PRINCIPLES AND PRACTICES OF AUDITING

III B.COM V SEM (NEP)

MODULE NO-1 INTRODUCTION TO AUDITING

Introduction

The term Audit is derived from the Latin term ‘Audire,’ which means to
hear. In early days an auditor used to listen to the accounts read over by an
accountant in order to check them. Auditing is as old as accounting. It was in use
in all ancient countries such as Mesopotamia, Greece, Egypt, Rome, U.K. and
India. The original objective of auditing was to detect and prevent errors and
frauds.

Meaning of Auditing

“Auditing is concerned with verification of accounting & financial records

with view to determine their accuracy & reliability”.

Auditing means “Detailed examination of books of accounts of an

organization for a given period by an independent & qualified person, who with
the help of vouchers, documents & information given, whether the profit & loss a/c
position & balance sheet exhibits a true & fair state of affairs of the business or
not”.

Auditing refers to “an intelligent and critical examination of books of

accounts of a business for the purpose of verifying the true and fair view of the
profit or loss and financial position of the business”.

Definition of Auditing

According to R.B. Bose “ Auditing may be said to be the verification of the

accuracy & correctness of the books of accounts by an independent person
qualified for the job & not in any way connected with the preparation of such
accounts”.

According to R.K. Mautz “Auditing is concerned with the verification of

accounting data, with determine the accuracy & reliability of accounting statement
& reports”.

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According to Montgomery “Auditing is a systematic examination of the

books & records of a business or other organization in order to ascertain or verify
& to report upon the facts regarding the financial operation & the results thereof”.

According A.W Hanson” An Audit is an examination of such records to

establish their reliability & the reliability of statements drawn from them”.

Characteristics of Auditing

1. Audit is a crucial review of the system of accounting & internal control.

2. It is an organized & scientific examination of the books of accounts of a
business.
3. Audit is undertaken by an independent person or body of persons who are
duly qualified for the job.
4. Audit is a verification of the results shown by the profit & loss account &
the state of affairs as shown by the balance sheet.
5. Audit is done with the help of vouchers, documents, information &
explanation received from the authorities.
6. The auditor has to satisfy himself with the authenticity of the financial
statements and report that they exhibit a true and fair view of the state of
affairs of the concern.

Objectives of Auditing

Objectives of Auditing

1. Primary or Main objective 2. Subsidiary or Ancillary objective

I. Detection and Prevention of Errors

Verification of Accounts and
Financial Statements II. Detection and Prevention of Frauds

III. Prevention of Errors and Frauds

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1. Primary or Main objective:-

The main objective of audit is to report to the owners of the business

whether the balance sheet exhibits a true & fair view of the state of affairs of the
company as at the end of the financial period & the Profit and Loss Account
exhibits a true & fair view of the Profit & loss for the financial period.
2. Subsidiary or Ancillary objective:-
i .Detection & Prevention of Errors
ii. Detection & Prevention of Frauds
iii. Prevention of Errors and Frauds

I. Detection & Prevention or Errors

Meaning of Errors

Errors refer to unintentional mis-statements or mis-descriptions made in the

books of accounts by the account assistants.
An error is a mis-statement or mis-representation of a transaction in the
books of accounts.

Errors are reportedly committed innocently, an auditor should be very

careful about it, because sometimes, errors which might appear as innocent are the
results of fraudulent manipulation.

Types of Errors

a) Technical Errors or Clerical Errors

b) Errors of Principle

a) Technical Errors or clerical Errors: - Errors which occur due to

carelessness of the staff.

Errors which committed in the course:

 In the course of recording transaction in the books of original entry such as
the cash book, purchase book, sales book etc.
 In casting, carry forward & balancing the subsidiary books.

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 In posting the entries from the books of original entry to the concerned
accounts in the ledger.
 In the totaling or balancing ledger accounts.

a) Technical or clerical errors may be sub divided into three types

i. Errors of Omission
ii. Errors of Commission
iii. Compensating Errors

i. Errors of Omission

Errors which arise on account of transaction not being recorded in the books of
accounts either wholly or partially are called errors of omission.

If a transaction is completely omitted to be recorded in a subsidiary book, it is an

error complete omission. An error of complete omission does not affect the agreement
of trial balance as both the aspects of the transaction are omitted from the trial balance.
Therefore such errors cannot be detected easily, an intensive checking of the
subsidiary books & the posting from subsidiary books to the ledger is required.

In certain cases, if transactions are partially recorded, these errors may

affect trial balance.

Ex: omission of cash receipts or payments to be posted to ledger accounts

from cash book.

ii. Errors of Commission

When incorrect entries are made in the books of accounts either wholly or
partially, the errors are known as errors of commission.

Ex: The amount 535 might be entered as 355 in the books of original entry such
errors can be located while vouching the purchases with original invoices.

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iii. Compensating Errors

A Compensating error is one which is counter balanced by another error or

errors.
When the effect of one error is counter-balanced, set off or compensated by
another error are known as compensating errors or offsetting errors.

Ex: If salaried account is under cast by Rs. 100 & wages account is over cast by
Rs 100 the errors in salaries account is set off by the error in wages account. Such
errors detected only by through checking of different subsidiary books & ledger
accounts.

b) Errors of Principle

If a transaction is recorded in the books of accounts against the generally

accepted principles of accountancy, the errors are known as errors of principle. As such
errors not disclosed by the disagreement of trial balance, they cannot be detected by
mere routine checking.

Ex: Capital expenditure is recorded as a revenue expenditure, incorrect provision

for doubtful debts, incorrect provision for discount on debtors etc.

II Detection & Prevention of Frauds

Meaning of Frauds

Fraud refers to intentional misstatements or mis-descriptions made in the

books of accounts by the account assistants, with a view to cheat or deceive some
body.

Types of Frauds
a. Misappropriation
b. Fraudulent manipulation of accounts

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a. Misappropriation

It refers to dishonest use of another’s funds or property for one’s own use.

Misappropriation may be sub divided into two types

i) Misappropriation or embezzlement of cash

ii) Misappropriation of goods

i) Misappropriation of embezzlement of cash

Misappropriation or embezzlement of cash refers to the fraudulent

appropriations of cash belonging to another person by one to whom it has been
entrusted or by one who handles it.

Different ways to misappropriating the cash:

(a)Non-disclosure of cash receipts: - Recording the cash sales proceeds at a figure

lower than the actual cash sales proceeds, omitting to record the credit sales.

(b)Showing false cash Payments: - Recording false cash purchase & pocketing the
amount, inflating the cash purchase i.e. at a figure higher than the actual &
pocketing the difference etc,

ii) Misappropriation of Goods

It means the wrongful conversion or fraudulent application of goods by

those who handle them.

Different ways of misappropriation of goods:

(a) Recording sales of larger quantities than actually supplied & misappropriating
the balance quantity.

(b) Recording purchase of large quantities, getting delivery of lesser quantities &
receiving the balance quantity privately.

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b. Fraudulent manipulation of accounts

It is said to be committed when a person makes a false entry in the business

records or alters, erases, removes or destroys a true entry in the business records.

Different ways of manipulations of accounts:

1. Non-payment of depreciation on fixed assets

2. Provision of less depreciation on fixed assets
3. Provision of more depreciation on fixed assets
4. Over-valuation of assets
5. Under- valuation of assets
6. Creation of secret reserves.

III. Prevention of Errors and Frauds

Lastly the duty of an auditor is not only to detect errors and frauds but also
to prevent them by advising the management. This is possible through proper
internal check system.

As regards the prevention of frauds an auditor does not do anything directly.

He can only indirectly help in the prevention of frauds by advising the
management. Auditor has to carry out the routine checking and vouching most
carefully and makes searching tactful and intelligent enquiries. Auditor should act
as a “watch dog and not a blood hound”. All that an auditor can do is to advice
his client the ways and means to prevent their future occurrence.

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Difference between Accounting and Auditing

BASIS BOOK KEEPING AND AUDITING
ACCOUNTANCY OR
ACCOUNTING

1.Period The book keeping & accounting Auditing work is generally

work is done Continuously undertaken at the end of the
throughout the year. financial year.

2.Nature of work The book keeping & Auditing is concerned

accounting work is constructive with examination of past
in approach. transactions. Auditing
work is analytical and
critical in approach.

3.Recording of The book keeping & Auditing is concerned

business accountancy is concerned with examination of past
transactions with current recording of transactions.
business transactions.

4.Detection of The book keepers & Auditors are required to

frauds accountants are not expected detect frauds.
to detect frauds.
5.Status The book keepers & Auditors are the outsiders.
accountants are the The qualified Chartered
employees of the concern. accountants.

6.Remuneration The book keepers & Auditors are given fee for
accountants are paid the specific work done.
regular salaries.
7.Qualification The book keepers & Auditors should be
accountants need not be Chartered accountants.
chartered accountants.

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8.knowledge The book keepers & Auditors must have the

accountants may or may not Knowledge audit techniques
have the knowledge of & procedures.
audit techniques &
procedures.
9.Accountancy & The book keepers or Auditors can take up both
audit work accountants cannot take up accountancy & audit
both accountancy & audit work.
work.
10.Code of conduct The book keeping & Auditing work is
accounting work is not governed by code of
governed by any code of conduct prescribed by the
conduct prescribed by Institute of Chartered
any professiona l body. Accountants.

Classification or Types of Audit

I. ON THE BASIS OF THE CONDUCT OF AUDIT

a) Continuous Audit or Detailed Audit or Running Audit

b) Interim Audit
c) Balance Sheet audit
d) Final audit or Annual Audit or Periodical Audit or Completed Audit
e) Partial Audit
f) Occasional audit

II. ON THE BASIS OF SPECIFIC OBJECTIVES OF AUDIT

a) Cash audit
b) Cost audit
c) Management audit
d) Special audit
e) Operational audit
f) Performance audit
g) Propriety audit

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III. ON THE BASIS OF DEGREE OF INDEPENDENCE

a) External Audit or Independent Audit

b) Internal Audit

IV. ON THE BASIS OF ORGANISATIONAL STRUCTURE

a) Statutory audit or Compulsory audit

b) Private Audit or Voluntary Audit
c) Government Audit

I. ON THE BASIS OF THE CONDUCT OF AUDIT

a) CONTINUOUS AUDIT OR DETAILED AUDIT OR RUNNING AUDIT

It is an audit, where the books of accounts are verified throughout the year or
at regular or irregular intervals say weekly, monthly & quarterly and the profit and
loss account and the balance sheet (financial statements) of the business are
examined at the end of the year.

Definition of Continuous Audit

According to R.C Williams, “A continuous audit is one where the auditor or

his staff is constantly engaged in checking the accounts during the whole period or
where the auditor or hiss staff attends at regular or irregular intervals during the
period.”

Continuous audit becomes imperative in the following types of business

(Suitability):

1. When internal check system is not satisfactory.

2. In big concerns where the volume of transactions are numerous.
3. In concerns, where monthly accounts are required to be presented to the
management.
4. Where it is desired that the audited final accounts should be ready immediately
after the close of the accounting period.

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Advantages of Continuous Audit

1. Detection of errors & frauds: - Auditor gets sufficient time to check all the
books of accounts in detail, in case of continuous audit. This facilitates
auditor to detect errors & frauds easily & quickly.

2. Moral Check: - Frequent visits of the auditor to the client’s business impose
a moral check on the accounting staff to keep the books of accounts up-to-
date & accurate.

3. Early presentation of accounts: - As accounts are checked throughout

year. It becomes possible for the accountant to present the audited financial
statements to the owners of the business immediately after the close of the
accounting year.

4. Valuable suggestions:- In case of continuous audit, auditor gets an

opportunity to familiarize himself with all the aspects of the clients business
this will help the auditor to give valuable suggestions for the improvement
of operational efficiency of the business.

5. Preparation of interim accounts: - If the directors of a company decide to

declare an interim dividend, continuous audit will help them in preparing
interim accounts without much delay.

6. Work efficiency:-As auditor has constant touch with the client’s business &
business & sufficient time, he can plan his work proper1y& carry out his
work more efficiently.

Disadvantages of Continuous audit

1. Very expensive: -It is very expensive, as more audit fees is required to be

paid to the auditor for his continuous visits.

2. Time consuming: - It involves much time. The time spent on audit will be a
sheer waste, if the size of the business is small.

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3. Alteration of figures: - In case of continuous audit, figures may be altered

by the dishonest accountant, after the auditor has checked the books of
accounts for a particular period.

4. Losing link in the audit work: - If proper notes of the work done on
previous visits are not correctly made, the auditor may lose link the work &
will fail to clear up the outstanding queries.

5. Monotony: - As audit is carried out throughout the year in case of

continuous audit, there is the danger of the audit work becoming mechanical.

6. Inconvenience: - Frequent & unexpected visits of the auditor to the client’s

business may cause inconvenience to the client’s staff & dislocation of
clients work.

b)INTERIM AUDIT

It is kind of audit, which is done between the two annual audits. In other
words, it is an audit conducted in the middle of the financial year. It is suitable for
those companies, which wants to declare interim dividend.

Advantages of Interim audit

1. The final audit can be completed very soon, if there has been an interim
audit.
2. Errors & frauds can be detected easily & quickly,
3. It imposes a moral check on the staff of the client.
4. This audit will be useful to have authenticated interim figures for
publication.

Disadvantages of Interim audit

1. Figures may be altered in the accounts, which have already been audited.
2. Even in case of interim audit, auditor is required to take extensive notes of
the figures audited. This would increase the work of the auditor.
3. It is comparatively expensive, as it involves additional financial burden to
the organization.

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Difference between Interim Audit & Continuous Audit

Basis Interim Audit Continuous Audit

1.period Accounting records of only a Accounting records of one
part accounting year are audited.
of the accounting year are
audited.
2.verification Verification of assets & Verification of assets &
liabilities liabilities is undertaken
is undertaken at the at the close of the
time of interim audit. financial year.
3.Auditors Auditors report is submitted Auditors report is submitted
report at the at
time of interim audit. the end of the financial
year.
4.Detailed The detailed checking is not The detailed checking is
checking done. done.

c) BALANCE SHEET AUDIT

It is type of audit, which concentrates mainly on the verification of the items

in the balance sheet, such as capital, reserve & provisions, profit & loss account
balances, assets & liabilities of the business. It may be noted that in case of balance
sheet audit, audit work commences from the balance sheet, working back to the
books of original entry & documentary evidences.

Suitability:

It is suitable for small & medium sized business units. It is also quite
effective in those big concerns, which have a good internal control system &
qualified accountants.

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Difference between continuous audit & Balance sheet Audit

Basis Continuous Audit Balance sheet Audit
1.suitability It is suitable for big It is quite suitable for small
business &
units, where the medium sized business
volume of business units.
transactions is
numerous.
2.Detection of It facilitates auditor to It does not facilitate
error & frauds detect auditor to
errors & frauds easily & detect errors & frauds
quickly. easily & quickly.
3.Moral check Frequent visits of the The auditor visits the
auditor to clients
the client’s business business only at the end
impose a moral check of the accounting year.
on the accounting staff . Therefore it is difficult
for the auditor to impose
a moral check on the
accounting staff.
4.Preparaition of It will helps in the It will not help in the
interim accounts preparation of preparation of interim
interim accounts accounts without much
without much delay. delay.
5.Work Auditor can carry out his It may be difficult for the
efficiency work auditor to carry out his
more efficiently. work more efficiently.
6.Expensive It is very expensive. It is less expensive.
7.Time It involves more time. It involves less time.
consuming
8.Alteration of Figures may be altered by There is no scope for
figures the alteration of figures.
dishonest accountant.
9.Monotony There is the danger of the There is no danger of the
audit audit
wok becoming work becoming
mechanical. mechanical.
10.Inconvenience It may cause It may not caused
inconvenience to inconvenience to the
the client’s staff clients staff.

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d) FINAL AUDIT OR ANNUAL AUDIT OR PERIODICAL AUDIT OR

COMPLETED AUDIT

It is an audit, where the auditor takes up his work of checking the books of
accounts at the end of the accounting period, when the transactions for the whole
year are completely recorded & financial statements have been prepared.

In simple words final audit is an audit which is done after the financial
period is over and the accounts are ready. It is continued in a session until the
complete audit work is over. It is also known as Annual or periodical audit.

Definition of Final Audit

According to Spicer and Pegler, “a final or completed audit is commonly
understood to be an audit which is not commenced until after the end of the
financial period, and is then carried on until completed.”

Suitability:
Final audit is adopted by almost all concerns. This type of audit is more
suitable for small concerns.

Advantages of Final Audit

1. Final audit is less expensive. Therefore, it is suitable for small concerns.

2. It involves less time. The audit work can be finished quickly within a reasonable
time.
3. There is less scope for alteration of figures. As audit work is done only in a one
continuous session chance for alteration figures.
4. There is no scope for the auditor may to lose the link of the work. As audit work
is done & completed in a continuous session, link in work can be properly
maintained.
5. There is less danger for the audit work becoming mechanical.
6. It does not cause inconvenience to the client’s staff, as the auditor visits the
client’s office only once a year the office work is not unnecessarily disturbed.

