F.Y.BAF PRESENTS PROJECT ON…..

CONCEPTS IN
AUDITING
 INTRODUCTION

Auditing –
Auditing begins, where accountancy ends. An auditor
examines the financial statements prepared by the
accountant and verifies the items therein with the help
of relevant documentary evidence and explanation and
information given to him.
In other words he examines analytically and critically
the accounts and financial statements prepared by the
accountant.
 Vouching consists of comparing the entries in the books
with particulars in the voucher as regards date, amount,
name of the party.

 But vouching is not a mere comparison of the entry with the

supporting document.

 It is a critical examination of the supporting documents to

understand the substance / essence of the transaction & to
ensure that accounting of the transaction is done as per
substance/ essence of the transaction.
What are the Objectives of vouching ?
1.Transactions are authorized.

2.Transactions represented by the entries are not ultra vires the

entity.

3.Transactions represented by the entries have :

- actually occurred
- during the period under the audit.
- pertain to the entry under audit.

4.Transactions have been recorded in the correct amounts.

5.Transactions have been allocated properly between capital

&revenue.
1. Addressed to the client – all vouchers should be in the name of the
client .if they are addressed in the name of an employee / official etc. it
could be a personal expense and not a business expense.

2. Date- the date on the voucher should be seen . The date of the
voucher should fall during the period under audit. Otherwise, it is
possible that payments pertaining to earlier or later period is included
in the accounts of the current period.

3. Cancelled- vouchers examined should be cancelled by initials /firm’s

stamps to avoid the same voucher being produced again in support of
another payment.

4. Amount- the amount entered should be checked with the amount on

the vouchers.

5. Authorization- voucher should be authorized by competent authority.

Verification of assets & liabilities.
Introduction:
Verification means confirmation of the truth , accuracy &
existence of an item or entry.

Verification of assets & liabilities implies obtaining and

examining evidence in respect of assets and liabilities.

Verification goes beyond books of accounts and

documentary evidence. It is more than checking arithmetical
accuracy of the record of assets & liabilities;

it involves physical inspection of certain assets as shown in

the balance sheet really exist.
Scope of verification/ verification includes:
1.Whether the assets are owned by the company.

2.Whether they are shown in the books of accounts.

3.Whether they are free from any change other than those
disclosed in the books .

4.Whether they are acquired in connection with the object of the

business.

5.Whether they are actually lying with the company or the

balance sheet date.

6.Whether they are properly valued or the balance sheet date.

 Valuation of assets means determining the fair value of assets
on the basis of generally accepted accounting principles
(GAAP).

 It is an important part of auditors duty. The auditor must satisfy

himself whether all the assets shown in the balance sheet are
at proper values.

 If the assets are over or under valued, the financial statement

will not disclose true & fair view of the state of affairs & the
profitability of the company .

 Thus, the main object of proper valuation of assets is to

represent a true and fair view of the state of affair of concern
through the balance sheet.
Methods of valuation of assets :
1.Cost price :
In this method, the assets are valued at actual cost including
installation charges if any.

2. Market value :
Market value is the price which exits in the market on the balance sheet
date .

3. Cost of market value whichever is lower :

This method of valuation is generally used for valuation of current
assets.

4. Replacement value:
Here, the replacement value means the amount of money which could
be required to replace an existing asset by purchasing a new asset of
the same type . On arriving, at such a value, expenses such as
commisions , freight etc are taken into account.
5. Realizablevalue:
It means the amount of money which will be realized in the
market from the sale of assets. Under this, assets are valued
according to be anticipated sale value of assets.

6. Scrap value:
Scrap value means realizable value of assets which are
receivable after long use. Under this, assets of no use to the
business are valued at the amount for which they can be
sold in the market as if they were scrap.

7. Going concern/ book value / written down value :

Going concern value is the estimated present value of the
asset. It is equivalent to cost less depreciation written off up
to date. Generally , fixed assets are value at going concern
value.
 VOUCHING
Meaning & Scope:
Is a substantive audit procedure which
deals with examination of profit and loss
transactions/items.
Normally, extensive vouching exercise is
done during the depth test/cradle-to grave
test.
Vouching enable the auditor to know
whether the transactions are genuine and
valid to enable the auditor to report on the
financial statements.
Vouching is the substantive
testing/examination of transaction at their
POINT OF ORIGIN.
VERIFICATION
Meaning & Scope:
Is a substantive audit procedure which
deals with examination
of balance sheet transactions/items
whether they are assets or liabilities are
properly stated in the balance sheet.
Also applies to profit and loss item to check
the account balances and their
presentation.
Verification process encompasses the
inquiry into the ownership/ title, existence,
valuation, completeness and presentation
of assets and liabilities in the balance
sheet.
Verification usually deals with the FINAL
BALANCE in the Final Accounts viz
the balance sheet and profit and loss
 VOUCHING VERIFICATION

Nature of work: Nature of work:

It examines the entries relating to It examines the assets & liabilities in the
transactions balance sheet
Time : Time :
It is done throughout the year It is done at the end of the year

Basis:
Basis:
It includes personal as well as documentary
It is based on documentary examination
examination

Valuation: Valuation:
It does not include valuation. It includes valuation
 Verification Valuation
Meaning: Meaning:
verification means determining the valuation means testing the accuracy of the
accuracy of assets and liabilities shown in asset and liabilities.
the balance sheet.

