,",ithat date rvlricir rtright have affectecl hisissuarrcc of Audi t Report .

Revision of ALrc!it Report after the sa,n" hus U"",i ;rrr.,"J

to his Audit Report ttrat facts nruf nuu* exi.;ri:d atReport had he beerr aware of such facts at fimc crt

, Alparcrrt ,,r ,ruke, ,u.onf ;,,ror,r,ntion nuout A.r, o.;;,,;.q;;";Jir"*"f oila"t. *t,

, Auditor may issue the Revisc-d R"port ."r.r.;"f ir,";";; ;;il.. 6;, if n,a"ag,.,r,*nr, ffi;1,:;:,i:il::',:";';;;,ff[lilJn:'ffjp'.."uiou,1', i,;;;;il;;i;;";;;ff;i;,eln th is case. auci i for nra l :. Seek legal advice;' Notil-r ' t lre client that Audit report no longer bc associated lvith financiai st 'r-crrerrr,. Notily regulatory authorit ies,. Make appropriate statelnenl at ACM:

Conclude to withdraw from furtlrer engagement.

In case of client U"lng .o,rrpn,rf, f," "un

.""ir" l..p.., ,if iaCV.-*For others' revise rvithin reasonable time, but not later t lran issuance of Aur{it Repcr.for i r r t r r ret l ia te ly ncxt accotrnt ing year .

r a

Time limit forrevision

I f i sL: i ' ! i . t t e()us l'7'l

{ ;1r l { }ANCE, No'rFl ON ATJDI ' roI i 's I iEP(}RT oN RI!vtrSFtD ACCOUN'I 'S oF) : : i 'N, \N[ES. I } I ] I iORE CIRCT]LA] ' ION T'O SHAREIIOLDERS

t; : : i :Yr!Y! ! , i , { l N

.-\uditui" s t luty

\ s 1 ; i i

\ \ ' l te t t ar t tc l t ( lcL l i lc ( ( )unls r rc r ( - l i l l ) r ( r t , . 'J b. t l rc borr t l 1r l q . r111l r111- , , ar t t l s t l t r r t t , r - r . \ r rd i tors a lcreqirested tcl rnake a report onoc aglirr orr lhe aniencled uccorrnts.

' A t t d i l o r s l t o r i l t l c t t s t r r c { l r l l . l l , . ( r l ) i c s o l ' o r i g i i i a l i i c cuun l s a r rd r cP , r r t i r r c r c t r r r r r c t l t t , l t i r r rat tc l ac le i l t ta te d isc losure c l l - lhc l o l - rev is ion l r )pcars i rs a speci f ic note i r r the arr rendeditcct)unts.

' I lorvc'u'er, it 'notes to anterrclerl accounts don't r:rtrrtairt anv note orr revision or if statutor_-r,Audi tor does r tot consider such a note as adecluate. i t \ \ i l l be h is duty ' io r , - ' f 'er to the fac iof rcv is ion of ,Accounts, i r r l r is rcpor l .

{[ , Re-openirrg or rcctif ication of Accounts after they l iai,e bcen adopted at the AGNl. should nol. be perrnitted in any circurnstances.

1,1.5 GUIDANCE NOTE ON PROPOSED DIVIDEND

l ' r o p o s e d, l i r i r l r "nd Mezrn ing '

I t is c i iv i t lerrd recornnrcrrcler. l hy RCiD p."ai"g " f l t iotnt

b1 sharelrolclers i rr AGM.

It is a liability, which is not present at balance sheet date.

i t ; r { e t i$ rv' .

t i r ' - i r

' ', . ,1 'r1l 4-!i 4

r r r , ! i t s l r ' s du ty

Proposed dividend represents an

However . it must be adjustedrequiring the sarne-

As per schedule VI of The Companies act '1956, i t should be shown as current l iabi l i ty inBalance sheet (even if it rvas not present as liability at B/S date)

a

a

event occurring after balance sheet date.

in accounts because there are statutory provisions

:i r

Auditor should ensure that provision for proposed dividend has been made by thecornpany as per requi renrerr ts .