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Disadvantages of Final audit

1. Auditor does not get sufficient time to check all the books of accounts in
detail. Hence there is every chance that some of the errors & frauds may be left
undetected.
2. Auditor does not impose a moral check on the accounting staff to keep the
books of accounts, up to date and accurate.
3. It is not possible for the accountant to present the audited financial
statements to the owners of the business immediately after the close of the
accounting year.
4. Auditors do not get an opportunity to familiarize himself with all the
aspects of the clients business.
5. It does not help him them in preparing interim accounts in time.
6. For large scale concerns, periodical audit is rarely practicable & it is not
much popular for them.

e) PARTIAL AUDIT

When the auditor is asked to check some of the records and books for a part
of whole of the period, it is called as partial audit.

It is kind of audit, where the work of the auditor is curtailed (limited). For
instance, auditor may be asked to check only the cash book to detect
misappropriation of cash. It may be noted that partial audit is not permitted in case
of companies.

f)OCCASIONAL AUDIT
It is a kind of audit, which is not conducted on a regular basis.

An occasional is audit is an audit which is conducted once a while,

whenever the need arises. It is kind of audit, which is not conducted on a regular
Basis, but is conducted for a special event, time or purpose. For instance, if an
audit is ordered to discover error or fraud or when an incoming partner or a
creditors desires etc. It is called occasional audit. It is not suitable for joint stock
companies.

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II. ON THE BASIS OF SPECIFIC OBJECTIVES OF AUDIT

a) Cash Audit:

It is a type of audit which only the cash receipts & payments are audited in
detail by the auditor.

b) Cost Audit

It is an independent & critical examination of the various records maintained

by the company by the cost auditor to ascertain whether cost of the product
manufactured by the company have been correctly in accordance with the
correct costing principles.

Cost Audit is the verification of the correctness of cost accounts and

adherence to the cost accounting plans. Cost Audit is the detailed checking of
costing system, techniques and accounts to verifying correctness and to ensure
adherence to the objectives of cost accounting.

c) Management Audit

The auditor examines the policies & the actions of the management to
ensure that there is proper & maximum utilization of available resources.

Management audit is a systematic examination of decisions and actions of

the management to analyse the performance. Management audit involves the
review of managerial aspects like organizational objective, policies, procedures,
structure, control and system in order to check the efficiency or performance of
the management over the activities of the company.

d) Special Audit

When the affairs of the company are not being managed, according to the
sound business principles, the central government is empowered to appoint a
special auditor to audit the company’s working & its state of affairs. Such audit
is known as special audit.

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e) Operational Audit

It involves intelligent examination of the various operation of the different

functional area of a business, & observing the weakness, lapses, inefficiencies
in operation & suggesting ways for strengthening the system.

Operational audit is the type of audit service that the review is mainly
focused on the key processes, procedures, system, as well as internal control
which the main objective is to improve productivity, as well as efficiency and
effectiveness of the operation.

f) Performance Audit

It is a procedure for analyzing the profits & losses of different economic

activities carried on by a business unit, examining the relationship between
production & sales & discovering the avenues for maximizing profits.

g) Propriety Audit

It is carried out with the objective of ascertaining that contracts entered into
with third parties are in the best interest of the concern & there is a system,
which ensures the safety of the assets of the concern.

In other words, Propriety Audit is that audit through which the auditor
ensures that the decisions taken by the management are for the benefit of the
organization, the expenses incurred are absolutely necessary to carry on the
businesses, the amounts expended are reasonable and there is no leakage of
revenue or misappropriation of funds.

III. ON THE BASIS OF DEGREE OF INDEPENDENCE

1. Independent Audit or External Audit

It is conducted by the independent qualified auditor. The purpose of

independent audit is to see whether financial statements give true and fair view of
financial position and profits. Mainly it is for safeguarding the interest of owners,

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shareholders and other parties who do not have knowledge of day-to-day

operations of organization.

External auditors are independent firms that inspect the accounts of entity &
render an opinion on whether its statements conform to GAAP & present fairly the
financial position of the company & the results of operations.

The external auditor’s primary obligation is to users of financial statements

outside the organization. External auditors are required to register with ISO 9000.

2. Internal Audit

Internal Audit is a continuous & systematic review of accounting, financial &

other operations of a concern by the staff specially appointed for the purpose.

Internal auditing considers the examination, monitoring & analysis of

activities related to a company’s operation, including its business structure,
employee behaviour & information system.

IV. ON THE BAISI OF ORGANISATIONAL STRUCTURE

1. Statutory Audit or Compulsory Audit

It refers to the audit of accounts of a business unit compulsorily under the

provisions of a statue or law. It is carried out in number organizations such as a
Joint stock companies, Banking Companies, Insurance companies etc.

2. Private Audit or Voluntary Audit

Where the audit is not compulsory under any statue, but is undertaken by the
owners voluntarily to get the benefits of audit, such audit is known as private or
voluntary audit. This suits to sole trading concerns, partnership firms & other
individuals.

3. Government Audit
It refers to the audit of accounts of Government Departments & offices
Government Companies & statutory or public corporations.

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Merits and Demerits of Auditing

Merits of Auditing

1. Ensures account correctness: Auditing conducts a detailed examination of

all accounting books of an organization. It finds out the accuracy of
financial records and ensures whether they fulfill all statutory requirements
or not.
2. Detects and prevent errors: It plays an efficient role in finding out errors
and prevention of fraud. Auditing evaluates each financial transaction of
business for checking if there is any mistake or not. This way it reduces the
chances of errors and overall risk occurring due to such errors or frauds.
3. Helps in maintaining accounts regularly: Maintenance of all accounts on
a regular basis is another major advantage provided by the auditing process.
It keeps a check on the regularity of account and raises questions if they are
not maintained in an adequate manner.
4. Easy procurement of loans: Auditing reports serves as a tool for easily
acquiring the required funds from various financial institutions. These
reports depict the true financial position of organizations to investors which
helps them in deciding the credibility of concerned business organizations.
5. Keeps morale check: Auditing monitors the overall financial dealing of
organizations. This prevents the working staff from committing any error
and fraud. All employees work efficiently towards their role with a fear that
all irregularities will be identified by auditing.
6. Assists in decision making: It provides valuable information to managers
for efficient decision making. Auditing is done by various experts of account
and finance who have detailed knowledge of subjects, so they provide
advice and resolves all problems.
7. Stakeholder’s confidence: Auditing statements enables in gaining the
confidence of stakeholders. All stakeholders such as creditors, shareholders,
banks, investors, etc. have more confidence in audited financial accounts of
the company.

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Demerits of Auditing

1. Costly: Auditing process puts a financial burden on organizations as it

requires the huge cost to conduct an examination of all financial accounts.
Business needs to pay large fees to auditing experts for their services.
2. Rely on experts: Auditor is dependent on experts of various fields for
conducting auditing process. For acquiring true information regarding the
valuation of fixed assets and contingent liabilities, he needs to approach
valuers, engineers and lawyers.
3. Impossibility of checking all transactions: Another major drawback of
auditing is that it is not always possible to check each financial transaction
of organizations. Some organizations are too big and have a large number of
transaction, where evaluating all of them become quite an impossible task.
4. Unsuitable for small concern: Auditing may not be fruitful for small
organizations where there are limited transactions. Their accounts can be
evaluated without an audit program.
5. Chances of fraud: Audit may lead to errors and frauds in a business. Audit
staff may perform their task carelessly and present an inaccurate audit
report. Also, there may be chances where staff auditing accounts may be har
assed within the organization and may be forced to manipulate the figures.

Relationship of Audit with other disciplines

1. Accounting: It is a known fact that auditing and accounting are closely

related. Auditors rely on accounting records and financial statements to
assess accuracy of financial information. It naturally calls on the part of the
auditor to have a thorough and sound knowledge of generally accepted
principles of accounting before he can review the financial statements.

2. Law and Legal Studies: Auditors need a strong understanding of laws and
regulations that pertain to financial reporting and business operations. Such
knowledge helps to ensure compliance of auditing with relevant laws.

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3. Economics: It is a fact that economic trends and indicators can impact on

entity’s financial performance and risk profile. So, auditor must consider
economic factors when assessing an organization’s financial health.

4. Statistics and Data Analysis: Auditing involves analyzing large volume of

financial data. Statistical techniques helps auditor to determine the reliability
of financial information, identify unusual patterns and select sampling for
testing.

5. Mathematics: Auditors use Mathematical calculations to pertain analytical

procedures, evaluate financial ratios and assess the reasonableness of
financial figures.

6. Finance and Investment: It helps auditors to evaluate an organization

financial performance and assess its investment attractiveness. So, auditing
plays a significant role in providing assurance to investors and stakeholders.

7. Management and Business Administration: knowledge of management

principles helps auditors to assess organization operations, internal control,
risk management processes and operational processes .

In addition to the above auditing has a relationship with Information

Technology (IT), Ethics and Philosophy, Environment Studies, Psychology
and communication and Risk Management.

Preparation before commencement of new Audit

1. Obtaining the letter of appointment

He must have a proper letter of appointment from the appropriate authority
& ensure that his appointment is an order. Further if he has been appointed in place
of another auditor, he should enquire from the retiring auditor, the reasons for the
changes.

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2. Knowing the nature & scope of his duties

He should obtain definite instructions from his client about the nature &
scope of his work i.e. whether he is to do continuous audit or final audit, whether
he is to do the accountancy work or audit work or both. This question will not arise
in the case of companies, as his duties, powers & liabilities are laid down by the
companies act itself.
3. Knowledge of the system of accounting employed
He should examine the system of accounting employed by his client. If he
finds any weak point, he must study it thoroughly & make recommendation to his
client to remove these weak spots.
4. Obtaining of the list of principal officers of the client’s organization
He should obtain a list of principal officers of the client’s organization
together with their authorities and responsibilities. This will help them to obtain the
required information from them.
5. Knowledge of internal control in force in the client’s business
He should obtain a written statement of internal control system in force in
the client’s organization. It will help him in determining the extent of his audit
work.
6. Obtaining of the list of books
He should obtain a list of all the books maintained in the office, together
with the names of in charge persons & their specimen signatures. A list should be
duly signed by a responsible official of the company.
7. Study of the previous year’s financial statements
He should study the previous year’s financial statements as well as the
auditor’s report. This will help him to know the state of affairs of the concern.
8. Study of the important documents
He should study all the documents like Memorandum of Association, Article
of Association etc., which have a bearing on the accounts.

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9. Giving instructions to the client

He should give clear instruction to his client in regard to the following:
a) The books should be closed before audit.
b) The vouchers should be arranged date wise.

If this has not been done, he should never begin his work until the
documents are arranged as per the instructions given by him.

10. Ascertain the nature of business

He should ascertain the nature of the business of his client i.e. whether it is
manufacturing or trading or service. The knowledge helps the auditor in planning
of the audit procedure.
11. Knowledge of the organization structure
He should get organization structure present in the client’s business. This
will help the auditor in planning his work procedure wisely.
After all the above steps are taken auditor should prepare his audit
programme that is a complete programme of his audit work.

Audit working papers

Audit working papers are the written private materials which an auditor
prepares for each audit. They describe the accounting information which he has
received from his client, the methods of examination used, his conclusions &
financial statements.

Advantages of Audit working papers

1. It provides evidence of work done to support the audit opinion.

2. It assists in planning future audit.
3. It helps to organize the work done.
4. Audit working papers increase value for the audit by improving the efficiency,
effectiveness and economy of an audit carried out.

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5. Audit working papers contains all evidence obtained and conclusions drawn for
future reference
6. It provides evidence of work done in case of litigation.

Disadvantages of Audit working papers

1. Maintaining comprehensive audit working papers can be time consuming and

resource intensive.
2. The creation of management of audit working papers can add to the overall
cost of conducting an audit. .
3. Lack of standardization in audit working papers, which can lead to
inconsistencies in documentation across different auditors and audit firms.
4. Maintaining confidential and sensitive information about the client’s financial
and operational processes is crucial.

Essentials of Audit Working papers

1. It should be in a standard form, the subject matter should arranged under

various headings and sub-headings.

2. Paper used for the preparation of working papers should be of better quality
and uniform size.
3. The relevant details should always be kept in the working papers. All
irrelevant information should be kept out of the space in order to enhance
their utility for the purpose for which they are kept.
4. The audit working paper files should be properly preserved and filed. These
files should be serially numbered and indexed so that they may be made
available whenever they are needed.
5. They must contain accurate information so that they will be relied upon.
6. They should contain the facts, which are of self-explanatory.
7. The facts given in working papers should be readily apparent to the reader.

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Auditors Note Book or Audit Memoranda

Meaning of Audit Note Book

Audit note book is a diary or register maintained by audit staff to note errors,
doubtful quarries and difficulties during the course of action.

An Audit Note book is a book, register or diary maintained by the audit staff
during the course of audit for recording his observations during the course of audit,
the points to be discussed with the senior audit clerk or auditor, the points which
require further clarifications, explanations & investigation & also the enquiries
made & the replies received there too.

Contents of Audit Note Book

1. A list of books of accounts maintained.
2. The names, duties and responsibilities of principal officers.
3. The particular of missing receipt and voucher the duplication of which have to
obtain.
4. Mistakes and errors detected or discovered.
5. Queries made and replies received.
6. The important points which need clarifications and explanations.
7. Various totals and balances.
8. The Points to be a part of audit report or points to be included in the audit
report.

Advantages of Audit Note Book

1. It helps the auditor to have a record of important points which arise during
the course of audit.
2. It is helpful in the preparation of audit report.
3. It is helpful in assessing the efficiency, ability & sincerity of the audit staff.
4. It can serve as evidence in the court of law, if a suit is filed against the
auditor for negligence of duty.

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Disadvantages of Audit Note Book

1. If it is not prepared carefully & properly, it can be used in a court of law as

an evidence of negligence on the part of the auditor.
2. It promotes a fault-finding attitude in the minds of the audit staff.
3. It may create misunderstanding between the staff of the client & audit staff.

Audit Program

Meaning of Audit Program

An audit program is the auditor’s plan of action, specifying the work to be

done, the procedures to be followed for doing the work, the persons responsible for
the completion of the work & the duration of time within which the work has to be
completed.

Advantages of Audit Program

1. Helps in Estimation and Division of Work: Audit Programme helps

in estimating the quantum of audit work in advance and also helps in dividing the
work among the audit assistants based on their capabilities.

2. Helps in Fixation of Responsibility: It enables to fix responsibility on the

audit assistants by clearly defining the scope of work.

3. Helps in Future Planning: Audit programme serves as a basis for planning the
audit work for subsequent year.

4. Serves as a Guide: It serves as a valuable guide for the audit staff in execution
of the audit work for succeeding years.

5. Valuable Evidence: It serves as an evidence for the work done as initials of

those who have done the particular work are appended to it. The auditor can
produce the audit programme as a proof when a charge of negligence is being
brought upon him.

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6. Uniformity: It provides for uniformity in audit work as the same work will be
done every year.

7. Continuity: When an audit staff goes on leave others can continue the work by
referring to the audit programme, hence, audit programme provides for continuity
of work.

8. Coordination: If facilitates coordination and helps in supervising the work of

the audit staff.

Disadvantages of Audit Program

1. Mechanical: When audit work is conducted mechanically every year based on

the audit programme, it causes monotony and boredom to the auditor and audit
staffs.

2. No Quality in Work: The audit staff will be more interested to complete the
work in time rather than to maintain any standard in the work.

3. Loss of Initiative: Audit staff cannot take their own decisions and they are
compelled to comply with the audit programme. Hence, an efficient audit clerk
loses his initiative and interest as he cannot make any suggestions.

4. Rigidity: A rigid and inflexible audit programme cannot be laid for all types of
business. During the course of audit, new areas to be verified may come to the
notice of the audit staff. Unless the audit programme is revised, such areas may
escape from auditing.

5. Shelter for Inefficient Staff: Inefficient audit staffs conceal their mistakes or
weakness on the basis of audit programme. Hence, it provides shelter for
inefficient audit staff.

6. Unsuitable: Pre-determined audit programme is not suitable for small business

organizations.

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Qualities of an Auditor

Statutory Qualification

1. Only Chartered Accountant is qualified to act as an auditor of the company.

2. A firm can be appointed as the auditor of the company, if all partners are
practicing Chartered Accountant in India.
3. A person, who holds certificate under restricted Auditors Certificate Rules,
1956 is also qualified to act as an auditor of the company.

Professional Qualities

1. He should have knowledge of principles and practice of General accounting,

cost accounting and Management Accounting.
2. He should have knowledge of provisions relating to Income Tax, Sales tax
and Wealth tax etc.
3. He should have knowledge of Economics, Business law, Mathematics,
Statistics, Business management and financial management etc.
4. He should have the ability to draft the report clearly, correctly concisely,
5. He should be vigilant and alert in his work.
6. He should be methodical and systematic.
7. He must not disclose the confidential information about the business of his
clients to others.
8. He should convey information but not means of information.

Audit Planning

"Audit planning" means developing a general strategy and a detailed

approach for the expected nature, timing and extent of the audit. The auditor
plans to perform the audit in an efficient and timely manner.

In simple words, developing an overall strategy for the effective conduct and
scope of the examination.

