19 Audit

8ef.
lCAl Module,
CA 8avl Chawchharla emp.

)ayesb M. Avaiya {Your Intelligence is My Common Sense]
|mavaiya.cagmail.com
9714259022 1
8as|c concepts |n aud|t|ng

Aud|t ev|dence
AudlL evldence refers Lo any lnformaLlon, verbal or wrlLLen, obLalned by Lhe audlLor durlng Lhe course of audlL Lo
arrlve aL Lhe concluslon on whlch he bases hls oplnlon on flnanclal sLaLemenLs
1he audlLor should obLaln sufflclenL approprlaLe audlL evldence Lhrough Lhe performance of compllance and
subsLanLlve procedures Lo enable hlm Lo draw reasonable concluslons abouL Lhe LruLhfulness and falrness of flnanclal
sLaLemenLs,
Pere, sufflclency refer Lo Lhe quanLum of audlL evldence obLalned whlle,
ApproprlaLeness relaLes Lo lLs relevance and rellablllLy.

Methods of obta|n|ng aud|t ev|dence
1. lnspecLlon
lnspecLlon refers Lo examlnlng of records, documenLs, or Langlble asseLs. lnspecLlon provldes evldence
of varylng degrees of rellablllLy dependlng upon Lhe naLure and Lhe source form whlch Lhey have been
obLalned, and Lhe effecLlveness of lnLernal conLrol over Lhelr processlng
2. CbservaLlon
CbservaLlon ls noLhlng buL wlLnesslng a process or procedure belng performed by oLhers. lL leaves no
audlL Lrall and so lL ls less rellable Lhan lnspecLlon
3. lnqulry and conflrmaLlon
lnqulry lnvolves seeklng of approprlaLe lnformaLlon from knowledgeable persons lnslde or ouLslde Lhe
enLlLy
ConflrmaLlon lnvolves ls Lhe response Lo an lnqulry Lo correlaLe lnformaLlon conLalned ln Lhe accounLlng
records.
4. CompuLaLlon
CompuLaLlon lnvolves checklng Lhe arlLhmeLlcal accuracy of source documenLs and accounLlng records
are performlng lndependenL calculaLlons
3. AnalyLlcal revlew
lL conslsL of
l. SLudylng slgnlflcanL raLlos and Lrends
ll. lnvesLlgaLlon unusual flucLuaLlons and lLems

ke||ab|||ty on aud|t ev|dence
Iactors:- Lhe rellablllLy of audlL evldence ls lnfluenced by:
1. lLs source
2. lLs naLure
3. ClrcumsLances under whlch lL ls obLalned
4. ConslsLency of evldence obLalned from dlfferenL sources or naLure
3. naLure of asserLlon obLalned and lLs maLerlallLy
Lv|dence based on sources |s (|n order of re||ab|||ty)
1. LxLernal evldence :- generally from ouLslde whlch ls noL passed Lhrough cllenL's hand
2. LxLernal-lnLernal evldence:- lnformaLlon generaLed by Lhlrd parLles and Lhen processed and malnLalned by cllenL
3. lnLernal-exLernal evldence:- Lhe daLe generaLed lnLernally and glven Lo lndependenL Lhlrd parLy for processlng ls
called lnLernal-exLernal evldence
4. lnLernal evldence:- for examples sales lnvolce, maLerlal lssue noLe eLc.
CenerallzaLlon ls useful ln assesslng Lhe rellablllLy of audlL evldence
1. LxLernal evldence ls more rellable Lhan lnLernal evldence
2. lnLernal evldence ls more rellable when relaLed lnLernal conLrol ls saLlsfacLory
3. Lvldence ln Lhe form of documenLs and wrlLLen represenLaLlons are usually more rellable Lhan oral
4. Lvldence obLalned by Lhe audlLor hlmself ls more rellable LhaL obLalned Lherough Lhe enLlLy
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Ana|yt|ca| procedures
AnalyLlcal procedures means Lhe analysls of slgnlflcanL raLlos and Lrends lncludlng Lhe resulLlng lnvesLlgaLlon of
flucLuaLlons and relaLlonshlp LhaL are lnconslsLenL wlLh oLher relevanL lnformaLlon or whlch devlaLe from predlcLed
amounLs
AnalyLlcal procedures are used for Lhe followlng purposes
1. 1o asslsL Lhe audlLor ln plannlng Lhe naLure, Llmlng and exLenL of oLher audlL procedures
2. As subsLanLlve procedures when Lhelr use can be more effecLlve or efflclenL Lhan LesLs of deLalls ln reduclng
deLecLlon rlsk for speclflc flnanclal sLaLemenL asserLlons and,
3. As an overall revlew of Lhe flnanclal sLaLemenLs ln Lhe flnal revlew sLage of Lhe audlL.

AudlLor should apply analyLlcal procedures aL Lhe end of Lhe audlL when formlng an overall concluslon As Lo
wheLher Lhe flnanclal sLaLemenLs as a whole are conslsLenL wlLh Lhe audlLor's knowledge of Lhe buslness.
Powever ln some cases, as a resulL of appllcaLlon of analyLlcal procedures, Lhe audlLor may ldenLlfy areas where
furLher procedures need Lo be applled before Lhe audlLor can form an overall concluslon abouL Lhe flnanclal sLaLemenLs
8ellance on analyLlcal procedures
1. MaLerlallLy of lLems lnvolved:- when lnvenLory balances are maLerlal, analyLlcal revlews alone wlll noL be
sufflclenL ln formlng Lhe audlL concluslon
2. CLher audlL procedures:- when oLher audlL procedures are dlrecLed ln Lhe same area, analyLlcal revlew may
provlde conformlLy evldence.
3. Accuracy of predlcLlon:- lf Lhe expecLed resulL of analyLlcal procedures can be predlcLed wlLh reasonable
accuracy, such procedures wlll be more rellable.
4. naLure of rlsks:- Lhe effecL of AnalyLlcal procedures also depends on Lhe assessmenL of lnherenL and conLrol
rlsks. lf lnLernal conLrol over sales order processlng ls weak, and hence, conLrol rlsk ls hlgh, more rellance wlll be
placed on LesLs of deLalls of LransacLlon and balances raLher Lhan on analyLlcal procedures.