Scope: Scope:
The scope of verification is wide. The scope of valuation is limited
Execution: Execution:
Verification is executed by auditor. Valuation executed by the client's staff.
Nature : Nature:
The nature of verification is objective. The nature of valuation is subjective.

Proof:
Proof :
It certifies the correct value of Asset &
It proves the existence, ownership & title
Liability
Evidence : Evidence :
Title deeds, receipts & payments. Certificate from owners/directors.
 PRIMARY OBJECTIVE OF AN AUDIT
 The basic primary objective is expression of opinion as to
truthfulness and fairness of financial statements.

 ACCORDING TO DE PAULA- “The main object of an audit is to

ascertain that the balance sheet and profit and loss account of
undertaking do show true and fair view of its financial position and
earnings”.

 This object has statutory recognition in India and has been clearly
stated in section 227 of the companies Act 1956. It requires the
auditor of a company to state whether in his opinion the accounts
give a “true and fair view” in case of balance sheet, of the state of
company’s affairs as at the end of financial year and incase of the
profit and loss account, of the profit or loss for the financial year.
 SECONDARY OBJECTIVE OF AN AUDIT

 Pretention and preventions of frauds and errors is a major

secondary objective of an audit.

 A “true and fair view” cannot be expressed by the auditor

on the basis of accounts which have material
misstatements resulting from errors and fraudulent
manipulations.

 ‘Fraud’ refers to intentional misstatement which is

material to the financial statements, management ,
employees or third parties may get involved in committing
frauds to obtain an illegal advantage of personal gain.

 Fraud generally involves either misappropriation of assets

that maybe called ‘employee
 SECRET RESERVE

 In “a dictionary for accountants” Eric L- Kohler defines the secret

reserve as, ‘the amount by which the net worth has been
deliberately understated – a hidden reserve.

 Such a condition exists where the assets are omitted or under-

valued or where liabilities are over-stated.

 The term does not represent any actual account bearing that
name.’

 thus a reserve which is not disclosed in the balance sheet of the

entities called a “secret reserve”, hidden reserve or an inner
reserve .
 SECRET RESERVE

Some of the ways of creating secrete reserves are given

below:

• By writing off excessive depreciation on fixed assets

• By undervaluing the closing stock

• By charging capital expenditure to reserves

• By surprising sales

• By making excessive provisions for bad debts

• By making excessive provisions for contingencies

 WINDOW DRESSING

 Window dressing is the art of showing a substantially better

financial position of the company that it is in reality.

 A sound financial position is painted on the face of the

balance sheet by concealing the actual state of affairs.

 In window dressing, assets are over valued , liabilities are

under valued and profits are over stated or, if there are
losses they are under stated.

 It is one of the methods of manipulating accounts , but it

does not necessarily involve misappropriation of cash or
goods .
 DIFFERENT WAYS OF WINDOW DRESSING

1. Charging inadequate depreciation on fixed assets.

2. Providing inadequate reserves for bad and doubtful debts.

3. Charging revenue expenditure to capital account

4. Over valuing closing stock at the end of the year .

5. Showing actual liabilities as contingent liabilities.

6. Showing fictitious credit sales & thereby over valuing

debtors.

7. Showing fictitious assets.

8. Creating inadequate provision for outstanding expenses.

OBJECTS/BENEFITS OF WINDOW DRESSING

1. It helps by attracting more applicants for shares or debentures in

case of fresh issue of shares .

2. It helps in getting more remuneration to the managerial

personnel when it is given on the basis of percentage of net
profit.

3. It helps in getting easy finance facilities like bank overdraft or

loan from bank and other financial institutions

4. It helps in getting more favourable credit terms on purchase

from suppliers .

5. More goodwill can be demanded in the case of absorption and in

the case of admission of a new partner .
 TEEMING & LADING

•Teeming and lading is one of the methods of

misappropriation of cash.

•Under this method, the money received from the first

customer is misappropriated by the cashier.

•The money received from the subsequent customer is

then credited to the account of the first customer and
this process continues till such a time that the cashier is
able to replace the money misused by him, or such time
that the cashier is caught.
 TEEMING & LADING

•The auditor can detect such a fraud by taking the following steps :

i. The auditor should verify the system of internal control and check
regarding receipt of cash from customers and the deposits take
place into bank.

ii.The auditor should scrutinize the Debtor’s Accounts, especially

those accounts which show part payment.

iii.He should co-relate the dates of cash receipts from debtors with
the date on which the amount is deposited into the bank.

iv.He should get the balance confirmation certificates from debtors.

v.He should check the discount allowed column in the cash book with
the prevailing discount rate.
CONCLUSION
BIBLIOGRAPHY
 ACKNOWLEDGEMENTS

We are heartily thankful to Professor Afsha Kirkire ,

Professor Ashok Vanjani and our co-ordinator
Professor Deshpande, whose encouragement,
guidance and support from the initial to the final level
enabled us to develop an understanding of the
subject.

Lastly, We offer my regards and blessings to all of

those who supported us in any respect during the
completion of the project.
 PRESENTED BY :

JAPJIV SINGH ANAND

18
SAHIL GANGWANI 20
SHIKHA SACHDEV 23
KOMAL RATANPAL 27
JHANVI PATEL 49
FAHAD HINGORA 59
SHUBHDA VARDE 60
 OU
K Y
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