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Importance of Audit Planning

1. It helps the auditor to obtain sufficient appropriate evidence.

2. It helps to keep audit costs at a reasonable level.
3. It helps avoid misunderstandings with the client by clear communication and
collaboration.
4. Audit planning includes establishing the overall strategy for the audit
engagement, with a particular focus on planned risk assessment procedures and
responses to the identified risks of material misstatement.
5. Proper planning helps to work efficiently and ensures auditing is conducted in
accordance with auditing standards.

Audit Strategy
It refers to the comprehensive plan and approach developed by an audit team
to conduct an effective and efficient audit. It outlines the scope, objectives and
methods that will be employed during the audit process to achieve the desired
outcomes.
The audit strategy sets out in general terms how the audit is to be conducted
and sets the scope, timing and direction of the audit. The audit strategy then guides
the development of the audit plan, which contains the detailed responses to the
auditor's risk assessment.

Audit Engagement
An audit engagement is a formal agreement between an auditor and a client
in which the auditor agrees to provide an objective opinion on the client's financial
statements, processes systems or controls. The engagement is governed by a
mutually agreed upon contract or engagement letter that outlines the terms, scope,
objectives, responsibilities and other relevant details of the audit.
Types of Audit Engagement

1. Financial statement audit: This is the most common type of audit

engagement, in which the auditor is engaged to express an opinion on the
fairness of the financial statements of an organization. The financial
statements may include the balance sheet, income statement, statement of

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cash flows, and statement of changes in equity.

2. Internal audit: This type of audit is performed by an organization's internal

auditing department or an external auditor. It is designed to assess the
effectiveness of the organization's internal controls and risk management
systems.

3. Operational audit: This type of audit is focused on evaluating the

efficiency and effectiveness of an organization's operations and processes. It
may include a review of the organization's processes, systems, and controls,
as well as its use of resources.

4. Compliance audit: This type of audit is designed to assess whether an

organization is complying with relevant laws, regulations, contractual
agreements and standards. It may involve a review of the organization's
policies, procedures, and controls to ensure compliance.

5. Information technology (IT) audit: This type of audit focuses on the

organization's use of information technology and may include a review of
the organization's IT systems, controls, and processes over data integrity and
security.

6. Forensic audit: This type of audit is designed to investigate potential fraud

or mismanagement or misconduct or irregularities within an organization. It
may involve the use of specialized techniques and tools, such as data
analytics, to uncover evidence of wrongdoing.

Audit Documentation

Audit documentation refers to the records, documents, and evidence

obtained and maintained by the auditors during an audit engagement. These
documents provide a comprehensive and organized record of the audit
process, procedures performed, evidence obtained and conclusions reached
and any other relevant information related to the audit.

Audit documentation is the principal record of auditing procedures

applied, evidence obtained, and conclusions reached by the auditor in the

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engagement. The quantity, type, and content of audit documentation are

matters of the auditor’s professional judgment.

Audit Evidence

It is the information and supporting documentation gathered by the auditor

during an audit engagement.

Audit evidence is all the information, whether obtained from audit

procedures or other sources that is used by the auditor in arriving at the
conclusions on which the auditor's opinion is based.

Types of Audit Evidence

1. Physical examination: This involves inspecting tangible assets, such as inventory,

machinery, property or assets or documents, to verify their existence, condition, or
ownership. Physical examination provides direct evidence and is often documented
in audit work papers.
2. Confirmations: This refers to relying on third parties such as banks or customers
to confirm balances or transactions of various aspects of the financial statements
(for example, the closing bank balance or accounts payable records).
3. Documentary evidence: Auditors will gather documentation such as written or
electronic records, invoices, bank statements, internal process documents, emails,
provide documentary support for transactions and balances and to help with
different portions of the overall audit. For example, the auditors may use the
documentation for vouching or tracing a process flow as a part of the audit
procedures.
4. Analytical procedures: Comparing financial information with expectations or
industry benchmarks helps to identify unusual or unexpected fluctuations that may
require further investigation. This includes any analysis performed by the auditors
using their calculations to substantiate the financial information and any
accounting records provided by the client to find discrepancies.
5. Oral evidence: Auditors may hold question-and-answer sessions with their client’s
senior leadership team, employees, management or other parties to inquire about
the business operations when audit planning and designing the audit procedures.

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6. Re-performance and Reconciliation: The auditor assesses the control risk by re-
performing key internal control processes to check for deficiencies and also auditor
perform calculations or reconcile accounts to verify accuracy.
7. Observatory evidence: Auditors may observe control activities or physical
processes or operations to assess their effectiveness. This allows them to assess the
effectiveness of internal controls, compliance with regulatory requirements, or
adherence to specific procedures.

Written representation

Written representations refers to formal written statements by management

to the auditor to confirm certain matters related to financial statements, internal
controls, and other information being audited.

Written representations are written statements by management to the auditor

that confirm and/or support other audit evidence. Written representations are part
of audit evidence and are obtained from management during the fieldwork phase of
the audit. Written representations complement other audit evidence. They are not
considered to be sufficient audit evidence for any assertion made in the financial
statements, and getting written representations from management does not
influence the nature and extent of other audit procedures.

Written representations should be requested from management with overall

responsibility and knowledge of the matters they contain. Written representations
are usually signed by the chief executive officer and the chief financial officer of
the company.

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MODULE NO-2 RISK ASSESSMENT AND

INTERNAL CONTROL

Introduction

Audit risk is the risk that an auditor may issue an incorrect or misleading
audit opinion on a set of financial statements. Audit risk is the probability that the
company’s financial statements contain an error that is material to the company
even though the same has been verified and audited by the company’s auditor
without any qualification concerning it.

Meaning of Audit Risk

Audit risk is the risk that auditors face, when they issue an incorrect opinion
on the financial statements, leading to the possibility that the statements are
materially misstated. In other words it is the overall risk that the auditor is willing
to accept for issuing an audit opinion.

Audit risk (also referred to as residual risk) as per International Standards on

Auditing (ISA) 200 refers to the risk that the auditor expresses an inappropriate
opinion when the financial statements are materiality misstated.

Audit risk is the risk that an auditor will not detect errors or fraud while
examining the financial statements of a client.

Definition of Audit Risk

Audit risk is defined as the risk of financial statements not being truly
representative of an actual financial position of the organization or a deliberate
attempt to conceal the facts even though audit opinion confirms that statements are
free from any material misstatement. This risk can have a bearing on shareholders,
creditors, and prospective investors.

Components or Types of Audit Risk

1. Inherent risk (IR) is the risk involved in the nature of business or transaction.
The inherent risk could not be prevented due to uncontrollable factors, and it is
also not found in the Audit.

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It is the susceptibility of an assertion in the financial transactions to

material misstatements even in the absence of controls.

Example: transactions involving exchange of cash may have higher

inherent risk than transactions involving settlement by cheques.

2. Control risk (CR) is the risk that a misstatement may not be prevented or
detected and corrected due to weakness in the entity's internal
control mechanism. Control Risk is the risk of error or misstatement in
financial statements due to the failure of internal controls.

It is the risk that internal controls will fail to prevent or detect material
misstatements in the financial statements.

Example: control risk assessment may be higher in an entity

where separation of duties is not well defined

3. Detection risk (DR) is the risk of failure on the auditor’s part to detect any
errors or misstatements in financial statements, thereby giving an incorrect
opinion about the firm’s financial statements.

Example: Failure by Auditors to identify the company’s continuous

misreporting of financial statements.
Audit risk can be calculated as:
Audit risk (AR) = Inherent risk (IR) x Control risk (CR) x Detection
risk (DR)

Assessment of Risk

Risk assessment is the identification and analysis of relevant risks to the

achievement of an organization's objectives, for the purpose of determining how
those risks should be managed.
Risk assessment is the identification and evaluation of several aspects of an
entity whereby risks are identified and evaluated for use in guiding the audit
procedures that will be necessary in order to substantiate the amounts reported in
the financial statements.

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Assessment process or process of Assessment

I. Understanding the entity and environment

a) Gain an understanding of the clients business, industry and operations.
b) Consider external factors that could impact the financial statements.

II. Identify Risks

a) Identify potential risks that could lead to material misstatements.

III. Assessing inherent risk

a) Evaluate the inherent risk for various accounts and assertions.
b) Assess factors such as complexity, subjectivity and susceptibility to fraud.

IV. Assessing control risk

a) Evaluate the effectiveness of internal controls.
b) Consider the design and operation of controls.

V. Determining detection risk

a) Determine the level of detection risk needed to achieve the desired result level
of audit.
b) Adjust detection risk based on the assessed inherent risk and control risk.

Internal Control

Meaning of Internal Control

Internal Control means “The whole system of controls, financial or

otherwise, established by the management in order to carry on the business of the
company in an orderly manner safeguard its assets & secure as far as possible the
accuracy & reliability of its record”.

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Internal control is a broad term with a wide coverage. It covers the control of
whole management system. Internal control involves a number of checks and
controls exercised in a business to ensure its efficient and economic working.

Definition of Internal Control

According to The American Institute of Certified Public Accountants,

“Internal control comprises of the plan of organization and all the coordinated
methods and measures adopted within a business to safeguard its assets, check the
accuracy and reliability of its accounting data to promote operational efficiency
and to encourage adherence to prescribed managerial policies.”

Objectives of Internal Control

1. To evaluate the efficiency of performance in the various activities of the
business.
2. To ensure orderly, efficient & economic conduct of the business.
3. To see that access to & use of assets are made only with proper authorization.
4. To safe guard the assets of the organization by preventing frauds, waste &
inefficiency.
5. To ensure that there is periodical verification & comparison of assets in
existence with those of accounting records & appropriate action is taken, when
there is any difference between the two.
6. To ensure that transactions are recorded in the proper books of accounts
regularly, correctly & systematically according to policies & procedures & the
accounts are accurate & reliable.

Internal Check

Meaning of Internal Check

It is the arrangement of the accounting duties under which the work of one
person comes under the scrutiny (ana1ysis) of another person, so that it is not
possible to commit fraud without collusion between two or more persons.

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Internal check is the valuable part of the internal control. It is an

arrangement of the duties of members of staff in such a manner that the work
performed one person is automatically and independently checked by the other.

Definition of Internal Check

According to F.R.M.De Paula, “Internal check means practically a

continuous internal audit Carried on by the staff itself, by means of which the work
of each individual is independently checked by other members of the staff.”

According to L.R Dicksee” Internal check is an arrangement of the

accounting routine that errors & frauds are automatically prevented or discovered
by the very operation of the book keeping itself’.

Objectives of Internal Check

1. To prevent the commission of any error or fraud by a clerk
2. To prevent the misappropriation of cash or goods by any clerk.
3. To throw responsibility on a particular clerk, when the fraud or mistake is
detected.
4. To detect a fraud or an error quickly & easily.
5. To have an accurate record of all business transactions.

Advantages of Internal Check

1. Proper Division of Work.

2. Efficiency and Economy.
3. Early Detection of Error and frauds.
4. Minimization of Error and Frauds.
5. Moral Influence on Staff.
6. Early Preparation of Final Account.
7. Increased Profitability.
8. Convince to Auditor.

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Disadvantages of Internal Check

1. Decreased in Quality of Work.
2. Costly for the Small Business.
3. Create Confusion.
4. Chance of Collusions.

Fundamental Principles of Internal Check

1. The system of internal check should be simple, easily workable and effective.
2. The internal check system should not be too expensive. It should be economical
for the concern.
3. The authority, duties and responsibilities of the staff should be clearly defined
that is there should be proper division of responsibility or work among the
members of the staff.
4. The division of work among the staff members should be based on their
qualifications, area of specialisation, experience and capabilities.
5. There should be no over-lapping or duplication of work at any level.
6. The duties among the staff of the business should be changed from time to time
so that no staff should be engaged in a particular job for a long time.
7. Every member of the staff should be encouraged to go on leave at least once in
a year .This will help in detecting the concealed errors and fraud.
8. Works relating to purchases, purchase returns, sales, sales returns, allowances,
discounts, bad debts etc should be performed by responsible officials under
strict control.
9. There should be effective control over all purchases, receipts and issue of
goods.
10. The receipts and payments of cash should be entrusted to different persons.
11. All remittances received should be deposited into the bank either on the same or
on the next day.
12. The cashier should have no access to the ledgers.
13. All payments should be made by crossed cheque as far as possible.
14. The cash and the bank balances should be verified frequently by a responsible
official.
15. Safeguards should be prescribed for the safe custody of unused cheque books,
securities, confidential files etc.

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16. The work of correspondence with the debtors and the creditors should be under
the charge of a responsible person.
17. The debtors and creditors of the business should be requested to send
statements of accounts the certain intervals to a responsible official.
18. All incoming letters, mails should be opened by a responsible official who
should enter all the letters, money orders, postal orders, cheques etc received in
a proper register.
19. The filing of vouchers should be done systematically either number wise or date
wise.
20. The system of internal check should be reviewed from time to time to ascertain
the loopholes and to introduce improvements.

Internal check as regards to payment of wages

To minimize the fraudulent manipulations of wage records, cash & the other
risks, the following internal check system can be adopted.

I. Maintenance of wage records

1. Time recording clock should be maintained for recording the time of workers
entering & leaving the place of work
2. If the workers are paid on the basis of piece wages system, proper books for
recording the actual work done by workers should be maintained.
3. If workers are allowed to work overtime, overtime slip must be issued to such
workers by the properly authorized official.
4. If any worker wants to go out of the factory, he should take written permission
from the authorized person.
5. If casual workers are also employed in the organization, a list of such workers
must be prepared by the foreman of each department. The list so prepared must be
certified by the officer, who is authorized to appoint casual workers.

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II. Preparation of Wage Sheets:

The work of preparation of wage sheets should be done by a separate

department. This work should be done at least by four clerks, so that irregularities
may be minimized. For example two clerks should examine the time records, piece
wage records, overtime records etc. the third clerk should prepare individual
employee statements i.e. address of the worker, work done & rate of wages. The
fourth clerk should check the calculations & deduct the rent, provident fund,
income tax & installment of loans etc., from the gross wages to arrive at the net
amount to be paid to the workers. All these clerks should initial the wage sheets
before they are signed by the works manager.

III. Payment of wages

1. The cashier should withdraw the net amount as shown in the wage sheets.
2. The payment of wages must be made by a person, who is in no way concerned
with the preparation of wages sheets.
3. Each worker, who is to receive the wages should be present at the time of
disbursement.
4. The foreman of each department should be present at the time of payment to
identify the workers of his section.
5. The signatures of the workers must be obtained, when they receive the amount
of wages.
6. Special arrangement should be made to pay to the absentee workers.
7. A list of unpaid workers should be prepared by the cashier & foreman of each
department.
8. The officer employing casual workers should be connected with the payment of
wages
9. As far as possible casual workers should be paid wages on a day different from
the payment day of regular workers.
10. A surprise visit of a senior official, while the wages are disbursed will be an
effective measure of control.

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Internal Check as regards to cash sales

For efficient working of sales department, its activities can be arranged in

the following manner:

I. Sales over the counter

1. For each counter, a separate salesman should be appointed to look after counter.
2. Each salesman should be given a separate sales memo book. Such books should
be of different colours for different counters.
3. The salesman when he sells the goods to the customers, he should prepare three
copies of cash memo. One copy should be retained for preparing sales summary &
the remaining two copies should be handed over to the customer & instruct the
customers to make payment at the cash counter.
4. The cashier, after having received the price of the goods from the customer,
should give one copy duly stamped as cash paid to the customer & other copy must
be retained by him.
5. At the end of the day, the cashier should prepare statement showing total cash
received & salesman should prepare sales summary to know the total sales. Then
both these statements should be sent to the officer in charge for verification.

II. Postal Sales:

1. A separate register should be maintained for recording sales made by (VPP)

value payable by post.
2. The goods returned should also be recorded in the value payable by post
register.
3. The total receipts on this account should be entered in the value payable by post
register.
4. Any advance received should be entered in the value payable by post register.

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III. Sales by Travelling Agents

1. The travelling agents should be allowed to issue rough receipts to the customers
for cash received on the sale f the articles. Final receipts should be issued only by
the head office.
2. Agents should remit the entire proceeds to the head office or they should deposit
the cash daily in a bank.
3. Agents should not be allowed to deduct their commission out of sale proceeds
collected by them.
4. The agent should be asked to submit statements of sales & such statements
should be check in detail.
5. Head office should maintain a list of debtors & other customers. Reminders
should be sent to those customers who have not cleared their debts.

Internal Check as regards to cash Purchases

1. Requisition: The procedure for issuing purchase requisitions should be

specified. The head of the department, who is in the need of goods, should fill
in a requisition slip duly signed and then should send it to the purchases
department. The details about the quantity, quality and the time by which the
goods must be supplied be clearly mentioned in the requisition slip

2. Enquiry: Purchase department makes an enquiry about the terms and

conditions of purchases from different suppliers. For this purpose tender are
generally invited. But, who shall open and accept the tenders, should be clearly
specified. At a rule, the lowest tender should be accepted and accordingly a
decision be taken.

3. Purchase Order: The Purchase Department places orders which should be

recorded in the Purchase Order book. Four copies of purchase order should be
prepared. One copy will be sent to the vendor, second to the store department,
third copy to the Accounts department and fourth one will be retained by the

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purchase department itself. A responsible officer should review the purchase

order, before signing by the authorized person or director.