Concept of mater|a||ty
1hls concepL ls fundamenLal Lo Lhe process of accounLlng. lL covers all Lhe sLages from Lhe recordlng Lo
classlflcaLlon and presenLaLlon. lL ls Lherefore, an lmporLanL and relevanL conslderaLlon for an audlLor who has
consLanLly Lo [udge wheLher a parLlcular lLem or LransacLlon ls maLerlal or noL.
SA 320 on maLerlallLy ln plannlng and performlng an audlL deals wlLh Lhe audlLor's responslblllLy Lo apply Lhe
concepL of maLerlallLy ln plannlng and performlng an audlL of flnanclal sLaLemenLs.
llnanclal sLaLemenLs maLerlally effecLed ln such sLaLemenL ls erroneously sLaLed or omlLLed Lo be sLaLed Lhereln
and economlc declslon of Lhe users Laken on Lhe basls of such lnformaLlon ls lnfluenced by such mlssLaLemenL or
omlsslon.

now the work of an expert shou|d be eva|uated before accept|ng the same as an aud|t ev|dence

When audlLor lnLends Lo use Lhe work of an experL he should evaluaLe Lhe followlng before accepLlng Lhe same
as audlL evldence.
1. rofesslonal quallflcaLlon of Lhe experL
2. Lxperlence and repuLaLlon of experL ln relaLed fleld
3. lndependence and ob[ecLlvlLy of Lhe experL
4. 1he ob[ecLlve and scope of Lhe experL's work
3. LxperL's relaLlonshlp wlLh Lhe cllenL, lf any
6. 1he sources daLa used
7. AssumpLlons and meLhod used
8. 1he resulL of Lhe experL's work ln Lhe llghL of audlLor's overall knowledge of Lhe buslness and of Lhe resulL of hls
audlL procedure

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Lxterna| conf|rmat|on
lL ls Lhe process of obLalnlng and evaluaLlng audlL evldence Lhrough a dlrecL communlcaLlon from a Lhlrd parLy,
whlch ls noL relaLed Lo Lhe enLlLy, ln responses Lo requesL for flnanclal lnformaLlon abouL a parLlcular lLem affecLlng
asserLlons made by managemenL on Lhe flnanclal sLaLemenLs
lollowlng are Lhe examples of slLuaLlons where exLernal conflrmaLlon may be useful
1. 8ank balances and oLher lnformaLlon from bankers
2. AccounL recelvables balances
3. SLock held by Lhlrd parLles
4. AccounL payable balances
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9714259022 4
Nature of aud|t|ng

Aud|t|ng
An audlL ls lndependenL examlnaLlon of flnanclal sLaLemenLs of any enLlLy, wheLher proflL orlenLed or noL, and
lrrespecLlve of lLs slze or legal form, when such an examlnaLlon ls conducLed wlLh a vlew Lo expresslng an oplnlon on
Lhereon.

ua||t|es of aud|tor
1he audlLor should possess speclflc knowledge of accounLancy, audlLlng, LaxaLlon, and company law maLLers eLc.
whlch ls requlred by hlm durlng Lhe course of hls LheoreLlcal quesLlon
1he audlLors should also have sufflclenL knowledge of general prlnclples of law of conLracLs, parLnershlp, speclflc
sLaLuLes and provlslon appllcable
ln shorL all Lhose personal quallLles LhaL goes Lo make a good person conLrlbuLe Lo Lhe maklng of a good audlLor.
ln addlLlon, he musL have shlne of culLure for aLLalnlng a greaL helghL. Pe musL have Lhe hlghesL degree of
lnLegrlLy, ob[ecLlvlLy and lndependence as one of Lhe baslc prlnclpal.

'Do|ng a statutory aud|t |s fu|| of r|sk" narrate the funct|on wh|ch cause the r|sk
An lndependenL audlL wheLher performed ln Lerms of relevanL sLaLuLory leglslaLlon or ln Lerms of Lhe
engagemenL, Lhe audlLor has Lo be reasonably saLlsfled as Lo wheLher Lhe lnformaLlon conLalned ln Lhe underlylng
accounLlng records and oLher source daLa ls rellable for Lhe preparaLlon of flnanclal sLaLemenLs.
lacLors whlch may cause
1. Lxerclslng [udgmenL on Lhe parL of Lhe audlLor
1he audlLor's work lnvolves exerclse of [udgmenL, for example, ln decldlng Lhe exLenL of audlL
procedures and ln assesslng Lhe reasonableness of Lhe [udgmenLs and esLlmaLes made by managemenL
ln preparlng Lhe flnanclal sLaLemenLs
2. naLure of audlL evldence
1he audlLor normally relles upon bellevable evldence raLher Lhan concluslve evldence. Lven ln
clrcumsLances where concluslve evldence ls avallable, Lhe cosL of obLalnlng such an evldence may far
exceeds Lhe beneflLs
3. lnherenL llmlLaLlon of lnLernal conLrol
lnLernal conLrol can provlde only reasonable, buL noL absoluLe assurance on accounL of several lnherenL
lmlLaLlons such as poLenLlal for human error, posslblllLy of clrcumsLances of conLrol Lhrough colluslon
eLc.
Cn accounL of above, lL ls qulLe naLure LhaL an audlL suffers from conLrol rlsk on accounL of lnherenL llmlLaLlons
of lnLernal conLrol rlsk and deLecLlon rlsk on accounL of LesL naLure of audlL and [udgmenL and esLlmaLes
lnvolved ln formulaLlng accounLlng pollcles

Lrrors of comm|ss|on
When a LransacLlon has been mlsreporLed elLher wholly or parLlally lL ls called as a error of commlsslon. Lrror of
commlsslon can happen ln Lhe followlng ways
Lrror ln posLlng
Lrrors ln casLlng
Lrrors ln carrylng forward
Lrrors occurrlng durlng exLracLlon of balance eLc.