In case, proposed dividend lras not been acijusted in financial statements, he shouldqual i fo h is audi t repor t . '

j't1: T'VPES OF AUDIT

i . rnu*pe"JeniAudit

Z, In ternal Audi t

: Refer to Chapter I;:

i Refer to Chapter 4

3. Cost Audit : Refer to Chapter 9

,1 . Govcrnment

" ticEr i

Refer to Chapter l3

6" Continuous : Refer to Chapter 3

Aur l i t ,,.-._._i__

t ? 8 lui l i t in q un d t l ss urunc e

7 . I j i a i u i r , r r g t r t i i l

8. ' f lx

, \ud i t

9 . ln ter inr Audi t

10. Balance sheetAudit

I

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{ -h ; r t r . I i

\1,' l ; l i ; ,\ i ;r l; i rs , i,orl. i .,,,r1,ui"., i i . by lr*, ;. i , i" i,,r i" i i ,,,,t"i"i".V uiiJi,For e i l o{}mpanics. Bar.rkirrg conrparrics , co-operative societies, ge{reri lr i i l j .r-rr",r 'cr.c .nrp: r r r ics. t^rs t etc . * ,hcre i t is rcqui red as per gover i r ing statute.I t c ; r r r be c.nducted or l ' b , r ' pr . fcss ionarr ' quar i f ie<J person for e.g. cA.I { isht - c i t r t i ts ' f r \udi t r r & sc.pc o i 'Audi t is deterrn ined as per law.Scope can' t l re res l r ic tcc l b1, c l icr r t .

It is c.rrdtrctcd urrder ser:tir-r. ie ,tg irf i ,.,.urrl" iax i.tI t is cor lducled to er ls t r ro corrcctness of 'accounts & courpl iance rv i th l 'ax Laws.I t c . . be ccrr rducrecl orr r l 'b . r professio.a i ly quar i f ied person r .e { l r l l r i r : r : ,3Accr- r r rntat r t .

I t is th t rs . a specia l audi t governed by statute.I {epor t is g iven tc l Tax Author i t ies.

fhcre is specil ied fonn of T'ar Audit Report.

It refbrs to auclit betrveen trvo annual Audits.I t is cc ' inducted for ' ln tcr i rn pr t rposes.

for exanrple for prov id ing fcr r i r r tcr im d iv idencl .It is not recluired under anv larv.

Generally, it is conducted by a Chartered Accountant.It results ir l quick detection of misstatement, thus it acts as good il!(]rAi qlir, ick l i lrremployees.

Thcrefore. it is early rvarning signal.

Horvever . it is not suitable for srnall orsanisation.

rt "'"ai,i rii'ii"J oi,Jii i' i"i'i"ii,,ir tr," u.i"""" ii,""i il;;;;;;ifi;J.Follorving are examined: Fixed assets, current assets, balances of resr.:r.ves

provisions, capital, profit carned or loss suffered by the firm during the .yciuother l iab i l i t ies.

3. P&L iterns directly associated with Assets/Liabil it ies are also checked. For example,adjustment w.r.t. bad debts.

4- Balance sheet audit is rnost suitable fbr small organisations or which have an efficlenlsystenr of internal control.

5. No statutorl, requirer.nents.

6. Nonnalh'. it is conducted by a Cllrarlered Accountarrt.7 . I l o r vevc r due to l i n r i t c r l sc .pc i t p ro r i des l ess assu ra r r ce t o Aud i t o r .

l. It is a systern or a,iJit p*""i"nt i" i"ig. u""tr ot,J .i."pti;;;iit large L.,rancl,es pithe banks.

2. It is carried out continuously throughout the year to check effectiveness uf w,r l rk i { iEand internal control of banks and branches of banks.Transaction are exarnined as and rwhen they take place.lt is thus conducted on a regular and continuous basis.It is a conrprehensive and systematic audit.

It helps management of bank to prevent and detect irregularit ies on an earlier b:xrr;It may be done by independent cA. or internar staff of bank corcerne.1.

aeaI

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I l . ConcurrentAudit

3 .4 -

6.1

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]v i i : t t-' l ! t t t t c r itt t t79

12, ( rprcr : r l r r . )nir l

l -1 . i \ r , . . " . . $c i i l { rnti . . r ' ! i

4 u a l '

' r ; , l $

l . I t is dct l r red ?!s an au( l i t io l r ; ruragcrner l t to prov i t lc i t wi th in fo. ,nat i . ,n * upprui* to f r i * t i r i l i c s

2. l t cr . r rers bot l r t rnancia l arrd operat ionai aspect of t l rc ent i tv concerned.