4. Receipt of Goods: On receipt of goods, the purchase department should be

properly inspecting them, and there after an entry in the goods inward (Receipt)
book, the same should be sent to the stores. Concerned department should be
informed about the receipt of the goods.

5. Making the Payments: The Purchase Department should thoroughly check the
invoices and send the same to accounting department for payment. The
accounting department should compare the invoice with the purchase order and
Incoming Inspection Report and should also verify the calculation. The
Accounts Department should enter the invoice in the Purchase Book. Only
responsible official should draw cheque for the payment of invoice. At the time
of signing, a signing authority must verify that correct payment is made. If
some portion of the goods is returned to the supplier, a proper entry must be
made in the Purchase Return Book. A Credit Note to that effect must be
obtained from the supplier and accounts section must adjust the payment
accordingly.

A good system of internal check with regard to purchase will prevent the following
types of irregularities, errors and frauds.
a) Fictitious Payment: Fictitious Purchase may be recorded in the purchase book
and the payments withdrawn may be misappropriated.
b) Double Payment: Some invoices may be recorded twice and double payment
made may be misappropriated.
c) Artificial inflation in profits: Goods purchased may not be entered in the period
so as to inflate profits.
d) Artificial reduction in profits: Goods not received in one period may be entered
as purchases so as to show profits less than the actual.
----------------------------------------------------------------------------------------------------

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MODULE NO-3 VERIFICATION AND VALUATION OF ASSETS AND LIABILITIES

VERIFICATION

Introduction

Verification means the act of assuring the correctness of value of assets and
liabilities in the organization. It refers to the examination of proof of title and their
existence or confirmation of assets and liabilities on the date of Balance Sheet. It
usually indicates verification of assets of any organization, which can be done by
examination of values, ownership, existence, possession of any assets and also
ensures that the assets are free from any charge.

Meaning of Verification

Verification is a process by which an auditor satisfies himself about the

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

In other words, verification means proving the truth or confirmation of the

assets & liabilities appearing in the balance sheet.

Thus, verification includes verifying:

1. The existence of the assets and liabilities.

2. Legal ownership and possession of the assets.
3. Correct valuation.
4. Ascertaining that the asset is free from any charge.

Definition of Verification
According to Spicer & Pegler “Verification as it implies an inquiry into the
value, ownership & title, existence & possession & the presence of any charge on
the assets”.

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J. R. Batliboi defines it as, “The auditor must satisfy himself that assets
really existed at the date of the Balance Sheet and were free from any charge and
that they have been properly valued”.

Objectives of Verification of assets and liabilities

1. To verify whether the value of assets and liabilities shown in the balance sheet
are valued as per generally accepted accounting principles.
2. To verify the evidence of proper accounting of the assets.
3. To verify whether his client is the owner of the assets shown in the balance
sheet through legal & official documents examination.
4. To verify the existence of assets shown in the balance sheet through the
physical examination of the assets.
5. To verify whether the assets shown in the balance sheet are under the
possession of his client.
6. To verify whether the assets shown in the balance sheet are free from any
charge or lien.
7. If an auditor does not perform his duty of verification of assets properly, he will
be held guilty of negligence & will be held liable to his client for damages.
8. To know whether the Balance Sheet exhibits a true and fair view of the state of
affairs of the business.
9. To find out whether there is an adequate internal control regarding acquisition,
utilization and disposal of assets.
10.To ensure that the assets and liabilities have been properly recorded in the
financial statement.
11.To see that all the liabilities of the clients business are properly classified and
disclosed.
12.To see that all the fictitious liabilities are not disclosed in the financial
statements.
General Principles of Verification

1. Confirm that the assets were in existence on the date of the balance sheet.
2. Ascertain that the assets had been acquired for the purpose of the business &
under proper authority.
3. Confirm that ownership of the asset rests with the organization

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4. Ascertain that no charge as been created on the asset.

5. Ensure that the current book value of the asset is determined after providing
correct amount of depreciation for various years.
6. Ensure that values reflect current physical condition of the asset.
7. Ensure that disclosures regarding assets are adequate.

VALUATION

Introduction

Valuation means estimation of various assets and liabilities. It is the duty of

Auditor to confirm that assets and liabilities are appearing in the balance sheet
exhibiting their proper and correct value. In the absence of proper valuation of
assets and liabilities, they will exhibit either overvalued or under-valued.
It is therefore required for an Auditor to exercise reasonable care and skill to
analyze the basis of valuation from technical experts and satisfy himself that
assets shown in Balance-sheet are properly valued accordance with the generally
accepted conventions and accounting principles.
Meaning of valuation

Valuation means finding out correct value of the assets on a particular date.
It is an act of determining the value of assets and critical examination of these
values on the basis of normally accepted accounting standard.
Valuation of assets means determining the fair value of the assets shown in
the balance sheet on the basis of Generally Accepted Accounting Principles.
Definition of Valuation
Joseph Lancaster, defines as “The valuation of assets is therefore an attempt to
equitable distribution of the original outlay on the period of the assets usefulness”.
Position of an auditor as regards the valuation of Assets

It is the duty of the auditor not only to verify the physical existence and
ownership of the asset, but also its valuation as shown in the Balance Sheet. He
should not only check the arithmetical accuracy of the assets appearing in the
Balance Sheet but should also make inquiries through information and explanation
to know the correct state of affairs.

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The auditor has to be very careful and cautious while examining the
valuation of various assets especially the current assets such as inventory, bills
receivable, accounts receivable etc. As far as fixed assets are concerned, the same
are valued on the basis of their historical costs less proper amount of depreciation.

An auditor may rely on the directors of the company or on the certificates of

other professional in respect of valuation of the assets, provided he uses reasonable
care and skill. In matters relating to valuation of assets the auditor must adhere to
the generally accepted principles of valuation, commercial practices and
accounting standards.

The auditor should ensure that adequate depreciation has been charged on
assets before determining the current value. The auditor should state the basis of
valuation of assets in the Balance Sheet as certified by the directors or engineers,
architect etc. as the case may be.

OR
Valuation of assets is to be made by the authorized officer and the duty of
auditor is to see whether they have been properly valued or not. For ensuring the
proper valuation, auditor should obtain the certificates of professionals, approved
values and other competent persons. Valuation is the primary duty of company
officials. Auditor can rely upon the valuation of concerned officer but it must be
clearly stated in the report because an auditor is not a technical person. Without
valuation, verification of assets is not possible.

If the valuation of assets is not correct, both the financial statements such as
Balance Sheet and Profit and Loss Account cannot be correct. Hence, the auditor
must take utmost care while valuing the assets to show true and fair view of the
state of affairs of the financial position of the concern.

Objectives of Valuation of assets and liabilities

1. To Show the Actual Financial Position

Balance sheet is prepared to show the actual financial position of a business.
If proper valuation is not made, such balance sheet does not provide true and fair

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information. So, to provide information about the real financial position,

verification and valuation of assets are essential.

2. To Know the Real Position of Profit And Loss

Depreciation and other expenses on assets will be incorrect if proper
valuation of assets is not made. So, to calculate the actual amount of profit and
loss, proper valuation of assets and liabilities is necessary.

3. To Increase Goodwill
Proper valuation gives fair information about profitability and financial
position of a business. So, people can get information which creates positive
attitude towards company. Positive attitude of public is increased goodwill.

4. To Assure Shareholders
Valuation and verification provide actual information about assets and
liabilities to the shareholders which assure the safety of their investment.

5. Easy For Sale

At the time of sale of the company, it can be sold at the price which is
enlisted in the balance sheet, but the assets whose valuation is not made need
valuation before selling the company.

6. Easy To Get Loan

Company discloses the balance sheet proved by auditor for public
knowledge which increases the trust of the company. Financial institutes provide
loan easily to such companies.

7. Easy To Get Compensation

Whenever the loss occurs due to any incident, insurance company provides
compensation on the basis of valuation of assets. So, the company can easily get
compensation.

VERIFICATION AND VALUATION OF ASSETS AND LIABILITIES

1. LAND & BUILDING

1. He should see that the freehold lands are shown in the Balance Sheet at cost,
and freehold buildings are shown at cost less depreciation.

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2. He should see that the leasehold property is shown in the Balance Sheet at cost
less depreciation written off to date.
3. He should examine the title deeds relating to the free hold lands & building to
ensure that they are in the name of the client.
4. He should examine the lease deeds to ascertain the terms & conditions of the
lease.
5. He should find out the existence of land and building either through physical
verification or through documentary examination.
6. If the land and building is mortgaged, the auditor should get a certificate from
the mortgages stating that title deeds are in his possession.
7. He should make proper enquiry that there is no second mortgage on the free
hold property.
8. Leasehold property cannot be mortgaged to others. But it can be sub-let to
others. In case it is sub-let to anybody, the auditor should examine the
agreement with the sub-tenant.

Valuation

Land is a permanent asset. It does not depreciate by use, so, it should be

shown in the balance sheet at its cost. The cost includes it purchase price, broker’s
commission, registration fees, & all other legal charges, etc. while valuating the
land, the auditor see what type of land it is & for what purpose it has been
purchased.

Land is of two types

i) Freehold land & building: -

Freehold land & building is a permanent property of the institution and has
full rights over it. Its valuation should be done in the following manner:

a. The valuation of free hold land & buildings is done at cost. Initial expenses like
broker’s commission, registration fees & other legal charges are added to the
purchase price to determine the cost.
b. Expenses on repairs are not added to the cost because these are considered
revenue expenses.

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c. Any increase in property should be added to the cost of the property

d. Depreciation should be deducted from the cost in the balance sheet
e. The property should never be over-valued in the balance sheet. If it has been
done i.e. if market or realizable value is taken as the basis, if should be clearly
disclosed.
ii) Leasehold land & building: -

Leasehold land & building is also a permanent property. It is acquired by a

lease agreement for a fixed duration & is returned to its original owner after that
period. It can again be acquired & kept on lease. The auditor should see that
separate accounts are maintained for freehold & leasehold properties. Its valuation
should be done in the following manner.

a. Property is shown at cost.

b. Any increase in the value of the property is added to the cost.
c. Depreciation should be deducted from the cost, which is calculated by dividing
the total cost of the lease with the period of the lease.
2. PLANT & MACHINERY

1. He should see that it is valued at cost price less depreciation written off to date.
2. He should check the plant register with the plant & machinery account & satisfy
himself as to the value of plant & machinery.
3. If necessary he should obtain a certificate from the technically qualified persons
for its valuations.
4. Satisfy that depreciation has been provided on a recognized method. If not, see
that adequate disclosure has been made in the year of change of the method
along with monetary impact.
5. He should find out the ownership & title of plant & machinery through the
examination of legal & official documents.
6. Conduct spot inspection for the physical existence of plant & machinery on
random basis.

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7. If plant & machinery is kept abroad, the auditor should get a certificate to that
effect from the concerned auditor.
8. To see the mortgage or charge on plant & machinery, the auditor should look
into the details given in the plant register.

Valuation

Valuation of plant & machinery is made like other fixed assets by deducting
depreciation from the cost. If the plant has been made by the concern itself, the
auditor should see whether a reasonable proportion of overhead expenses have
been included in its cost or not. If some property has been sold, the auditor will
have to check whether it has been recorded in the sales account. Market or
realization value of plant & machinery is subject to fluctuations. It is not generally
considered for the purpose of valuation. More ever, it is a fixed asset & is not re-
sale.

3. GOODWILL

It refers to the good name or reputation of the firm which enables the firm to
earn more than the normal rate of profit.

1. If goodwill has been purchased along with a running business from the vendors,
the auditor from the purchase agreement should verify the amount of goodwill.
2. When a company has raised goodwill account by writing up the value of its
assets, the auditor should examine the basis on which the assets have been
revalued.
3. The auditor with the help of the partnership deed should verify the amount of
goodwill created in the books of a partnership firm, on admission or retirement
or death of a partner.
4. The valuation of goodwill is a matter of financial policy, to be decided by the
management to shown in the balance sheet at its proper value.
5. If it appears to the auditor that the future benefits associated with goodwill do
not exist, he should insist on the writing off of the goodwill.

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Valuation

Goodwill is defined as the assessed value of the reputation of a business or

as the difference between the purchase price & the net assets which are purchased
& the excess amount so paid, represents the goodwill acquired by the business. It is
intangible assets. It value depends upon the earning capacity of the business &
fluctuates accordingly. In case the Directors have debited the profit and loss
account and credited the amount to the good will account, the auditor should object
to this step especially when the action taken is likely to prejudice the interest on
any class of shareholders. He should mention this fact in his report to the
shareholders if such a step has been taken.

Goodwill should be valued at cost less amount (of goodwill) written off. So
the auditor should see that goodwill is valued and shown in the balance sheet at
cost less amount written off.

4. INVESTMENTS

1. If investments are in large number, the auditor should obtain a schedule

certified by a senior officer of the company. The schedule must include the
name of the investment, the book value, the market price, the date of purchase
of investment, rate of interest, date of payment of interest, tax deducted at
sources etc.
2. If the investments are held as Fixed Assets they should be valued as cost price
on the other hand if the investments are held as Current Assets they should be
valued as cost price or market price whichever is less.
3. If the investments are in the hands of the client, the auditor should verify the
existence of the investments by personal inspections.
4. If a trustee on behalf of the company holds the investments, the auditor should
examine the trust deed.
5. If the investments have been entrusted to a bank for safe custody, he should get
a certificate from the bank.

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6. If the securities are deposited with a bank or any other creditor as securities
towards loans borrowed, the auditor should get a certificate from the bank or
the creditor.
7. He should ensure that the investments are registered in the name of the client.

Valuation

1. Obtain a schedule of investment in hand at the beginning of the audit period.

Obtain the details of description of investments together with distinctive
number of face value, date of purchase, book value, market value, date of
payment of interest or date around which dividend is declared etc., with also the
details of interest or dividend received along with tax deducted at source.
2. Add to the above list, purchase made during the year and delete the investments
sold during the year with all the above details.
3. Balance this schedule & compare the balance with general ledger & balance
sheet
4. Check the market value of investment with reference to stock exchange
quotations or other suitable method, on balance sheet date & see that the values
are disclosed in the balance sheet.
5. Inspect the certificate or securities physically on the balance sheet date.

5. STOCK-IN-TRADE
1. He should see that the basis of valuation has been consistently adapted from
year to year to facilitate comparison of profits of different years.
2. As stock is a floating asset meant for resale auditor should see whether the
stock is value that cost price or market price whichever is less.
3. He should check the values of few items in the stock sheets with their
corresponding invoice prices and current selling prices.
4. He should find out whether the calculations, additions and castings in the
stock sheets are correct.
5. He should see that a responsible official signs the stock sheets.
6. He should see that the goods with the consignees or with the customers are
valued at cost price and not at selling price.

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7. He should compare the percentage of gross profit to sales of the current year
with the previous year and investigate into any material difference in the
percentage of profit.
8. He should verify whether slow moving, obsolete and damage goods have
been listed separately end or properly valued.

Valuation

1. The auditor should ensure that there is no change in the method of valuation.
2. In case there is a change in method of valuation of stocks as compared to the
previous year, the auditors should disclosure this fact in his report & ensure that
the method is proper & recognized.
3. The auditor should ensure that the stock is valued & recorded according to the
generally accepted principles of evaluation. He should ensure that the valuation
is done in confirmation with the guideline issued by the ICAI.
4. The auditor should check the computational accuracy of stocks by testing a few
calculations involved in valuation.
5. The auditor should ensure that there is no over/under valuation of stock which
will distort the true & fair view of the accounts.

6. BILLS PAYABLE
1. He should obtain a schedule of bills payable, whether the schedule contains all
the details of the bills payable.
2. He should check the total of the schedule of the bills payable with the bills
payable book, bills payable account & cashbook.
3. He should examine the returned bills payable, which can be taken as an
evidence for the payment made for the matured bills.
4. He should see that the bills payable, which have been paid, are not shown as
outstanding.
5. He should check the bills payable paid after the balance sheet but before the
date of audit with the entries in the cashbook.

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Valuation

1. The bills payable book should be checked with the bills payable account. .
2. The bills payable already paid should be checked from the cash book & the
returned bills payable should be examined.
3. To verify the bills payable which have not yet matured at the year end, the
auditor should examine the bills payable book & should check the Cash book of
the succeeding year, to see whether any payment has been in respect of such
bills. In case of any doubt, the auditor may ask the drawers for the confirmation
of the bill.
4. The auditor should see if any charge has been created on the assets of the
concern by accepting the bill & he should see that the facts are disclosed in the
balance sheet.

7. CREDITORS OR SUNDRY CREDITORS

1. He should get a list of creditors from the management & verify whether the
schedule contains all the details about sundry creditors.
2. He may also obtain statement of accounts from the creditors to check the
accuracy of the creditor ledger balances.
3. He should check the goods inwards book to ensure that all goods purchased
during the year have been actually received & are duly recorded in the purchase
book.
4. He should compare the percentage of gross profit to sales of the current year
with that of the previous year & investigate into any material difference in the
percentage of profit.
5. He should examine the purchase invoice for the succeeding year to ensure that
none of them relate to the current year.
6. To ensure that all the liabilities are properly valued classified & disclosed.
7. He should check the schedule of creditors with the balances in the creditor
ledger.