Cperat|ona| Aud|t
CperaLlonal audlL lnvolves examlnaLlon of all operaLlons and acLlvlLles of Lhe enLlLy
1he ob[ecL of operaLlonal audlL lnclude Lhe conLrol sLrucLure and of Lhe relaLlon of deparLmenL conLrols Lo
general pollcles.
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lL provldes an appralsal of wheLher Lhe deparLmenL ls operaLlng ln conformlLy wlLh prescrlbed sLandards and
procedures and wheLher sLandards of efflclency and economy are malnLalned.

'1he aud|tor's respons|b|||t|es re|at|ng to fraud |n aud|t of f|nanc|a| statements.' Def|ne fraud and
error
lraud: - fraud ls an lnLenLlonal mlssLaLemenL or omlsslon or dlsclosure of Lhe flnanclal sLaLemenLs
Lrror: - error may be deflned as Lhe unlnLenLlonal mlssLaLemenLs or omlsslons of amounLs or dlsclosure ln flnanclal
sLaLemenLs.

Aud|tor's respons|b|||ty
1he responslblllLy for Lhe prevenLlon and deLecLlon of fraud and errors prlmarlly resLs wlLh Lhe managemenL
Lhrough Lhe lmplemenLaLlon and conLlnued operaLlon of an adequaLe sysLem of lnLernal conLrol. 8uL lL does noL
ellmlnaLe Lhe posslblllLy of fraud and error
1hus Lhe audlLor should plan hls audlL so LhaL he has a reasonable expecLaLlon of deLecLlng maLerlal
mlssLaLemenL ln Lhe flnanclal lnformaLlon resulLlng from fraud and error.
AudlLor's responslblllLy musL be vlewed afLer conslderlng Lhe followlng polnLs
a. lnherenL llmlLaLlons of lnLernal conLrol
b. rofesslonal skepLlclsm. -audlLor ls enLlLled Lo accepL Lhe record and documenLs ls genulne
c. ulscusslon of audlL plannlng
d. lnqulres Lo managemenL
e. ulscusslon wlLh Lhose charged wlLh Lhe managemenL
f. AudlL rlsk and lLs assessmenL
ln plannlng and performlng hls examlnaLlon of audlLor should Lake lnLo conslderaLlon rlsk of maLerlal
mlssLaLemenL of Lhe flnanclal lnformaLlon caused by fraud and error. Pe should enqulre wlLh Lhe managemenL
as Lo any fraud or slgnlflcanL error, whlch has occurred ln Lhe reporLlng perlod, and modlfy hls audlL procedures,
lf necessary
1he audlLor also has Lhe responslblllLy Lo communlcaLe Lhe mlssLaLemenL Lo Lhe approprlaLe level of
managemenL on a Llmely basls and conslder Lhe need Lo reporL Lo lL Lhen changed wlLh governance.
Pe may also obLaln legal advlce before reporLlng on Lhe flnanclal lnformaLlon or before wlLhdrawlng from Lhe
managemenL.
1he audlLor also should conslder Lhe lmpllcaLlon of Lhe frauds and error, and frame hls reporL approprlaLely. ln
case of a slgnlflcanL fraud, Lhe same should be dlsclosed ln Lhe flnanclal sLaLemenL. lf adequaLe dlsclosure ls noL
made, Lhere should be a sulLable dlsclosure ln hls audlL reporL.

Comment on "aud|tor's profess|ona| respons|b|||t|es are governed by bas|c pr|nc|p|es wh|ch shou|d
be comp||ed w|th whenever an aud|t |s carr|ed out"?
8aslc prlnclples for governlng an audlL:-
1. lnLegrlLy, ob[ecLlvlLy and lndependence
1he audlLor should be sLralghL forward, honesL and slncere ln hls approach Lo hls professlonal work. Pe
should malnLaln an lmparLlal aLLlLude and boLh be and appear o be free of any lnLeresL whlch mlghL be
regarded, whaLever ls acLual effecL, as belng lncompaLlble wlLh lnLegrlLy and ob[ecLlvlLy.
2. ConfldenLlallLy
1he audlLor should respecL Lhe confldenLlallLy of lnformaLlon acqulred ln Lhe course of hls work and
should noL dlsclose any such lnformaLlon Lo a Lhlrd parLy wlLhouL speclflc auLhorlLy or unless Lhere ls a
legal or professlonal duLy Lo dlsclose
3. Skllls and compeLence
1he audlL should be performed and Lhe reporL prepared wlLh due professlonal care by persons who have
adequaLe Lralnlng, experlence and compeLence ln audlLlng

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9714259022
4. Work performed by oLhers
When Lhe audlLor delegaLed work asslsLanLs Lo uses work performed by oLher audlLor and experLs, he
conLlnues Lo be responslble for formlng and expresslon hls oplnlon on Lhe flnanclal lnformaLlon.
3. uocumenLaLlon
1he audlLor should documenL maLLers whlch are lmporLanL ln provldlng evldence LhaL Lhe audlL was
carrled ouL ln accordance wlLh Lhe baslc prlnclples
6. lannlng
1he audlLor should plan hls work Lo enable hlm Lo conducL an effecLlve audlL ln an efflclenL and Llmely
manner. lans should be based on knowledge of Lhe cllenL's buslness
7. AudlL evldence
1he audlLor should obLaln sufflclenL approprlaLe evldence Lhrough Lhe performance of compllance and
subsLanLlve procedures Lo enable hlm Lo draw reasonable concluslons Lhere from on whlch Lo base hls
oplnlon on Lhe flnanclal lnformaLlon
8. AccounLlng sysLem and lnLernal conLrol
1he audlLor should galn an undersLandlng of Lhe accounLlng sysLem and relaLed conLrols and should
sLudy and undersLandlng of Lhe accounLlng sysLem and relaLed conLrols and should sLudy and evaluaLe
Lhe operaLlon of Lhose lnLernal conLrols upon whlch he wlses Lo rely ln deLermlnlng Lhe naLure, Llmlng
and exLenL of oLher audlL procedures
9. AudlL concluslon and reporLlng
1he audlLor should revlew and assess Lhe concluslons drawn from Lhe audlL evldence obLalned from hls
knowledge of buslness of Lhe enLlLy as Lhe basls for Lhe expresslon of hls oplnlon on hls flnanclal
lnformaLlon.