3. I t is carr icd r r r r l in thc s i lnre lT)anner l ikc in ternal auci i t .

4 . I t l rc lps lnanagcr l lc i i i io ide nt i i ,v lveakness in prescnt svste lns.

5. ' l

l rc ar- rd i tor prov i r les s ' . isg.est ior ts a lso in h is at rc l i t repor t -

6. I t is t rsurr l l l 'dc- ,nc bv tcnnr o l 'cxpens f ront var ious f ie lds.

l . l t is at r t l i t o f nranagernetr t pcr f i r rmance.

7. l t i r rvo l les cxarniurr l ion o1 'a l l act iv i t ies f ront top to bot torn, specia l lyu l rc t l rcr gcneral manirge n le l r t is l i rnct ioning srnoot l t lv and sat is factor i ly or

3. l t is pcr ferr rncd for f inc l i r rg ueaknesses in ntat tagement funct ioning andsugl le s t ious to inrprove thc s i t r rat ion"

I . I t is just arrother tool to ass is t r l ranagement in fu l f i l l ing i ts object ives.

2. Gerrerally. It is conclucted l 'ry tearn of rnanagernent experts.

3. I t r r ray be uscfu l in case of a i l ing ent i t ies.

l . l t is conductcd to errsure compl iance rvi th Cornpanies Act and other formal i t ies.

2. I t is required by SEBI.

3. l , isted ent i t ies are required to get i t done..

It carr be conducted eitlrcr by a Chartered Accountant or Company Secretary.

r. ii i 'rtorr,", ""n,ni,ru,i;,r

;i i","ru.iio" between i..,rin"r, unl ,u.rounaing..

2. It seeks to ensure hor.r., lvsl! organisation, managelnent & equipments are functioning

to protect ettvirottrnertt.

3. It is conducted by teanr ofexperts.

4. Measures for environment protection are also suggested.

5. It acts as a good public rnoralit l ' ' .

6. [] lorvever. in India it is not ttrattdatory'.

to ensurenot.

pror iding

l i l r11&lenta l

i ! { {:UT-OFF PROCIIDURES

.,, . l}F, . t; .";;;i" r.*r"g",i"rr of,transactiolr oron" period r.om tnl other so tlrat the result

ol'working of each period can be correctly ascertaincd.

The arrangement that is rnade to ensure such separation is technically known as

, 'cut- offProcedure'... r lt is part of the internal check of the organization-

Autliting and I ssttettt't' i !u ip. t {180

Appl ic: l t io l t' -I 'his

prurccdttre is gerlerall l 'appliect to transactions afl-ected by tlre corttintritv . ' t

bttsirress l ikc salcs. purchase artd stock'

. This proce<lttre ensures that gotlds purchased during a y€ar have been incltt i- ie<l itr

. inventory attd the l iabil i t l" ltas been provided itr the case of credit purchase'

. Sirnilarly goocls solcl have becn excludecl from the inventories and credit has lree'l

taken f(lr the sales.

'fhe auditor satisfics by exaniinatiorr t lrat the cut-offprocedures adequately enstrrc that-

(i) goocls lturchasecl, property irt $li icl i has passed to tlte client' have in fact bcen

inclutled in the inveni. ',r i. i , arrd ihat t lre l iabil i ty has been provided {br itt r 'rsc r:f

creclit ptrrchirse: atrd

(i i) goocls solcl have been excltrdeci ft 'om thc inventories and credit has been lak'erl for t lre' ' "salcs;

if the value of sales is to be received, the concerned party has berrr r-lq:brltrrj.

Aut l i tor 's dutv

THEORETICAL QI-IESTIONS

98 Nor' 'Cloncurretrt audit provides a supplementary management tool' ' Comment'

99 Ma1 Dist ingtr ish betu 'een Audi t ing and lnvest igat ion '

00 Ma1" An au6itor became aware of a matter regarding a conrpany, only after he had issued his audit opi.ion' Had

'e become aware of the same prior ,o his i-ssuing ihe-audiireport, he would have issued *'rJifrltrent

opin i r r l . Conlnrenl /s tate your opi r r ion '

0 ' i Nor ( ' t l t o f f Procedures