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8. He should check the postings from the subsidiary books, such as, purchase
book, purchase returns book, cashbook, bills payable book etc to the creditor’s
accounts in the ledger.
9. If there is any debit balance in the creditor’s ledger, the auditor should see that
they are shown on the assets side of the balance sheet.

Valuation

1. The auditor should ask for a schedule of creditors & check the same with the
purchase ledger as that is already examined by him.
2. He should ensure that all purchase made during the year especially at the end of
the year are included in the accounts of the creditors.
3. In case of suspicion about any creditors, the auditor with the consent of the
client can ask the statement of account to be sent & verify the same by
scrutinizing ledger accounts.
4. He should see the various debts is given for discount, goods returned etc., &
confirm that the same are genuine.
5. The auditor should ask for the reason for not paying any overdue creditors.

8. CONTINGENT LIABILITIES

Contingent liabilities are those liabilities which may not arise in the future for
payment.

1. He should obtain a list of contingent liabilities duly certified from the

management to ensure that all contingent liabilities have been disclosed.
2. To verify the existence of contingent liabilities, he should examine the accounts
books, minutes, correspondence, share certificates etc
3. If there is provision for contingent liabilities, the auditor should examine the
minute’s book or resolution to confirm the provisions.
4. He should see that contingent liabilities are properly disclosed in the balance
sheet.
5. If provisions have not been made by the management for certain contingent
liabilities & if the auditor thinks that they are likely to materialize as actual

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liabilities, he should insist on the management to make necessary provision for

them.

Valuation

The auditor’s duty is to see that all known & unknown liabilities have been
brought into the accounts at the date of the balance sheet & have been shown in the
balance sheet separately as such.

1. Liabilities on bills receivable discounted & not matured: - If bills receivable are
discounted with a bank & the money so received from it is made use of, the
entire money will be refunded to the bank, if the acceptor does not make
payment on the date of its maturity. This is why a contingent liability is
distinctly shown in the balance sheet by way of a footnote.
2. Liabilities for calls on partly paid share: - The amount called on shares held &
paid should be verified from the cash book & the liability for the amount
uncalled should be ascertained.
3. Liability under a guarantee: - The auditor should ascertain the liability for a
guarantee given by the client for a loan or overdraft to his friend or partner. In
case of nonpayment of such a loan, the possible liability should be ascertained.
4. Liability for cases against the company not acknowledged as debt: - It is a
liability in a disputed case where damages may have to be paid. A contingent
liability should be ascertained & a note should be made at the foot of the
balance sheet.
5. Liability in respect of arrears of dividend on cumulative preference share: - The
auditor should examine the articles of association which should lay down rules
in this regard & due provision should be made for such a liability.

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MODULE NO-4 COMPANY AUDIT AND AUDIT OF OTHER ENTITIES

Introduction

The auditor is an individual who is trained to review and verify that the
accounting data provided by an audited company accurately corresponds to the
activities that have been taken by the company. The auditor's job is to write a
report at the conclusion of the audit which determines the level of accuracy and
clarity that the organization has accounted for.

For instance, if all accounting moves made by the company are reflected in
the books (such as the general ledger), and all data that appears in the records
correspond to the course of business in the company, then the audit will have
shown no misstatements.

Meaning of Company Auditor

An auditor is a qualified Chartered Accountant appointed for the purpose of

examining the accounts of a joint stock company and giving the report thereon to
the shareholders every year at the annual general meeting.

Company Auditor is an individual appointed for preparing an

independent audit report of the company. They can be either appointed by the
company’s Board of Directors, Shareholders, Central Government or Comptroller
and Auditor General of India (C&AG) accordingly. An individual must have
expert knowledge and a practicing certificate from the Indian Institute of Chartered
Accountants for becoming a company auditor.

He is an agent or servant of the shareholders who is required to examine the

accounts of the company & give an assurance to the shareholders that the annual
accounts of the company are bona fide, & they give a true & fair view of the state
of affairs of the company.

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Appointment of a Company Auditor

Appointment of Auditor in case of Sole proprietor:

The appointment of Auditor in case of sole trader is done by the owner of

the business. In case of sole traders the auditor generally acts as an accountant who
also prepares accounts besides checking their accuracy. As he is appointed by an
individual he must get clear instructions from his client in writing as to what he is
expected to do.

His work and its scope will depend upon the agreement with his client since
the appointment of an auditor is not under any statute, therefore the rights and the
duties will depend upon the agreement.

Appointment of Auditor in case of partnership:

The Auditor of a partnership firm is made by the mutual consent of all the
partners.

Appointment of Companies Auditors:

The provisions regarding appointment of the auditor are contained in section

139 of Companies Act 2013.

1. Appointment of auditor by members [sec 139(1)]:

a) A company shall appoint an individual or a firm as an Auditor at the first annual

general meeting and each subsequent sixth annual general meeting.
b) Such auditors shall hold office till conclusion of sixth annual general meeting.
c) Such appointment shall be placed before the members at each annual general
meeting for ratification.

2. Period for which the appointment is made [sec 139(2)]:

a) An individual can be appointed of a team not more than five years.

b) An audit firm can be appointed for a consecutive term not more than two
terms of five years.

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c) An individual or a firm which has completed its term shall not be eligible for
reappointment as auditor in the same company for five years from the
completion of term.

3. Appointment of auditor of Government companies (sec 139 (5)):

The Comptroller and Auditor General shall in respect of financial year

appoint an auditor duly qualified within 180 days from the commencement of
financial year who shall hold office till conclusion of annual general meeting.

4. Appointment of First Auditor by Board of Directors [sec139 (6)]:

The first auditor of a company, other than Government Company, shall be
appointed by the board of directors within 30 days of registration of company.

If the board fails to appoint first auditors, it shall inform the members of
company, who shall appoint auditor within 90 days at extra ordinary general
meeting who shall hold the office till conclusion of first annual general meeting.

5. Appointment of First Auditor of Government Company [sec 139 (7)]:

The first Auditor of a Government Company shall be appointed by

Comptroller and Auditor general within 60 days of registration of company. In
case of its failure to appoint first auditor, then board of directors shall appoint
auditor within next 30 days. The company shall inform the members if the board
fails to appoint first auditor who shall appoint the auditor within 60 days at extra
ordinary general meeting who shall hold the office till conclusion of the first
annual general meeting.

6. Casual vacancy of an Auditor [sec 139 (8)]:

a) The casual vacancy of auditor, except in case of Government Company, shall

be filled by the board of directors within 30 days but if it arises as a result of
resignation of the auditor it shall be approved by company at general meeting

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convened within 3 months of recommendation of board. Such auditor shall hold

office till conclusion of next annual general meeting.

b) Casual vacancy in case of Government Company shall be filled by Comptroller

and Auditor General within 30 days if he fails to fill the vacancy, the board
shall fill the vacancy within next 30 days.

7. Reappointment of a retiring auditor [sec 139 (9)]:

Such an auditor can be reappointed at annual general meeting if:

a) He is not disqualified for reappointment.

b) He has not given notice to company of his unwillingness.
c) A special resolution has not been passed at annual general meeting appointing
some other person or providing expressly that he shall not be reappointed.

Qualification of Company Auditor

1. A person shall be eligible for the appointment of an auditor of a company only if

he is a chartered accountant.

2. Where a firm including a limited liability partnership is appointed as an auditor

of a company only the partners who are chartered accountants shall be authorized
to act and sign on behalf of the firm. or A Firm including Limited Liability
Partnership shall be eligible for Appointment as an Auditor of a Company, if
Authorized Signing Partner is Chartered Accountant.

3. A person who holds a certificate under restricted auditor’s certificate rules is

also qualified to act as an auditor of the company.

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Disqualification of Company Auditor

The following persons shall not be eligible for the appointment as an auditor
of a company:

1. A Body Corporate other than LLP registered under Limited Liability

Partnership Act, 2008.
2. An officer or employee of the company.
3. A person who is a partner, or who is in employment of an officer or
employee of the company.
4. A person or a firm who, whether directly or indirectly has business
relationship with the company, or subsidiary of such holding company or
associate company of such nature as may be prescribed.
5. A person whose relative is director or is in the employment of the company
as director or key managerial personnel.
6. A person who is in full time employment elsewhere or a person or a partner
of a firm holding appointment as its auditor, if such persons or partner is at
the date of such appointment or reappointment holding appointment as
auditor of more than 20 companies.
7. A person who has been convicted by a court of an offence involving fraud
and a period of 10 years has not lapsed from the date of such conviction.
8. A person who is indebted to Company or its Subsidiary, or its Holding, or
Associate Company or a subsidiary of such holding company, in excess of
Rs.5,00,000.

Removal of Company Auditor

1. The first auditor, who is appointed by the Board of Director to hold office till
the conclusion of the first Annual General Meeting, can be removed without
obtaining the prior approval of the central government.
2. Subsequent auditor can be removed before the expiry of his term by the
company only at a general meeting, after obtaining prior approval of the central
government.
3. In all cases of auditors, provisions of companies are applicable. These relate to
the right of auditor to make written representation, to get it circulated among
the shareholders & to be heard orally at the Annual General Meeting of the
company.

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Legal status or position of a Company Auditor

1. As an agent of the company:

An agent is a person who is employed to do an act, for another or to
represent other in dealings with the third person. Sometimes, an auditor has to act
as a representative of the company for which he has been appointed as an auditor.
As per the provisions of Section 230(b) if the company asks for investigation, He
has to act as an agent of the company.
An auditor is appointed by the shareholders of the company in the annual
general meeting (except when he is appointed by the Board of Directors of the
company in a newly established company).
The shareholders of the company have to depend on the good faith and
efficiency of the auditor appointed to check the accounts and report on the Profit
and Loss account and Balance Sheet of the company. He is appointed to safeguard
the interest of the shareholders. An agent principal relationship is established
between the auditor and the shareholders.

2. As an officer of the company:

An officer means any person who is regularly employed as part of his
business or occupation in conducting the affairs of the company. According to
Section 2(30) of the Indian Companies Act, a company’s auditor is supposed to be
an officer of the company.

a) As per Section 477 he can summon the persons suspected of having the
property of the company in the case of winding up of the company.
b) Section 478 empowers an auditor to order public examination of the promoters,
directors etc. who are guilty of fraud.
c) Section 539 gives the power to the auditor to recommend the penalties for the
falsification of accounts book.
d) Section 543 deals with the power of the court to assess damages against
delinquent directors and officers of the company and to compel the payment.
e) Section 545 is concerned with prosecution of delinquent officers and members
of the company.

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f) Section 621 lays down that offenses against this act will be cognizable only on
complaint by Registrar, shareholders or government.
g) According to Section 633, he has the power of the court to grant relief in certain
cases i.e. in proceedings for negligence, default, breach of duty, misfeasance
etc.

3. As an employee of the company:

An employee works under a contract of service with his employer, who has
the power not only to direct what work the employee has to do, but also the manner
in which the work has to be done. An auditor is the employee of the company as he
is paid for the job performed by him for the company. His position is a little
different from the employees of the company. He cannot be called as the servant of
the directors of the company, rather he is appointed to check the work of the
directors.

Rights and Powers of a Company Auditor

1. Right to access books of account & vouchers:-

An auditor of company has a right to access, at all times, to the books of

accounts & vouchers of the company, whether they are kept at the head office of
the company or elsewhere. The auditor of the company may examine the books &
vouchers whenever he likes.

2. Right to obtain information & explanations:-

An auditor of a company has a right to obtain from the directors & officers
of the company such information & explanations as he may think necessary for the
performance of his duties. If the directors or officers of the company refuse to
supply any information on the ground that, in their opinion, it is not necessary to
furnish it, the auditor has a right to mention that fact in his report.

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3. Right to comment on the inadequacy of the accounting system in his

report:-
If the system of maintaining accounts is inadequate, auditor can advice the
directors to amend the system of accounting. However, if his advice or suggestion
is not carried out by the directors, he has a right to mention the fact in his report.
He has to state in his report that proper books of accounts have not been
maintained by the company.

4. Right to receive notices & other communication of general meeting:-

An auditor of a company has a right to receive notices & other

communications relating to any general meeting, like any other member of
accompany, irrespective of the fact whether accounts are discussed or not at that
meeting.

5. Right to have legal, technical or expert advice:-

An auditor has a right to take legal, technical or expert advice on any matter
relating to the business in order to perform his work satisfactory. It may be noted
that, no doubt, the auditor has the right to seek legal, technical or expert advice.
But in his report, he must give his own opinion & not that of the expert.

6. Right to receive remuneration for his audit work:-

An auditor of a company has right to receive remuneration for his audit work
provided he has completed the work which he undertook. It may note that if the
remuneration payable to the auditor is fixed in the form of annual fee, he is entitled
to full year’s fee, if he is dismissed during the year.

7. Right to be indemnified:-

An auditor of a company has a right to be indemnified, out of the assets of

the company, for any liability incurred by him in defending himself against any

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civil or criminal proceedings by the company, provided the judgments is in his

favour.

8. Right to sign the audit report:-

An auditor has the right to sign the audit report. It may be noted that only a
person appointed as an auditor of the company may sign the auditor’s report.

9. Right to make representation & to speak in the general meeting when he is

asked to vacate office:-

An auditor has the right to make representation in writing & also to speak in
the general meeting in all cases when he asked to vacate his office.

10. Right to refuse to start the audit work until the books of account of the
business is balanced by the management:-
An auditor has the right to refuse to start the audit work until the books of
accounts of the business are balanced by the management.

11. Right to visit branches:-

The auditor has the right to access all books and vouchers kept at the head
office or at any branches of the company. In case the accounts of branches are
audited by a person other than the company’s auditor, he shall be entitled to visit
the branch office. The company auditor can get copies of accounts certified by the
branch auditor.

12. Right to report to members:-

The auditor has right as well as duty to make a report to the members on the
accounts examined by him & to state whether in his opinion & to the best of his
information & explanation given to him. Auditor has to state whether the financial
statements give a true & fair view of the state of affairs of the business of the
company.

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13. Right to give suggestions to the Board:-

The auditor has the right to suggest some modifications in the books of
accounts to the Board. The Board should comply with the suggestions made by the
company auditor. If not, the auditor should report the same to the members. But the
auditor cannot make changes in the books of accounts of his own.
14. Right to correct any wrong statements:-
The auditor has the right to correct wrong statements made by the directors
relating to the accounts. But it should be remembered that any statement by him to
this effect will not relieve himself for any omission or incompleteness in his report.

Duties and Responsibilities of a Company Auditor

An auditor highlight accompany has several duties & responsibilities to

perform. The various duties of an auditor of company can be grouped into 4
categories. They are:

I. Statutory duties
II. Contractual duties
III. Certain duties imposed by legal or court decisions.
IV. Duties arising out of professional ethics.

I. Statutory duties

Statutory duties refer to the duties imposed by the statue i.e. by the
Companies Act. It may be noted that the statutory duties of an auditor cannot be
restricted either by the articles of associations of the company or by any resolution
of the members of the company or the directors of the company.

The various statutory duties of an auditor under the Companies act of 1956
are as follows:

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A. Duty to make certain enquiries

1. Whether loans & advances made by the company on the basis of securities have
been properly secured.
2. Whether the terms on which loans have been made are not prejudicial to the
interest of the company or its members.
3. Where the company is not an investment company, whether the shares,
debentures & the other securities of the company have been sold at price less
than its purchase price.
4. Whether loans & advances made by the company have been shown as deposits.
5. Whether the position as stated in the books is correct, regular & not misleading.

B. Duty to sign his audit report

It is the duty of an auditor to sign the audit report prepared by him. In the
case of a firm of auditors, any partner of the firm can sign the audit report.
C. Duty to assist investigators or inspectors
It is the duty of the auditor of a company to preserve & produce all books &
papers relating to the company under investigation to the investigators or
inspectors & to give them all assistance in connection with investigation.
D. Duty to assist the central Government in connection with prosecution
An auditor of a company is required to give the central government all
reasonable assistance in connection with prosecution of directors, managing
director or other officers of the company.
E. Duty to certify the statutory report
The auditor of the company should certify the statutory report as correct
after it has been certified more correct by not less than two directors, one of whom
should be the managing director.

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F. Duty to report
1. Whether he has obtained all the information & explanations to the best of his
knowledge & behalf & which were necessary for the purpose of his audit.
2. Whether, in his opinion, proper books of accounts, as required by law, have
been kept by the company & proper returns necessary for the purpose of his
audit have been received from branches not visited by him.
3. Whether the company’s balance sheet & PL a/c are in agreement with the books
of accounts & returns.
4. Whether, in his opinion & to the best of his information & according to the
explanations given to him, whether the balance sheet & Profit and Loss account
have been drawn up according to the requirements of the companies act &
exhibits a true & fair view of the state of affairs of the company.

II.Contractual duties

Duties arising out of Common Law i.e. under his Contract with the company.

An auditor is appointed by an agreement with his client, i.e. the company so,
he has some duties arising out of the common law or the law of contract.

The important contractual duties of an auditor are:

l. If he is requested to perform certain special duties under the contract with the
company, say conduct of efficiency audit or propriety audit, he has to perform
them.

2. An auditor is required to perform his contractual duties with reasonable care &
diligence in order to avoid his liability for breach of contract.