rlnclples aspecLs Lo be covered ln audlL
1. lnLernal conLrol sysLem
2. 8evlew
3. ArlLhmeLlcal accuracy
4. vouchlng
3. AccounLlng prlnclples
6. llnanclal sLaLemenLs and books
7. AsseLs and llablllLles
8. lalrness of & L a/c.
9. SLaLuLory requlremenLs
10. 8eporL

lndependenL audlL
lndependenL audlL ls generally conducLed Lo ascerLaln wheLher Lhe balance sheeL and proflL amd loss accounL
presenL a Lrue and falr vlew of Lhe flnanclal poslLlon and worklng resulLs.
lL musL be kepL ln mlnd LhaL deLecLlon of frauds and errors ls noL Lhe ob[ecLlve of lndependenL flnanclal audlL.

ulsLlngulsh beLween lnvesLlgaLlon and AudlLlng
art|cu|ars Invest|gat|on Aud|t|ng
Meanlng lnvesLlgaLlon lmplles sysLemaLlc, crlLlcal and
speclal examlnaLlon of Lhe records of a buslness
for a speclflc purpose
An audlL ls lndependenL examlnaLlon of flnanclal
lnformaLlon of any enLlLy, when such an
examlnaLlon ls conducLed wlLh a vlew Lo
expresslng an oplnlon Lhereon
compulsory
naLure
volunLary compulsory for companles, for oLher lL ls
volunLary
ConducLed by Any person, who may noL be a CA A CharLered AccounLanL wlLhln Lhe meanlng of
CA acL 1949
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9714259022 7
AppolnLlng
agency
Cwners or managemenL even Lhlrd parLles may
appolnL Lhe lnvesLlgaLor
Cwners/shareholders of Lhe enLerprlse
roLecLlon of
lnLeresLs
Work ls carrled ouL from Lhe vlew polnL of Lhe
appolnLlng agency
Work ls carrled ouL on behalf of Lhe owners, even
of Lhe power of appolnLmenL ls delegaLed Lo say,
8Cu
Scope and
coverage
1o answer any Lhose quesLlon lald done ln Lhe
engagemenL leLLer
When compared Lo lnvesLlgaLlon- seeks Lo form
an oplnlon on flnanclal sLaLemenL
erlod
covered
noL necessarlly resLrlcLed Lo a flnanclal year. lL
conslsL for number of years
Cenerally a perlod of flnanclal year
Lvldence lLs essence lles ln golng lnLo Lhe maLLer wlLh some
pre-concelved noLlon sulLed Lo Lhe ob[ecLlve
AudlL ls noL based on susplclon unless
clrcumsLances exlsL Lo arouse susplclon
LxLenL of
checklng
ueLalled, exhausLlve and Lhrough checklng ls
called for
Much of audlL evldence ls bellevable raLher Lhan
concluslve
lorm of
reporLlng
1here ls no sLaLuLory form of lnvesLlgaLlon reporL 1he maLLers Lo be covered ln Lhe audlL reporL are
someLlmes prescrlbed by law.

Iundamenta| account|ng assumpt|on
1. Colng concern:- Lhe enLerprlse ls generally vlewed as a golng concern, LhaL ls conLlnulLy ln operaLlon for Lhe
foreseeable naLure.
2. ConslsLenL:- lL ls assumed LhaL accounLlng pollcles are conslsLenL from one perlod Lo anoLher
3. Accrual:- revenues and cosLs are recognlzed as and when Lhey are earned or lncurred ln Lhe flnanclal sLaLemenLs
of LhaL perlod Lo whlch Lhey relaLe.
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9714259022 8
reparat|on for an aud|t

Aud|t Lngagement Letter
1o avold mlsundersLandlng beLween cllenLs and Lhe audlLor, Lhe audlLor should send a leLLer called audlL
engagemenL leLLer Lo Lhe cllenL before sLarLlng Lhe audlL.
ConLenL of leLLer
l. Cb[ecLlve of Lhe audlL of flnanclal sLaLemenLs
ll. 8esponslblllLy of managemenL ln relaLlon Lo flnanclal sLaLemenLs
lll. ManagemenL responslblllLy regardlng Lhe followlng
1. SelecLlon of accounLlng pollcles
2. ConslsLenL followlng of accounLlng pollcles
3. MalnLenance of adequaLe accounLlng records
4. ArrangemenL concernlng Lhe lnvolvemenL of lnLernal audlLors and Lhe sLaff of Lhe cllenL
lv. 1he scope of audlL lncludlng reference Lo appllcable laws and regulaLlons and Lhe
pronouncemenL of lCAl
v. 1esL naLure of audlL, frauds and error may remaln undeLecLed
vl. 1he facL LhaL audlL process may be sub[ecLed Lo a peer revlew under CA acL, 1949.
Cont|nuous aud|t
a conLlnuous audlL ls one ln whlch Lhe audlLor's sLaff engaged conLlnuous checklng Lhe accounLs of Lhe cllenL
Lhe whole year around.
8uL when audlLor's sLaff aLLends Lhe audlL work L flxed lnLerval lL may be sLrlcLly called |nterna| aud|t.
ln conLlnuous audlL mosL of Lhe Llme, Lhe audlL sLaff ls presenL aL Lhe locaLlon