III.Duties imposed by Legal or court decisions

There are certain duties imposed on a company auditor by court or legal
decisions. They are:

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l. He is not bound to be a detective or to approach is work with suspicion or with

foregone conclusion that there is something wrong. He is a watchdog, but not a
blood hound. He is justified in believing the responsible officials of the company
& is rely upon their representations, provided he takes reasonable care.

2. An auditor should correspond in writing with the previous auditor in whose

place he has been appointed as an auditor of the company.

IV.Duties arising out of professional ethics

1. It is the duty of an auditor not to practice as an auditor unless he is a member of

the Institute of Chartered Accountants & a holder of certificate of a practice from
the council of the institute.

2. An auditor should comply with the rules & regulations formulated by the ICAI.

He must be honest, sincere, technically competent & carry on his duties with
due regard to public interest & not in his personal interest. Further, he should
disclose full & fair information about the working & the financial positions of the
company to all the stakeholders.

Liabilities of a Company Auditor

A company auditor is appointed under the Companies Act, so his liabilities
are determined by the Companies Act. It may be noted that the liabilities of a
company auditor laid down in the Companies Act cannot be curtailed or restricted.
Further, under the Companies Act, the liabilities of a company auditor can be
grouped under two heads:

A. Civil Liabilities
B. Criminal Liabilities

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A. Civil Liabilities

Liability of an auditor to pay damages is known as civil liabilities. The civil

liabilities of company auditor may be grouped under two leads.

1. Civil liability of an Auditor for negligence:-

An auditor of a company is appointed by the shareholders. As such, he become
an agent of the shareholder, he must safeguard the interest of the company. To
safeguard the interest of the company, he must exercise reasonable care & skill in
the performance of his duties. If he fails to do so & as a consequence thereof, if the
company suffers any loss, the auditor will be held liable to compensate the loss
suffered by the company.

2. Civil Liability of an auditor for misfeasance:-

Misfeasance means breach of trust or duty imposed by law. In other words,

if an auditor of a company does something wrongfully in the performance of his
duties, resulting in financial loss to the company, he is held guilty of misfeasance.

B. Criminal Liabilities

Criminal liability of an auditor arises out of an act constituting a crime, say,

misrepresentation of facts, falsification of facts, issue of false certificate, making of
false statement, destruction of any voucher or document or doing or any other act,
with an intent to deceive others. The penalty for any criminal liability of an auditor
may be fine, imprisonment or both.

a. Criminal Liabilities of an Auditor under the Companies Act of 1956

l. Where the prospectus issued by a company includes any untrue statement or mis-
statement by the auditor, the auditor becomes criminally liable. In this case, he
may be punishable with imprisonment for a term which may extend to two years or
with fine which may extend to Rs. 5,000 or both

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2. If an auditor intentionally gives false evidence upon any examination about the
winding up of the company, he becomes punishable with imprisonment for a term
which may extend to 7 years and also to fine.

3. An auditor of the company becomes liable for criminal prosecution, if he, in any
return, report, certificate, makes a false statement, particularly knowing it to be
false or omits any material fact, knowing it to be material. The punishment on
conviction will be imprisonment for a term which may extend to 2 years & also
fine.

4. If an auditor destroys, mutilates or make alterations in any books, papers or

securities belonging to the company with intent to defraud or deceive any person at
the time of the winding up of the company he become punishable with
imprisonment for terms which may extend to 7 years & also to fine.

5. When a company is wound up, the court may direct the auditor of the company,
who is suspected or known to be in possession of any property, books or papers of
the company, to appear before the court and to return to the court the property,
books or papers of the company. If the auditor fails to appear before the court, he
can be imprisoned.

6. If the central government takes action & prosecutes any officer connected with
the affairs of the company, the auditor is required to assist the prosecution. If he
fails to do so, he becomes punishable with imprisonment for 6 months or with the
fine up to 500 or with both.

7. If the auditor of a company does not give the required assistance to an inspector
appointed by the Central Government to investigate the affairs of a company, the
auditor is punishable with imprisonment up to 6 months or with the fine up to
10,000 or with both.

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b. Criminal Liability of an auditor under the Indian Penal Code

If an auditor issues or signs any certificate, knowing or believing that such
certificate is false in any material point, he becomes punishable in the same
manner as if he gives false evidence.
c. Criminal liabilities of an auditor under the Income tax act of 1961
If an auditor induces in any person to make deliver to the income tax
authorities a false statement or declaration relating to any income chargeable to
tax, he becomes punishable with simple imprisonment which may extend to 6
months or with fine which may extend to Rs. 1,000 or with both.
d. Criminal Liabilities of an auditor under the Chartered Accountants Act
If a person, not being a chartered accountant, acts as auditor of a company &
signs any document, he becomes liable for criminal prosecution.
If a company has suffered any loss, it is only the company which can sue the
auditor for damages and an individual, shareholders has no right to do so. Further
the court has the power to relieve an auditor either partially or wholly, if a case is
proceeding against him for negligence or misfeasance, provided it is satisfied that
the auditor acted honestly and reasonably.
Professional Ethics of an Auditor

The Chartered Accountants Act 1949 set out the acceptable forms of
behavior of the members of the profession. All the members are required to adhere
to the requirements of the act.

Meaning of Professional Ethics

The “code of conduct” is essentially a set of professional ethical standards

regulating the relationship of Chartered Accountants with their clients, employers,
employees, fellow members of the group & the public generally.

Professional ethics refers to the behaviour of a member of professional body

towards the other members of his profession & towards the member of the public.

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Audit procedure of Non-Governmental Organisations (NGO)

A non-Government organisation is a non-profit making organisation. It

raises funds from members and donors. It solicits people cooperation in terms of
their time, energy and skills to enable it to achieve its objectives like imparting
education, providing medical aid, assisting the poor and the needy. An NGO will
include charitable and religious organisations, voluntary health and welfare
agencies, old age homes, and the like. Examples NGOs in India are CRY (Child
Relief and You), UNICEF, Concern India Foundation, Actionaid, etc.

Audit planning of an NGO:

Before setting out to audit an NGO, the auditor most carefully go

through the following:
• Objects, activities and area of operations of the NGO.
• Requirements of the laws applicable to the NGO.
• Constitution of the NGO such as, byelaws, memorandum, articles of
association and the organisation structure.
• Management decisions impacting finances of the NGO.
• System of accenting, internal control and its efficiency.
• Time frame as to making of various reports and communications.
• Audit report of the previous auditor, if any.

Audit of income

Audit of income of an NGO will involve the following:

a) Contributions and grants: An NGO receives contributions from donors and grant
from government and other agencies. The auditor should examine the agreements
with donors and documents relating to grants and see that there is accounting for
all funds received. He should also ascertain that deposit of foreign funds has taken
place as per Foreign Contribution (Regulation) Act.

b) Funds raised through other means: There should be effective internal control
system for funds raised through special programs and functions. Person should be

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accountable for funds raised and money collected by them that should be deposited
in bank on daily basis.

c) Subscription for publications: There should be proper accounting of subscription

fees received in respect of magazines and other publications of the NGO. The
auditor should see that subscription receipts are as per advertised rates.

d) Membership fees: Checking of fees received from members should be by

reference to the Register of members. There should be separate accounting for fees
received for the current, past and future years. Likewise initial membership fees,
annual fees and life membership fees should appear separately.

e) Interest, dividend, etc: The auditor should check the income by way of interest
and dividend with reference to the investments.

Audit of expenditure

Audit of expenditure of an NGO will involve the following:

a) Administrative expenses: The auditor should check the payment by way of

Salaries, travel expenses and stationary and postage, from the relevant records.
He should see that there is deduction of Life Insurance premium and income tax
from salaries and paid to relevant agencies in time.

b) Project and programme expenses: Project and programmes undertaken by

NGO will involve expenditure on organizing them publicity, travel,
accommodation etc. The auditor should check the expenditure from the
supporting documents ensuring that each item of expenditure has proper
authorization. In case of sponsored projects and programmes. The auditor
should check the agreement with sponsors and see that expenditure conforms to
the terms.

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Audit of assets

Audit of assets of an NGO will involve the following:

a) Cash in hand and at bank: The auditor should physically verify the cash in hand.
Checking of The balance with bank should be with reference to bank reconciliation
statement and a certificate from the bank.

b) Investments: The auditor should see that all investments or their disposal is with
authority of the management. He should check the investments with Investment
Register and see that all Investments are in existence, owned by the NGO and in its
possession, or with an authorised agent.

c) Other assets: An NGO may own fixed assets and other stock. In respect of fixed
assets, the Auditor should examine the title deeds and provision of depreciation
thereon. As for stock in Hand, he should physically verify the same and obtain
certificate from the management in respect of the same

Audit of liabilities

Audit of liabilities will involve the following:

a) Corpus fund: The corpus means the principal sum a fund as distinct from
income or interest. Some donors may contribute money to an NGO to meet its
regular expenses, while others may do so with specific instruction that the amount
should form part of this corpus. The auditor should verify the contribution keeping
in view instruction from the contributors. Checking of interest or other income
from investment of the corpus fund should be with reference to the investment
register.

b) Reserve funds: Creation of reserves will be from surplus arising from receipts
from programmes and projects. Sale proceeds of assets may also find place in the
reserves. The auditor should see whether transfers to reserves have due authority
from management.

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c) Funds for specific projects / programmes: Checking of contributions

received from donors for specific projects or programmes should be with reference
to relevant correspondence, resolutions passed by the NGO management, etc.

d) Loans: The auditor should check loans with relevant loan agreements and
proof of receipt.

Audit procedure of Charitable Institutions

While auditing the accounts of a charitable institution, an auditor should take
the following steps:

General

1. He should carefully examine the constitution and the rules and regulations of
the charitable institution, and note down the provisions affecting the
accounts.
2. He should inspect the minutes book of the managing committee and
ascertain how far its resolutions have been carried out.
3. He should see that the funds of the institution have been applied only for the
purpose for which they are meant.
4. He should examine the minutes books and see that the sanction of the
trustees or the managing committees is obtained for important payments,
expenditure and investments.

Incomes

5. He should vouch the receipts from donations and subscriptions as recorded

in the cashbook with the counterfoils of the receipt books, register or list of
subscribers and donors Correspondence with the subscribers and donors and
other documentary evidences.
6. He should see that subscriptions and donations in arrears are carried forward
and adjusted in accounts.
7. He should see that subscriptions received in advance are carried forward and
brought into Accounts.

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8. He should check the receipts from legacies with the register of legacies. He
should see that Legacies due are properly adjusted and brought into account.
9. Grants received from the Government or the local body should be carefully
checked.
10.He should vouch the receipts of rents from the properties belonging to the
institution with the Rent roll, agreements with the tenants and the receipts
issued to the tenants.
11.He should Vouch the income from investments i.e., interest and dividend on
securities, by reference to the investment register, and the interest and
dividend warrants.
12.If the income of the charitable institution is exempted from tax, the auditor
should see that the Income -tax deducted at source from the income from
interest and dividend is recovered from the income -tax authorities.

Expenditure

13.He should see that a proper distinction has been made between capital
expenditure and revenue expenditure.
14.He should vouch the important payments by reference to the minutes books
of the trustees or the managing committee.
15.He should see that all expenses incurred paid to the activities of the
institution by carefully examining the relevant documents.

Miscellaneous

16.He should verify the cash and Bank balances.

17.He should verify the investments, in case the investments are ledged with the
bank, he should get a certificate from the bank.
18.He should verify the other assets of the institution.
19.He should verify all the liabilities of the institution.
20.He should see that the annual accounts of the institution have been prepared
in the prescribed from according the relevant regulations.

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Audit procedure of Educational Institutions (i.e., SCHOOLS, COLLEGES

AND UNIVERSITIES)

The sources of income of educational institutions are fees from students,

grants from the Government or local body, subscriptions & donations, incomes
from investments etc. so, the audit of income should be on the following lines:

General

1. He should examine the charter, trust deed, or university act, if any & note all the
rules & regulations, especially those which relate to the accounts.
2. He should inspect the Minute books of the board of management, governing
body or managing committee of the educational institution & ascertain from them
any resolutions specially passed in respect of accounts to confirm whether such
resolutions have been complied with.
3. He should study the internal check system in operation to know how far it is
satisfactory.
4. He should obtain a copy of the budget or financial statements to study the
different heads of income & expenditure.

Incomes

1) He should verify the receipts of monthly or terms fees from the counterfoils or
carbon copies of the receipts, the register of students & the cash book. He should
also see whether the cash received has been banked daily or not.
2) He should vouch the receipts on account of admission fees by reference to the
proper documentary evidence. He should compare the receipts from admission fees
with the application forms for admission.
3) He should vouch the receipts on account of examination fees by reference to
proper documentary evidence.
4) He should also verify other charges collected from the students, such as
laboratory fees, fines etc. carefully.
5) He should see that the concessions of fees & free ships given to students are
duly authorized by the proper authority.
6) He should vouch the grant-in-aid received from the Government or local body
carefully by examining the correspondence & any other documentary evidence.

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7) Receipts from donations & subscriptions should be verified with counterfoils of

the receipts book, cash book & the list of donors or subscribers published in the
annual report. He should also ascertain whether donations & subscriptions received
for certain purposes are utilized for the purposes for which they have been
received.
8) He should vouch the income by way of rent from landed property with reference
to rent rolls. He should also see that rent in arrears and rent received in advance are
properly adjusted.
9) He should vouch the incomes from endowments, if any and see that the incomes
arising there from have been utilized for the objects of endowment.

Expenditures

1) He should vouch the amount of salaries paid to the staff with the salary register,
counterfoils of the cheque book, cash book & the bank pass book.
2) He should see whether any increment given to an employee has been duly
sanctioned by the proper authority say the managing committee.
3) He should see that, while making the payment of staff salaries, income-tax has
been deducted at source & duly deposited with the income-tax department.
4) The establishment expenses must be careful vouched with relevant vouchers &
the entries in the cash book.
5) The payment of scholarship should be verified with the receipts from students &
the scholarship register.
6) He should vouch the items of capital expenditure & see that are sanctioned by
proper authority, i.e. the managing committee.

Miscellaneous

1) He should ascertain whether all purchase are properly authorised by a

responsible official.
2) He should verify the stocks of stationery, sports materials, equipments etc. as far
as possible. He should see that proper records have been maintained for these
items.
3) He should ensure whether adequate depreciation has been provided on fixed
assets like furniture, equipments etc.,

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4) He should see that proper distinction has been made between capital & revenue
receipts & capital & revenue expenditure.
5) He should see that the assets & liabilities are properly exhibited in the balance
sheet.
6) He should verify the cash & bank balances in the usual manner.
7) He should see that investments representing prize endowment funds are kept
separately & are not mixed up with ordinary investments.

Audit procedure of Government

Audit of Expenditure

(a)Audit against Rules and Orders: To ensure accountability for public money, it
has been provided that the expenditure out of consolidated funds should utility for
public money, it has been under constitution or any law made thereunder. The C&
AG accordance with their the relevant rules, regulations or order dealing with
incurring, claiming, Sanctioning, disbursement of the expenditure out of
Consolidated Fund of India have be claiming or adhered to.

(b) Audit of Sanctions: The expenditure should be one that can be incurred out of
Governmental funds and the sanctioning authority should have financial powers
allow for it. The Financial powers of the sanctioning authority may be prescribed
under powers to allow for it the delegation orders.

(c) Audit against provision of funds: This audit aspect covers that the
expenditure incurred is one the purpose of which is covered within the grant or
appropriation and the amount induced well within the amount provided for in this
respect.

(d) Propriety audit: The audit of rules, sanction and provision is called regularity
audit. An, expenditure may be properly incurred and may hence be regular. The
auditor should not be content with it. He should go beyond these. The necessity to
incur such expenditure, the wisdom in decision, the integrity and morality in
utilizing the funds should all be inquired into. Such an examination beyond what it
looks apparently regular is called propriety audit. In propriety examination of
expenditure the auditor sees that the expenditure is incurred economically and the

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demands of the occasion justifies the expenditure. Again the personal pecuniary
benefit had not entered in incurring such expenditure. The expenditure should be
for the common good and no personal or caste-biased profiteering should be
involved in it.

(e) Performance Audit: The performance of projects, activities or operations

should conform to the parameters of economy, efficiency and effectiveness. The
objectives, in the form of goals Targets should be achieved with minimum cost,
resources and without waste. The means of attaining them should also involve
efficient utilisation. The optimum results within the constraints of available
resources should be achieved. The effectiveness in achieving results and efficiency
in utilisation of resources are critically examined in this aspect of auditing phase.

Audit of Receipts

The objective of checking the receipts into the Consolidated Fund of India is
to ensure that the system to ensure that revenue due to the Government is fairly
assessed, collected and there is leakage of income in this respect. The audit of
receipts encompasses the a criticized and Examination

1. Whether there is a system involving adequate regulations and procedures to

secure an effective check on the assessment, collection and proper allocation of
revenues.
2. Whether the system is effectively working throughout the period without break
and in effect.
3. Whether all the receipts including recovery towards debts have been correctly
received, recorded and reported.
4. Whether there is a system involving checks to ensure prompt detection and
investigation of irregularities, double refunds, fraudulent or forged refunds, other
loss of revenue, or willful omission to levy or collect taxes or issue refunds.
5. Whether the system of internal procedures are adequate, secure and accounting
of the Demand, Collection. Refunds are in order and whether they require any
improvement in any areas.

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Audit of Commercial Accounts of the Government

The contemporary Government is not merely functioning as a laissez faire

onlooker, protector of law and order alone but is a pro active participant in
economic transactions of the economy. It does the business of commercial
transactions.

The Government takes the following entity forms while doing commercial
transactions:

a) Departmental enterprises engaged in commercial transactions subject to

departmental rules and regulation.

b) Statutory bodies, Corporations, established under special statutes.

c) Government Companies set up under the Companies Act 1956.

The audit of departmental enterprises shall have to be done in accordance

with the rules and regulations of the department concerned. The enactments to
which the statutory corporations. Bodies owe their genesis prescribe the provisions
relating to the audit of accounts of such entities. The Companies Act, 1956
stipulates the audit of the government companies by qualified Chartered
Accountants in accordance with the directives, superintendence of the C & AG.

Audit procedure of Local Bodies

1. Understanding the Local Government Body: Gain a comprehensive

understanding of the local body’s functions, services, programs, and
organizational structure. Identify the legal and regulatory framework governing
the local body’s operations.
2. Assessing Risk and Materiality: Identify risks specific to local government
bodies, such as mismanagement of funds, lack of accountability, or non-
compliance with laws and regulations.

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3. Budgetary Compliance: Verify compliance with budgetary limits and

appropriations established by governing bodies. Confirm that expenditures align
with approved budgets and allocations.
4. 4. Financial Reporting and Transparency: Examine financial statements to
ensure accuracy, completeness, and proper disclosure of activities, assets,
liabilities, and equity. Verify the appropriate classification and presentation of
financial information.
5. Program Effectiveness and Community Impact: Evaluate the effectiveness
of Local programs in addressing community needs and priorities.
6. Internal Controls and Governance: Assess the effectiveness of internal
controls over financial reporting, procurement, and contract management.
7. Risk Assessment and Fraud Detection: Identify areas vulnerable to fraud,
corruption, or misappropriation of public funds.
8. Review of Supporting Documentation: Examine supporting documentation
for financial transactions, contracts, agreements, and expenditure
authorizations.
9. Testing of Revenue and Expenditures: Verify the completeness and accuracy
of revenue collection and expenditure transactions. Confirm that public funds
are collected, recorded, and expended in accordance with established
procedures.
10.Assessment of Public Program Outcomes: Evaluate the outcomes and impact
of local programs on the community and residents
11.Compliance with Laws and Regulations: Verify compliance with local,
regional, and national laws and regulations applicable to local. Government
operations.
12. Evaluation of Local Governance Practices: Assess the effectiveness of local
governance practices, public engagement, and mechanisms for accountability.
13.Internal Control Testing: Test the effectiveness of internal controls. Through
inquiry, observation, and sample testing.
14.Audit Findings and Recommendations: Document and communicate
significant findings, deficiencies, or areas for improvement.
15.Communication with Stakeholders: Discuss audit findings with key
stakeholders, including local officials, residents, and oversight agencies.
Provide assurance on the transparency, accountability, and responsible use of
public funds.

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Audit procedure of Co-operative Society

A co-operative society is a voluntary association of individuals having
common needs who join hands for the achievement of common economic interest.
Its aim is to serve the interest of the poorer sections of society through the principle
of self-help and mutual help.
A cooperative society refers to that type of business organization,
wherein people work together, for a common goal, i.e. welfare of its members.
A Co-operative society is formed under the Co-operative Societies act
1912. Audit of co-operative societies institutions are to be conducted by the
Registrar of co-operative societies.
The provisions for Audit as Per Section 17 of the Co-operative Society Act,
1912:
1) The Registrar shall audit or cause to be audited by some person authorized by
him by general or special order in writing in this behalf the accounts of every
registered society once at least in every year.
2) The Audit under sub-section (1) should include an examination of overdue
debts, if any & a valuation of the assets & liabilities of the society.
3) The Registrar, the collector or any person authorized by general or special order
in writing in this behalf by the register shall at all times have access to all the
books, accounts, papers & securities of a society & every officer of the society
shall furnish such information in regard to the transactions & working of the
society as the person making such inspection may require.
Rights and Duties of the Auditor in case of audit of co-operative society

The auditor of a Co-operative Society has a right to examine the books and
vouchers of the business to enable his to satisfy himself whether or not the balance
sheet is drawn up, so as to exhibit a true or fair view of the state of affairs of the
business, according to the best of his information and explanation given to him. To
enable him to perform his duty, the auditor should take the following steps:

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1. He should study the Co-operative Societies Act, 1912, and the bye-laws of the
society concerned.

2. He should see that member does not hold more than ten percent of the capital of
the society.

3. He should vouch the receipt of cash on account of deposits with the cash book,
counterfoils of the receipt book and compare them with the relative accounts.

4. He should vouch the money borrowed from the Central Co-operative Bank with
the Cash Book, correspondence and resolution passed by the Managing Committee
of the Society to borrow money, the period, the rate of interest, etc.

5. Interest received from borrowers or return of loan from them should be vouched
with the agreement entered into between the society and the borrower, regulations
of the society, counterfoils of the receipt book, cash book, etc.

6. Loans to the members should be vouched with the agreement, regulations and
the resolution passed by the Managing Committee, receipt issued by the member
concerned, cash book, etc. If under any circumstance, loan has been granted to a
non-member, he should seen whether permission had been obtained from the
Registrar of Co-operative Societies for the grant of loan.

7. He should examine the minutes book of the members.

8. He should vouch the expenses as usual.

9. He should see that first 25 percent of the profits of the society are carried to the
Reserve Fund and ten percent are carried to the Welfare Fund.

10. Cash in hand should be vouched by actually accounting the cash and
comparing it with the cash book.

11. Investments should be verified by inspecting them and comparing them with
the Investment Account in the ledger.

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12. Surplus funds of a co-operative society can be invested only in Government

Saving Banks or any other bank which is on the approved list of the Registrar of
Co-operative Societies. The auditor should see that the investments are in
accordance with the rules.

13. If it is a consumer’s society, the auditor should check the sales summaries with
the sales. He should check the purchases with the order book, the stock book etc.
He should verify the stock and examine the method of valuation.

14. He should see that the accounts of the society are prepared according the Co-
operative Societies Act and the provisions of the Income Tax Act as applicable to
the Co-operative Societies have been followed.

15. The Balance Sheet and Profit and Loss Account are to be drawn up in
accordance with the Proforma which is prepared by the chief auditor of Co-
operative Societies of the State in which the society is registered, given under Part
V, Third Schedule, Sec 56 of Banking Regulation Act, 1949.

16. He should satisfy himself whether or not the balance sheet is properly drawn up
so as to exhibit a true and fair view of the state of affairs of the business according
to the best of his information and explanation given to him.

17. The Registrars of Co-operative Societies of certain States have prescribed a

Proforma for drawing up the auditor’s report and the final accounts. The auditor
should see that his report, etc. is according to the Proforma.

18. He should physically examine and verify all the assets and liabilities of a
society.

19. Furniture and Stationery should be physically verified and compared with the
Stock Register.

20. He should pay attention to the over-due debts, if any.

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Audit procedure of Hotels

General

1. He should go through the documents setting up the hotel, viz., the

Memorandum of Association and the Article of Association or the Partnership
deed and note down the provision affecting the accounts
2. He should examine the system of internal check in force with regard to (a)
purchases and issue of provisions, stores, linens, wines, crockery, etc, (b) payments
for provisions, stores, wines, etc., (c) cash receipts on account of room rent daily
sales of meals, wines etc.
3. He should familiarize himself with the system of book-keeping in vogue in the
hotel.

Incomes

The revenue for room rent in hotels is generated through the rental fees
charged to guests for staying in the hotel's rooms. The amount of revenue
generated from room rent can vary depending on factors such as the hotel's
location, the quality of its accommodations, and the demand for lodging in the
area.
The revenue from the minibar in a hotel is generated through the sale of
items such as snacks, beverages, and other convenience items to guests staying in
the hotel. The audit procedure for the minibar revenue would involve examining
the hotel's sales records, inventory management systems, and internal controls
related to minibar operations.

1. He should check the receipts from the visitors by reference to the entries in the
cashbook and the window ledger or visitors’ ledger. He should also examine the
bills issued to the visitors for purpose.
2. For balance outstanding he should examine the personal ledger.
3. He should vouch the receipts from the sale of foodstuffs, wines cool drinks etc.
from the copies of the cash memos and the summary of the day’s takings prepared
by the cashier.

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4. He should check the receipts from the holding of conferences, marriage

receptions, etc with agreement and correspondence with the parties concerned and
counterfoils of the receipt issued to them.
5. He should also examine the other receipts carefully.

Expenditures

1. He should see that proper distinction has been made between capital
expenditures and revenue expenditures.
2. He should satisfy himself that purchases of items of capital nature and duly
authorised, and vouch them with tenders, price list of suppliers, bills, money
receipts and other correspondence.
3. He should check all the purchases carefully. He should see that purchases of
provision, wines etc. are against duly authorised requisition. He should also see
that heavy prices have not been paid for purchases.
4. He should vouch the payment of wages and salaries with the salaries and wages
and register and receipt obtained from the employees.
5. He should see that the expenses incurred on printing, equipment, etc .are spread
over a reasonable number of years.
6. He should thoroughly check the petty cash payments.

Miscellaneous

1. He should verify the stocks of provisions, wines, stores, etc. at the date of the
balance sheet.
2. He should verify all other assets and liabilities.
3. He should see that all assets and liabilities are properly and distinctly shown in
the balance sheet.
4. He should see that all depreciable assets, such as furniture, fixtures and fittings,
buildings, utensils, cutlery, crockery, glass, etc. have been adequately depreciated.

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Audit procedure of Hospitals

While auditing for hospitals the auditor should pay attention to the following:

Preliminary or general

1. He should study the organization of the following hospital and accounting

system in hospital.
2. He should examine the character of the trust deed under which the hospital
has been setup and note down the provisions affecting the accounts.
3. He should assess the strength and weakness of the internal check system in
operation before chalking out the audit program.

Income

4. He should vouch the entries in the patient bill register with carbon copies of
the bills issued to the patients to see either the bills use to the patients have
been correctly prepared. (He should test check the bill pertaining to a
selected period).
5. He should ascertain whether bills have been issued to all the patients from
charges are due, comparing the bills with the attendance register of the
patients. He should also see whether the same has been done according to
established rules and procedures.
6. He should vouch the collections or receipts from the patients with the carbon
copies of the bills issued to patients, entries in the bills register and the cash
book.
7. Arrears of dues from patients should be properly carried forward.
8. Where the arrears dues are demanded to be irrecoverable, they should be
written off after authorization from the managing committee according to
the predetermined criteria.
9. Grants-in-aid from the government or local body should be verified by
reference to the correspondence with the authorities concerned and entries in
the cashbook. He should also see weather special grants for construction of
additional buildings or acquisition of expensive equipment are duly
accounted for and used for the specified purposes.

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10.Legacies and donations received should be verified by reference to the

correspondence with the donors and entries in the cash book.
11.He should see whether legacies and donation received for specific purpose
are used for specific purpose, and not for any other purpose
12.He should check subscriptions are received with the subscribers register and
the cashbook entries.
13.He should whether outstanding subscriptions and subscriptions received in
advance are properly adjusted and are disclosed in the annual statements.
14.He should vouch the income from investment i.e., interest and dividend on
securities, with the securities as recorded in the investment register and the
dividend and the interest warrants.
15.He should also ensure that interest and dividends accrued but not yet
received and brought into account and are duly disclosed in the annual
settlements.
16.Rental income from landlord property, as shown in the property register,
should be vouched with the counterfoils of rent receipts and rent rolls.
17.He should weather rent in arrears or rent received in advance are properly
adjusted and are duly disclosed in the annual statement.

Expenditure

18.He should vouch the payments of purchase of stores, drugs, clothes liners
instruments, etc. He should also see whether all such purchases had been
duly authorised.
19. He should vouch the payments of salaries and wages with the vouchers and
the salaries register.
20.He should vouch the payment of other expenses with the voucher.

Miscellaneous

21.He should ascertain whether a clear distinction has been made between
capital expenditure and revenue expenditure.
22.He should see that the incomes and expenditure under different heads are
within the budget limits. If there are major deviations, he should bring the
same to the notice of the managing committee.

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23.He should ensure that expenditure of capital nature has been duly authorised
by a valid resolution of a managing committee.
24.He should verify the stocks of medicine, linens, clothes etc, etc. on the date
of balance sheet.
25.He should also verify all the assets at the date of balance sheet.
26.He should verify whether the adequate depreciation has been provided in
respect of all depreciable assets.
27.He should see the all appoints of staff and payment of salaries and annual
increments are authorised by the managing committee.

Audit procedure of Clubs

While Auditing the Accounts of a club, an Auditor should take the following steps:

General

1. He should study the Constitution and the bye -laws of the club and Note
down those points which affect the Accounts of the club.
2. He should examine the minutes book of the club's to know the important
decisions taken by the management on the various financial and other
matters.
3. He should assess the strength& weakness of the system of internal check in
vogue in respect of purchases, stock of food stuff, drinks etc. receipts in
restaurant etc. and devise his audit program accordingly.

Incomes

4. He should vouch, the receipt on account of entrance fees or admission fees

with the help of the counterfoils of the receipts, the list of register of
members, the applications received from the members and the minutes of the
managing committee approving the membership.
5. He should check the life membership fees and see that they are either treated
as capital receipts or credited to the income and expenditure account over
number of years.

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6. He should vouch the receipts on account of subscriptions, which is the main

source of income of a club, by reference to the counterfoils in the receipt
books, cash book enters and the list of members.
7. He should check the subscriptions in arrears with the help of the schedule
received from the club, and see that they are duly certified by the managing
committee and are properly adjusted.
8. He should also verify whether necessary steps have been taken for the
recovery of arrears of subscriptions and whether the amount considered
irrecoverable has been written off.
9. He should ascertain that the subscriptions received in advance are carried
forward and are adjusted subsequently in the accounts.
10.He should see that, if some special donation are received by the club, they
are utilised for the purpose you which they are meant.
11.If the club runs a canteen or bar, the auditor should vouch the receipts from
the canteen or bar.
12.If there are receipts from drama or annual dinner organised by the club, the
auditor should vouch carefully the receipt from the drama or annual dinner
with the help of the counterfoils of the receipts, the tickets issued & other
records available for the purpose.
13.If some property of the club has been let out, the auditor should check the
income received by the club there from.
14.He should see that the sale proceeds of periodicals are properly accounted
for.

Expenditure

15.He should vouch all the purchases for the canteen and bar, sports goods etc
and see that they have been properly authorized.
16.He should verify the salaries paid to the staff and the increments to the stuff
by reference to service contracts, salary register and the minutes of the
meetings of the managing committee.
17.He should vouch the expenditure on purchases of magazines and journals
with the bills from suppliers and the voucher obtained from them.

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18.He should vouch all other expenditure incurred by the club.

19.He should ensure that proper distinction has been made between capital and
revenue
20.He should see that heavy expenses are treated as deferred revenue
expenditure and are spread over number of years instead of being charged to
the year in which they are incurred.

Miscellaneous

21.He should see whether proper records are maintained for stocks of
provisions, cigarettes, drinks etc. used in the canteen or bar.
22.He should verify the stocks in hand and see whether they are properly
valued.
23.He should verify the investments.
24.He should verify all other assets of the club and see whether they are
properly valued.
25.He should ascertain whether adequate provisions have been made for
depreciates on all depreciable assets like sports goods, furniture etc.

Audit procedure of Banks

SPECIAL AUDIT OF BANKING COMPANIES OR BANK AUDIT

Non-nationalised banks (i.e, private sector banks) are governed by the

Banking Regulation Act of 1949 and certain provisions of the Companies Act,
1956.

Points to be noted by an Auditor while Auditing the Accounts of Banking

Company:

While auditing the accounts of a banking company, an auditor should bear in

mind the following points:

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1. He should thoroughly familiarize himself with the provisions of the Banking

Regulation Act of 1949 and the Companies Act, 1956 relating to accounts and
audit.

2. He should see that the following provisions of the Banking Regulation Act of
1949 he been duly complied with.

(a) Provision regarding the minimum paid up capital and reserves.

(b) Provision regarding the capital structure of the bank and the voting rights of the
shareholders

(c) Provision containing restrictions regarding commission, brokerage, discount,

etc on the sale of shares

(d) Provision prohibiting the creation of any charge on the unpaid capital or a
floating charge on the assets of the bank.

(e) Provision regarding restrictions as to the payment of dividend to the

shareholder

(1) Provision regarding the creation of compulsory reserve fund

(g) Provision of regarding the maintenance of cash reserves.

(h) Provisions regarding the restrictions on loans and advances

3. On account of the large number and complexity of business transactions, it is

practically impossible for an auditor to perform detailed audit. He has to rely
considerably on the systems of internal control and internal check in the operation
of bank. So before actually starting audit of bank accounts, the auditor should
study the systems of internal control and internal check in operation in the bank
and ascertain whether they are adequate and effective. Only after assessing the
strength of internal control and internal check in operation that the auditor should
decide the scope of his audit.