Advantages of cont|nuous aud|t
1. Lrror are dlsclosed earller due Lo ls adequaLe Llme for maklng Lhe necessary recLlflcaLlon
2. 8ecause of Lhe frequenL aLLendance of Lhe audlLor, Lhe chances of commlLLlng frauds are reduced.
3. 1he aLLendance of Lhe audlL sLaff acLs a moral check on Lhe cllenL's sLaff.
4. 1he accounLs are always malnLalned up Lo daLe
3. Slnce audlL can be carrled on Lhrough Lhe year, Lhere ls more Llme for deLall checklng of Lhe accounLs.
6. lf Lhe audlL of rouLlne LransacLlon ls compleLed before Lhe close of Lhe year, Lhe flnal accounLs can be prepared
and reporLed upon much earller.
7. lf Lhe audlLor carrles on a conLlnuous audlL, he can obLaln deLall knowledge of cllenLs' buslness Lhereby able Lo
carry ouL hls duLles effecLlvely.

D|sadvantage of cont|nuous aud|t.
1. 1here ls a danger LhaL Lhe records of LransacLlon afLer Lhey have been audlLed may be alLered elLher lnnocenLly
or fraudulenLly.
2. 1he examlnaLlon of an lLem lefL lncompleLe on a vlslL for belng underLaklng on Lhe nexL vlslL may be overlooked.
3. A conLlnuous audlL may lnvolve good deal of wasLe of Llme and efforL lf Lhe slze of Lhe concern ls small.

D|st|ngu|sh between aud|t procedures and aud|t techn|ques
art|cu|ars Aud|t procedures Aud|t techn|ques
Meanlng 1hey represenL Lhe board frame of Lhe manner
of holdlng Lhe audlL work. rocedure may
comprlse number of Lechnlques
1echnlques refer Lo Lhe meLhods employed for
carrylng ouL Lhe procedure. lor example, ln
vouchlng procedure, Lhe Lechnlque ls employed
are lnspecLlon and checklng compuLaLlon of
documenLary evldence.
1ypes 1wo Lypes:
1. Compllance procedure and
AudlL Lechnlques are generally lnLer-dependenL. A
comblnaLlon of Lechnlques ls applled ln a
8ef. lCAl Module,

9714259022 9
2. 1esLs of deLall
1esLs of deLall lncludes
a. SubsLanLlve audlL procedures,
b. AnalyLlcal revlew procedure
parLlcular procedure.
lor example, ln verlflcaLlon of asseLs, Lhe audlL
Lechnlque lnvolved are physlcal examlnaLlon,
conflrmaLlon from Lhlrd parLles eLc.

Aud|t process
AudlL plannlng ls one of Lhe baslc prlnclples governlng an audlL. 1he audlLor should plan work Lo eneble hlm Lo
conducL an effecLlve audlL ln an efflclenL and Llmely manner. lannlng should be based on knowledge of Lhe cllenLs
buslness.

Aud|t programme
AudlL programme ls deLalled plan of work, prepared by Lhe audlLor for carrylng ouL an audlL, L consLlLuLes Lhe
plan of Lhe work and also provldes basls for Lhe supervlslon and conLrol of Lhe audlL work. lL conslsLs of a seL of
Lechnlques and procedure, whlch Lhe audlLor plans Lo apply ln Lhe glven audlL for formlng an oplnlon abouL Lhe flnanclal
sLaLemenL.

Advantages of aud|t programme
1. lL provldes Lhe asslsLanL carrylng ouL Lhe audlL wlLh LoLal and clear seL of lnsLrucLlons od Lhe work Lo be done
2. LlecLlon of asslsLance for Lhe [obs on Lhe basls of capablllLy becomes easler when Lhe work ls raLlonally planned,
deflned and segregaLed.
3. under a properly framed programme, Lhe danger of lgnorlng or overlooklng cerLaln books and records ls
slgnlflcanLly leLs and Lhe audlL can processed sysLemaLlcally.
4. 1he prlnclpal can conLrol Lhe progress of Lhe varlous audlLs ln hand by examlnaLlon of audlL programme.
3. lL serves as a gulde Lo be carrled ouL ln Lhe succeedlng year.

D|sadvantages of aud|t programme
1. A hard and fasL audlL programme may klll Lhe lnlLlaLlve of efflclenL and expresslng asslsLanLs.
2. Make Lhe audlL exerclse rlgld and mechanlcal.
3. lnefflclenL asslsLanLs may Lake shelLer behlnd Lhe program saylng Lhe maLLer does noL conLaln any lnsLrucLlon.
4. rocedure may be underLaken whlch may be approprlaLe Lo Lhe clrcumsLances of Lhe cllenL's buslness.

In perform|ng an aud|t of f|nanc|a| statements the aud|tor shou|d have or obta|n know|edge of the
bus|ness.
1he audlLor needs Lo have a level of knowledge of Lhe cllenLs buslness and lndusLry LhaL wlll enable hlm Lo
ldenLlfy Lhe evenLs, LransacLlons and pracLlces LhaL, ln hls [udgmenL may have slgnlflcanL effecLs on Lhe flnanclal
lnformaLlon. CLherwlse he may noL be able Lo assess Lhe adequacy or oLherwlse of Lhe lnLernal conLrol sysLem
prevalllng ln cllenL's buslness.
knowledge of cllenL's buslness helps Lhe audlLor Lo
a. repare Lhe overall audlL plan
b. ldenLlfy areas for speclal audlL conslderaLlon
c. LvaluaLe Lhe reasonableness boLh of accounLlng esLlmaLes and managemenL represenLaLlon
d. Make [udgmenL regardlng Lhe approprlaLeness of accounLlng pollcles and dlsclosure.

Aud|t papers
uocumenLaLlon refers Lo Lhe worklng papers prepared or obLalns by Lhe audlLor as reLalned by hlm ln
connecLlon wlLh Lhe performance of hls audlL.