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While assessing the strength of the internal control and internal check system
in operation, the auditor should see whether the systems provide for the
following:

A. The officers and supervisors of the bank are transferred from one branch to
another periodically, and the clerks of the bank are rotated from one position to
another frequently without notice.

B. The work in the bank is so arranged that, in the normal course of working, the
work of one person is checked by another.

C. The authorities and responsibilities of each officer are well defined and are
according to his status.

D. The cashier has no access to the ledgers or does not prepare or check the bank
statements.

E. The ledger keepers have no access to the cash book or clearing house journal.

F. The cash book, the balances in current accounts, deposit accounts and loan
accounts are checked frequently by responsible officers.

G. Some responsible officer verifies, by inspection, the securities lodged with the
bank in respect of overdraft, cash credit or loan.

H. Surprise checking of the bank's branches is made by inspectors, auditors or

some responsible officers, and if any discrepancies are located, they are reported
immediately to the head office.

I. There is strict control over clearing house transactions.

J. The internal audit system is effective. The internal audit inspectors pay frequent
visit to the branches.

4. He should visit the bank on the last day of the accounting year and verify the
cash in hand. For this purpose, he should count or weigh coins, notes, postal

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orders, cheques, etc. which are with the bank on that date (and which constitute the
cash in hand). He should insure that the cash in hand tallies with the general cash
balance as shown by the books of accounts.

5. For money deposited with the Reserve Bank of India, or with any other bank,
the auditor should obtain confirmation certificates directly from those banks.

6. He should examine the drafts, cheques, etc. received on the closing day, and see
that they are cleared during the next few days.

7. He should verify the money at call and short notice with cash deposit receipts.

8. He should examine the investments of the banks. He should see that they have
been properly valued. He should also see that the income on such investments has
been fully taken into account.

9. He should examine the limits fixed by the board of directors for bills discounted
and Purchased, and see that they have not been exceeded.

10. He should examine the unmatured bills of exchange and see that adequate
provision has been made in respect of doubtful or overdue bills.

11. He should see that provisions are made for rebate on bills discounted and is
carried forward.

12. He should check the loan accounts and agree them with the schedule of debtors
supplied by the bank. He should see that outstanding interest on loans has been
brought into account. He should see that the total of schedule agrees with general
ledger. He should also see that the loans to customers are not more than the limits
imposed.

13. He should examine the securities against which loans are granted, and verify
whether there is adequate cover for the loans. While examining the securities, he
should ask for the simultaneous production of all the securities so that the same
securities are not produced again.

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14. In the case of unsecured loans, he must see that confidential reports regarding
the financial position of the borrowers have been obtained.

15. He should see that adequate provision has been made for bad and doubtful
debts

16. He should check the balances in the savings, current and fixed deposit accounts
and see whether they agree with the schedule of creditors supplied by the bank. He
should see that all interest on outstanding on deposits has been provided for. He
should also see that the total of the schedules of the creditors tallies with the
general ledger.

17. He should test check a few entries of the bank pass book and compare them
with the ledger accounts.

18. He should verify the other assets of the bank like premises, furniture, etc., and
see that all the assets of the bank are properly accounted for.

19. He should see that all the liabilities of the bank have been duly brought into
account, and shown in the balance sheet in the prescribed manner.

20. He should see that all the contingent liabilities of the bank have been shown as
a foot note to the balance sheet.

21. He should vouch the commission received from the customers for the services
rendered to them with the help of the vouchers.

22. He should vouch the payment on account of salaries with the help of salaries
register and service contracts.

23. He should vouch the payment on account for rent with the help of the rent
deed.

24. He should see that the capital expenditure has been properly recorded in the
books, and a proper distinction is made between capital and revenue expenditure.

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25. He should check the general ledger in detail.

26. He should check the general ledger balances with the trial balance and final
accounts.

27. He should see that branch returns are duly certified and properly incorporated
in the head office books.

28. He should scrutinize the foreign currency transactions properly.

29. He should see that loans and advances are properly classified and are shown in
the balance sheet as debts fully secured, debts partly secured and debts unsecured.

30. He should see that the secret reserves created by a bank are not misused by the
directors. If the secret reserves are drawn up, the auditor should see that such a fact
is shown in the balance sheet.

31. He should see that 20% of the annual profits, before the payment of dividend,
have been transferred to reserve fund unless the Reserve Bank has exempted the
bank in this regard.

32. He should see that no dividend is paid until all the capitalized expenses and
expenses not represented by tangible assets like preliminary expenses,
underwriting commission, brokerage on shares, etc, have been completely written
off.

33. He should see that the profit and loss account and the balance sheet of the bank
have been drawn up in the form prescribed by the Banking Regulation Act of 1949.

34. After the audit work is over, the auditor should give his audit report.

Audit of Nationalised Banks:

The Nationalised banks are regulated by the provisions of the Banking

Companies (Acquisition of Transfer of Undertakings) Act of 1970. Some of the
provisions of the Banking Regulation 1949 also apply to the nationalised banks.

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The following are some of the important provisions of the Banking

Companies (Acquisition and Transfer to Undertakings) Act of 1970 in regard
to audit:

1. Each nationalised bank is required to close its books of accounts on 31st

December, each year (now, on 31st March, each year).

2. Every bank is required to appoint auditors for the audit of its accounts with the
prior approval of the Reserve Bank of India. (The qualifications prescribed for the
auditor of a nationalised bank are the same as those of a joint stock company.)

3. The remuneration of the auditors should be fixed by the Reserve Bank in

consultation with the Central Government

4. The auditors of a nationalised bank may, at the expense of the bank, employ
accountants or other persons to assist him in audit work.

5. The auditor of the nationalised bank has the right to examine the books,
accounts and other documents. He may also examine any officials or employees as
per the requisite of audit.

6. The auditor of a nationalised bank should submit his audit report to the Central
Government and forward a copy thereof to the nationalised bank and to the
Reserve Bank of India.

The audit report should contain a statement as regards the following:

(a) Whether, in his opinion, the balance sheet is a full and fair balance sheet,
containing the necessary particulars and is properly drawn up so as to give a true
and fair view the state of affairs of the bank.

(b) Whether he has obtained all information and explanations necessary for his
work and whether the same are satisfactory.

(c) Whether the transactions of the bank, as noticed by him, are within the powers
of the bank

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(d) Whether the returns received from the offices and branches of the bank are
adequate for the purposes of his audit.

(e) Whether the profit and loss account gives a true balance of profit or loss for the
period covered by it.

(f) Whether there is any matter which he considers significant and deserving to be
brought to the notice of the Central Government.

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MODULE NO-5 AUDIT REPORT AND PROFESSIONAL ETHICS

Introduction

An auditor's report is a written letter from the auditor containing their

opinion on whether a company's financial statements comply with Generally
Accepted Accounting Principles (GAAP) and are free from material misstatement.
Meaning of Audit Report

An audit report is a statement through which an auditor submits his findings & expresses
his opinion on the state of affairs of the company’s business. It is the medium through which an
auditor expresses his opinion on the financial statements of a business.

Definition of Audit Report

According to Joseph Lancaster has defines an audit report as “a statement of collected

and considered facts, so drawn up as to give clear and concise information to persons who are
not already in possession of the full facts of subject matter of the report.”

Features of Audit report

l. It is the medium through which an auditor expresses his opinion on the financial statements &
conditions of a business.
2. It is the end product of audit, as it summarizes the results of the audit work conducted by an
auditor.
3. It is based on factual information.
4. It may be short or long.
5. It may be in the form of a letter or mere statement.
6. It is attached to the balance sheet.

Elements or Contents or components of Audit Report

l. Whether he has obtained all the information & explanations which to the best of his knowledge
& belief were necessary for the purpose of his audit.
2. Whether proper returns adequate for the purpose of his audit have been obtained from
branches not visited by him.
3. Whether proper books of accounts as required by law have been kept by company so far so
appears from his examinations.
4. Whether the report on the accounts of any branch office audited by any other auditor has been
forwarded to him & how he has dealt with the same in preparing his report

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5. Whether the company’s balance sheet & Profit and loss Account are in agreement with the
books, accounts & returns.
6. Whether any other statements have been included as required by the central govt.
7. Whether his opinion & to the best of his information & according to the explanation given to
him a true & fair view:
A. In the case of the balance sheet, of the state of the company’s affairs at the end of its financial
year.
B. In the case of the profit and loss Account, of the Profit and loss for the financial year.

Types of Audit Report

1. Clean or Unqualified audit report

2. Qualified audit report
3. Adverse or Negative audit report
4. Disclaimer audit report

1. Clean or Unqualified audit report: - Unqualified audit report issued by auditor to financial
statement when auditor found no material misstatement after their testing. This report contains
the unqualified opinion from an independence auditor. The report shown that the entity financial
statements are prepared & present true & fair & complying with accounting framework being
used.

Clean or Unqualified report will be given by the auditor if the auditor is satisfied that the
accounts, Balance Sheet, Profit and Loss Account and Cash Flow statement do represent a true
and fair view and they are prepared in conformity with the accounting principles and statutory
requirements.

2. Qualified audit report: - It is the report that issue by auditors to the financial statements
that found material misstatements on them. But those material misstatements are not pervasive.

In qualified report the auditor believes that overall financial statements are not fairly stated.
The reasons for giving Qualified Report are be as follows:

1. The books of accounts, Profit and Loss Account and the Balance Sheet do not represent the
true and fair view of the state of affairs and results of the operations, due to lack of
conformity with the accounting principles and statutory requirements.
2. The auditor is not able to verify the value and existence of certain assets.
3. The information requested by the auditor is not furnished.

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4. Proper books of account are not maintained as required by law.

5. Part of audit examination done by other auditors.
3. Adverse or Negative audit report: - It is type of audit report that issued to the financial
statements when auditors found that there are material misstatements in the financial statements.
The misstatements found here are different from the material misstatements found qualified audit
report.

When there is sufficient basis for the auditor to form an opinion that the whole accounts and
financial statements, do not present a true and fair view of the financial condition and results of
operation, the adverse or negative opinion will be given. The adverse or negative report will be
given on the following grounds:
1. When the auditor is not satisfied with the truth and fairness of financial statements.
2. Non conformity with the Generally Accepted Accounting Principles.
3. Mistakes, discrepancies and material misstatement in the financial statements.
4. Omission of a material disclosure.

4. Disclaimer audit report: - It is the report that issues to the financial statements where there
are matters to auditor’s independence & those matter cause auditor not be able to obtain
sufficient audit’s evidence to support their opinion.

The auditor may disclaim or refuse opinion on the accounts, Profit and Loss Account and the
Balance Sheet, when he does not have sufficient information to base his opinion. In the scope
and opinion paragraph, the auditor should give disclaimer information. This may happen on the
following grounds:
1. The auditor has not been able to obtain sufficient information to form his opinion.
2. The audit examination is not adequate to form an opinion.
3. There are some material un-determined items in audit examination.

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Independent Auditor’s Report and their Illustration

Clean Audit Report

To the Share Holders

XYZ Limited
Bengaluru

We have audit the attached balance sheet and profit and loss account for the
year ended…. and we report that:-
1. We have obtained all the information and explanations which, to the best
of our knowledge and belief were necessary for the purpose of his audit.
2. Proper returns adequate for the purpose of our audit have been obtained
from branches not visited by us.
3. Proper books of accounts as required have been kept by the company so
far as appears from our examination.
4. The company’s balance sheet and Profit and loss account are in the
agreement with the books, accounts and returns.
5. In our opinion and to the best of our information and according to the
explanation given to us, balance sheet and Profit and loss account
exhibits a true and fair view of state of affairs of the company.

For Ganesh and Company

(Senior Partner)

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Qualified Audit Report and their Illustration

To the Share Holders

XYZ Limited
Bengaluru

We have audit the attached balance sheet and profit and loss account for the
year ended…. and we report that:-
1. We have obtained all the information and explanations which, to the best
of our knowledge and belief were necessary for the purpose of his audit.
2. Proper returns adequate for the purpose of our audit have been obtained
from branches not visited by us.
3. Proper books of accounts as required have been kept by the company so
far as appears from our examination.
4. The company’s balance sheet and Profit and loss account are in the
agreement with the books, accounts and returns.
5. In our opinion and to the best of our information and according to the
explanation given to us, balance sheet and Profit and loss account
exhibits a true and fair view of state of affairs of the company, subject to
the following reservations:
 Inadequate provisions for bad and doubtful debts provided.
 Overvaluation of closing stock.
 Capital expenditure is treated as revenue expenditure.
 Incorrect provisions for discount on debtors.

For Ganesh and Company

(Senior Partner)

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Professional Ethics of an Auditor

The Chartered Accountants Act 1949 set out the acceptable forms of behavior of the
members of the profession. All the members are required to adhere to the requirements of the act.

Meaning of Professional Ethics

The “code of conduct” is essentially a set of professional ethical standards regulating the
relationship of Chartered Accountants with their clients, employers, employees, fellow members
of the group & the public generally.

Professional ethics refers to the behaviour of a member of professional body towards the
other members of his profession & towards the member of the public.

Meaning of Code of Conduct

A Code of Ethics is a comprehensive statement of the values and principles which should
guide the daily work of auditors.

Meaning of Professional Misconduct

It means any failure to perform a duty according to accepted professional standards. Such
gross negligence gives rise to a civil liability to pay damages to the party who has suffered a loss.

Fundamental Principles of Professional Ethics

1. Honesty and truthfulness: Every professional should be honest to his

professional he should never lie in his professional dealing. He should
understand that the public to whom he serves depends on his honesty and
should give right service and information to the clients or customers.

2. Unbiased attitude: Professional people should never become unjust or

biased. They should have similar behaviour and attitude with the every
client the deal. They should never do favoritism on any basis. He should
give equal rights to the clients to whom the deals.

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3. Value to the public: People who come to the professionals to seek help
should be facilitated positively and the professional should give value to
the problems of the clients. He should try to understand what the client
wants to get and should try to facilitate him positively.

4. Respect and concern: He should show respect and concern and he

should never harm to the integrity of the people. His concern toward client
is a proof that he is loyal to his service. Disrespect can be of various
natures and a professional can be penalized for showing disrespect to the
client.

5. Punctuality and availability: He should ensure that he is available

whenever the client needs his service. He should be punctual in his work
and should not make excuses. The professional should never do his
personal chores while in service job is to seek help to the clients.

6. Integrity: A professional should be straightforward and honest in all

professional and business relationships.

7. Professional Competence and Due Care: A professional has a

continuing duty, act diligently to maintain professional knowledge and
skill at the level required to ensure that a client or employer receives
competent professional service based on current developments in practice,
legislation and techniques.

8. Confidentiality: A professional should respect the confidentiality of

information acquired as a result of professional and business relationships
and should not disclose any such information to third parties without
proper and specific authority unless there is a legal or professional right or
duty to disclose.

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9. Professional Behaviour: A professional should comply with relevant

laws and regulations and should avoid any action that discredits the
profession.

Professional Accountants in Public Practice

Professional Accountants in public practice are individual who provide a wide
range of accounting, auditing, taxation and advisory services to clients who can
include individuals, businesses, nonprofit organisations and government entities.
These Accountants work in accounting firms ranging from small local practices to
large multinational firms. They play crucial role in ensuring financial transparency,
compliance and accountability of the clients.

Roles and responsibilities of Professional Accountants in Public Practice

1. Auditing and Assurance Services: Conducting financial statements audits

in order to provide independent verification of the accuracy and reliability of
financial information.
2. Taxation Services: Preparing and filing tax returns for individuals and
business ensuring compliance with tax laws and regulations .Providing Tax
Planning and advisory services to minimise tax liabilities.
3. Consulting and Advisory services: Assisting clients with financial and
business decision such as budgeting, Investment analysis and strategic
planning.
4. Forensic accounting and Investigation: Detecting and investigating
financial fraud, misappropriation of funds and other financial irregularities.
5. Business Valuation: Determining the value of the businesses or assets for
the purposes such as mergers and acquisitions, financial reporting and
litigation.
6. Ethics and professionalism: Upholding ethical standards and professional
integrity in all interactions with clients, stakeholders and regulatory bodies.

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Professional Accountants in Business

Professional Accountants in business work within organisations including

corporations, government agencies, nonprofit organisations and educational
institutions. They contribute to various aspects of financial management, decision
making and strategic planning within their organisations.

Roles and responsibilities of Professional Accountants in Business

1. Financial Reporting and Analysis: Preparing and analyzing financial

statements, budgets and financial reports to support management decision
making.
2. Internal Control and Risk Management: Developing and implementing
internal control procedures to safeguard assets, prevent fraud and ensure
accurate financial reporting.
3. Management Accounting: Providing Cost Analysis, budgeting and
performance measurement to aid in operational efficiency and cost control.
Assisting in product costing, pricing decisions and profitability analysis.
4. Strategic Planning and Business Analysis: contributing financial expertise
to strategic planning initiatives and business expansion. Evaluating
investment opportunities, conducting financial modelling and assessing
feasibility.
5. Information technology and Systems integration: Collaborating with IT
teams to implement and maintain Financial System, software and data
analytical tools. Enhancing financial reporting capabilities through
technology integration.
6. Ethics and governance: Promoting ethical behaviour, corporate
governance and financial transparency within the organisation.

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