8ef. lCAl Module,

9714259022 10

Contents of aud|t papers
1. 8aslc consLlLuLlonal documenLs e.g. parLnershlp deed, ACA, LrusL deed eLc.
2. ConLenLs of Lhe mlnuLe book
3. ConLenLs of Lhe balance sheeL and & L accounL
4. LeLLer of engagemenL
Iunct|ons of aud|t papers
1. Means of conLrolllng currenL audlL work
2. Supervlslon and revlew of Lhe audlL work
3. Lvldence of audlL work performed Lo supporL audlLor's oplnlon
4. lnformaLlon abouL Lhe buslness belng audlLed and recenL hlsLory.
3. roper delegaLlon of work whlle provldlng a means Lo conLrol quallLy of work performed

Contents of permanent aud|t f||e
1. lnformaLlon concernlng Lhe legal organlzaLlonal sLrucLure of Lhe enLlLy
2. LxLracLs of coples of lmporLanL legal documenLs, agreemenLs and mlnuLe relevanL Lo Lhe audlL.
3. A record of Lhe sLudy and revaluaLlon of lnLernal conLrols relaLed Lo Lhe accounLlng sysLem.Lhls mlghL be ln Lhe
form of narraLlve descrlpLlons, quesLlonnalres of flow charLs, or some comblnaLlon Lherof.
4. Coples of audlLed flnanclal sLaLemenLs of prevlous years.
3. Analysls of slgnlflcanL raLlos and Lrends.
6. Coples of managemenL leLLers lssued by Lhe audlLor lf any,
7. 8ecord of communlcaLlon wlLh reLlrlng audlLor, lf any before accepLance of Lhe appolnLmenL as audlLor.
8. noLes regardlng slgnlflcanL accounLlng pollcles
9. SlgnlflcanL audlLlng observaLlons of earller years.

Contents of current aud|t f||e
1. Correspondence relaLlng Lo accepLance of appolnLmenL
2. LxLracLs of mlnuLes of board meeLlngs and general meeLlngs, as are relevanL Lo Lhe audlL.
3. Lvldence of Lhe plannlng process of Lhe audlL and audlL programme
4. 8ecord of Lhe naLure, Llmlng and exLenL of audlL procedures performed, and resulLs of such procedures
3. Lvldence LhaL Lhe work performed by asslsLanLs was supervlsed and revlewed
6. Coples of communlcaLlon wlLh oLher audlLors, experLs and oLher Lhlrd parLles
7. Coples of leLLer or noLes concernlng audlL maLLers communlcaLed Lo or dlscussed wlLh Lhe cllenL, lncludlng Lhe
Lerms of engagemenL and maLerlal weaknesses ln relevanL lnLernal conLrols
8. LeLLers of represenLaLlon or conflrmaLlon recelved from Lhe cllenL
9. Coples of Lhe flnanclal lnformaLlon belng reporLed on and relaLed audlL reporLs.

Aud|tor's ||en on c||ent's books
1he audlLor can exerclse hls llen on cllenL's books and documenLs, ln Lerms of general prlnclples of law of sub[ecL Lo Lhe
followlng condlLlon
1. uocumenLs reLalned musL belong Lo Lhe cllenL who owes Lhe money
2. Such documenLs musL have come lnLo Lhe audlLor's possesslon on Lhe cllenL's auLhorlLy and noL acqulred
Lhrough lrregular or lllegal means
3. Some work has been done ln relaLlon Lo such documenLs
4. 1he fees for work performed musL be ouLsLandlng.

8ef. lCAl Module,

9714259022 11
Aud|t note book
A audlL noLe book ls a bound book ln whlch varleLy of maLLers observed durlng Lhe course of audlL are recorded.
lL ls a noLebook conLalnlng polnLs or querles LhaL requlre clarlflcaLlon, explanaLlon and lnvesLlgaLlon and Lhe
manner ln whlch Lhey are flnally seLLled.
arLs of audlL book
1. Genera| |nformat|on conta|n|ng
a. naLure of buslness carrled ln
b. lmporLanL provlslons affecLlng lLs funcLlonlng: MCA. arLnershlp ueed
c. SLrucLure of Lhe flnanclal and admlnlsLraLlve organlzaLlon
d. A llsL of Lhe books of accounLs
e. name of prlnclple offlcers, Lhelr duLles and responslblllLles
f. arLlculars of Lhe sysLem of accounLs and Lhose of lnLernal check whlch are ln operaLlon
g. arLlculars of Lhe accounLlng and flnanclal pollcles followed
h. lmporLanL conLracLs Lo whlch Lhe cllenL ls parLy such as collaboraLlon conLracLs, royalLy conLracL eLc.
2. Current Informat|on conta|n|ng
a. AudlL querles noL cleared lmmedlaLely. L.g. mlsslng recelpLs, vouchers eLc
b. MlsLake or lrregularlLles observed durlng Lhe course of audlL e.g. fallure Lo provlde depreclaLlon
c. unsaLlsfacLory book keeplng arrangemenLs and cosLlng meLhod
d. lmporLanL lnformaLlon abouL Lhe company whlch ls noL apparenL from Lhe accounLs
e. Speclal polnLs requlrlng conslderaLlon aL Lhe Llme of verlflcaLlon of flnal accounLs
f. lmporLanL maLLers for fuLure reference.

Surpr|se check
AudlL procedures can noL be roLLenly and mechanlcally applled as a seL of ruled ln an and every slLuaLlon.
1here musL be flexlblllLy and a sense of surprlse ln Lhe manner cerLaln checks are carrled ouL. L.g. cash checklng,
lnvesLmenL checklng eLc.
S|gn|f|cance of surpr|se check
1. AudlL effecLlveness
2. 8evlew of lnLernal conLrol
3. ueLecLlon of errors and frauds
4. Moral check
3. SulLablllLy
6. Areas for checks
7. up Lo daLe records

Depth-Aud|t|ng
LxamlnaLlon ln depLh means examlnaLlon of a few selecLed LransacLlon from Lhe beglnnlng Lo Lhe end Lhrough
Lhe enLlre flow of Lhe LransacLlon
lL lnvolves sLudylng Lhe recordlng of LransacLlon aL Lhe varlous sLages Lhrough whlch Lhey have passed.

1est-check|ng
1esL checklng ls an accepLed audlLlng procedure where ln only a parL of lL ls checked Lo form an oplnlon lnsLead
of checklng all LransacLlon.

now shou|d test check|ng be made sc|ent|f|c and effect|ve?
1. effecLlve LesL checklng
a good LesL check sysLem wlll provlde sufflclenL saLlsfacLlon Lo Lhe audlLor lf,
lL ls one based on Lhe approprlaLe slze of Lhe same,
lL ls selecLed on random basls,
lL reduced Lhe chance of blas ln selecLlon of Lhe sample
8ef. lCAl Module,

9714259022 12
lL ls capable of glvlng resulLs wlLh a calculaLed degree of rlsk
2. precauLlons
1esL checklng Lechnlque ls an accepLed audlLlng procedure and ls generally used ln case of large buslness
organlzaLlon havlng many homogeneous LransacLlons.
1he precauLlons Lo be Laken are.
a. ClasslflcaLlon - under approprlaLe heads
b. SysLem sLudy
c. Lfflcacy of lnLernal conLrol
d. ClarlLy of plan
e. SclenLlflc sample selecLlon
f. rohlblLed areas
g. Sample slze
h. MaLerlallLy

Iudgment samp||ng
1he audlLor deLermlnes Lhe slze of Lhe sample and quallfles Lhe same, based on hls prevlous experlence
Lxample:- ln a cerLaln year Lhe audlLor may selecL LransacLlon of !une, Sep, nov. monLh for cash book verlflcaLlon and
oLher monLh for verlflcaLlon ln Lhe followlng year.

Stat|st|ca| samp||ng
lL ls a meLhod of drawlng a sample based on maLhemaLlcal and sLaLlsLlcal Lechnlques
Lxample:- Lhe Lheory of probablllLy and Lheory of roman numbers are consldered ln deLermlne Lhe sample slze and
composlLlon.

Aud|t mater|a||ty
1he concepL of maLerlallLy ls fundamenLal Lo Lhe process of accounLlng
lL ls Lherefore, an lmporLanL and relevanL conslderaLlon for an audlLor Lo [udge wheLher a parLlcular lLem or
LransacLlon ls maLerlal or noL.
8ef. lCAl Module,

9714259022 13
Interna| contro|

Interna| contro|
lnLernal conLrol may be deflned as Lhe organlzaLlon plans and all Lhe meLhods and procedures adopLed by
Lhe managemenL for achlevlng,
Crderly efflclenL conducL of lLs buslness, lncludlng adherence Lo managemenL pollcles,
Safeguardlng of asseLs,
revenLlon and deLecLlon of fraud and error,
1lmely preparaLlon of rellable flnanclal lnformaLlon.

Dut|es of an aud|tor w|th regard to |nterna| contro|
1he audlLor should sLudy and evaluaLe Lhe operaLlons of Lhe lnLernal conLrols upon whlch he wlshes Lo rely
ln deLermlnlng Lhe naLure, Llmlng and exLenL Lo oLher audlL procedure.
lf audlLor revlews Lhe lnLernal conLrol sysLem of Lhe cllenL he wlll be ln a poslLlon Lo brlng Lo Lhe noLlce of
Lhe managemenL Lhe weakness of Lhe sysLem and Lo suggesL measure for lmprovemenL
uurlng Lhe course of hls audlL, he may also ascerLaln how far Lhe weakness have been removed.
roper undersLandlng of Lhe lnLernal conLrol sysLem enables Lhe audlLor Lo declde upon Lhe approprlaLe
audlL procedure. 1o be applled ln dlfferenL areas ln whlch lnLernal conLrol ls consldered weak, he mlghL
exLend cerLaln LesLs Lo cover a large number of LransacLlon

Interna| contro| quest|onna|re (IC)
1. Meanlng
a. lCC ls a deLalled serles of quesLlons deslgned Lo provlde a compleLe vlew of Lhe sLaLe of lnLernal conLrol
ln an organlzaLlon
b. 1he quesLlonnalre ls usually provlded Lo Lhe cllenL and Lhe cllenL ls requesLed Lo geL lL fllled by Lhe
concerned execuLlve and employees for Lhe purpose of evaluaLlon of lnLernal conLrol sysLem
2. Cb[ecLlve
CuesLlons are generally deslgned ln secLlons of areas llke,
a. urchase and credlLors for goods
b. Sales and debLors
c. SLocks
d. Cash and bank recelpLs and paymenLs
e. llxed asseLs
3. use of lCC
a. 1o ldenLlfy weakness ln Lhe lnLernal conLrol sysLem
b. 1o declde exLenL and depLh of checklng ln accounL areas requlred durlng audlL
c. 1o selecL proper samples ln a raLlonal manner
d. 1he audlL program ls planned and also be modlfled lf consldered necessary.

Interna| Check
Checks on day Lo day LransacLlons whlch operaLe conLlnuously as parL of he rouLlne sysLem whereby Lhe work of
one person ls provlded lndependenLly or s complemenLary Lo Lhe work of anoLher Lhe ob[ecL belng Lhe prevenLlon or
early deLecLlon of error or fraud.

Interna| Aud|t|ng
lnLernal audlLlng ls a revlew of Lhe operaLlon and records, someLlmes conLlnuously underLaken, wlLhln buslness
by speclally asslgned sLaff.

L|m|tat|ons of |nterna| contro|
8ef. lCAl Module,

9714259022 14
1. ManagemenL's conslderaLlon LhaL conLrol be cosL-effecLlve
2. 1he facL LhaL cosL conLrols do noL Lend Lo be dlrecLed aL LransacLlons of unusual naLure
3. 1he poLenLlal for human error
4. 1he posslblllLy lf clrcumsLances of conLrol Lhrough colluslon wlLh parLles ouLslde Lhe enLlLy or wlLh employees of
enLlLy
3. 1he posslblllLy LhaL a person responslble for exLracLlng conLrol and abuse LhaL auLhorlLy
6. 1he posslblllLy LhaL a procedures may become lnadequaLe due Lo change ln condlLlons and compllance wlLh
procedures may deLerloraLe
7. ManlpulaLlon by managemenL wlLh respecL Lo LransacLlon or esLlmaLes and [udgmenLs requlred ln Lhe preparaLlon
of flnanclal sysLems.

State genera| cons|derat|on |n fram|ng a system of |nterna| check
1. no slngle person has an lndependenL conLrol over any lmporLanL aspecLs of Lhe buslness. Lvery aspecLs musL
come under Lhe revlew of anoLher
2. 1he duLles of member of Lhe sLaff should be changed from Llme Lo Llme wlLhouL any prevlous noLlce so Lhe same
offlcer does noL perform Lhe same funcLlon for conslderable Llme.
3. Lvery member of sLaff should be encouraged Lo go on leave aL leasL one ln year, because frauds successfully
concealed by employee are ofLen found when LhaL are on leave
4. ersons havlng physlcally cusLody of flxed asseLs musL noL be permlLLed Lo access Lo book of accounLs
3. 1o prevenL loss or mlsapproprlaLlon of cash, mechanlcal devlce such as Lhe auLomaLlc cash reglsLer should be
employed
6. lor sLock-Laklng aL Lhe close of Lhe year, Lradlng acLlvlLles should, lf posslble be suspended
7. 1he flnanclal and admlnlsLraLlve powers should be dlsLrlbuLed very [udlclously among dlfferenL offlcers should
be revlewed perlodlcally.
8. rocedures should be lald down for perlodlcal verlflcaLlon and LesLlng of dlfferenL secLlons or accounLlng records
Lo ensure LhaL Lhey are accuraLe.

ke|at|onsh|p between statutory aud|tor and Interna| Aud|tor
Statutory Aud|tor (SA) Interna| Aud|tor (IA)
1he exLenL of Lhe work underLaken by SA arlses from Lhe
responslblllLy place hlm by Lhe sLaLuLes
1he exLenL of Lhe work underLaken by Lhe lA ls deLermlned
by Lhe managemenL
1he approach of Lhls audlLor ls governed by Lhe hls
sLaLuLory duLy Lo saLlsfy hlmself LhaL Lhe accounLs Lo be
presenLed Lo Lhe shareholder show a Lrue and falr vlew of
Lhe flnanclal poslLlon
1he approach Lo Lhls audlLor ls wlLh a vlew Lo saLlsfy LhaL
Lhe accounLlng sysLem ls efflclenL, so LhaL Lhe accounLlng
lnformaLlon presenLed Lo Lhe managemenL ls accuraLe and
dlscloses maLerlal facLs
1hls audlLor ls responslble dlrecLly Lo Lhe shareholder 1hls audlLor ls responslble Lo managemenL
LxLernal audlLor ls noL Lhe employee of Lhe company so he
has lndependenL sLaLus
lnLernal audlLor ls an employee of Lhe company. So he can
noL en[oy lndependence LhaL SLaLauLory audlLor has.

Can statutory aud|tor |s re|y upon the work of an |nterna| aud|tor.
1. 8ellance on lnLernal audlLor
8elylng upon Lhe work of an lnLernal audlLor sLaLes LhaL Lhe exLernal audlLor should as parL of hls audlL,
evaluaLe Lhe lnLernal audlL funcLlon Lo Lhe exLenL he conslders LhaL lf wlll be relevanL ln deLermlnlng Lhe naLure
and exLenL of hls compllance and subsLanLlve procedure.
2. Common audlL approach
1here ls conslderable slmllarlLy ln Lhe funcLlon and areas of operaLlon of lnLernal and sLaLuLory audlLor
llke common lnLeresL ln ensurlng accounLlng sysLem ls adequaLe, examlnaLlon of same accounLlng documenLs.

8ef. lCAl Module,

9714259022 15
3. LffecL of lnLernal AudlL
AfLer seelng Lhe work of an lnLernal audlLor, he may reduce hls areas of rouLlne checklng whenever he
fells LhaL Lhe lnLernal audlL ls adequaLe and effecLlve
4. 8esponslblllLy of exLernal audlLor
Any rellance he place upon work performed by Lhe lnLernal audlLor ls parL of audlL approach. lL does noL
reduce hls duLy Lo exerclse sufflclenL professlonal care and skllls before he pronounce an audlL oplnlon.

D|st|ngu|sh between |nterna| aud|t and |nterna| check
art|cu|ar Interna| Check Interna| Aud|t
ueflnlLlon Checks on day Lo day LransacLlon whlch ls
operaLe conLlnuously as parL of Lhe rouLlne
sysLem whereby Lhe work of one person ls
proved lndependenLly or compllmenLary Lo Lhe
work of anoLher, Lhe ob[ecL belng Lhe
prevenLlon of Lhe earller deLecLlon of fraud
lndependenL appralsal acLlvlLy wlLhln an
organlzaLlon for Lhe revlew of operaLlons a s a
servlce Lo Lhe organlzaLlon. lL ls a managerlal
conLrol whlch funcLlons by measurlng and
evaluaLlng Lhe effecLlveness of oLher conLrols
Cb[ecLlve Mlnlmlzlng Lhe deLecLlng error and frauds ln day
Lo day funcLlon performed
LvaluaLlng Lhe effecLlveness of lmplemenLed
organlzaLlonal conLrol
luncLlon lL ls a rouLlne llne funcLlon lL ls a speclfled sLaff funcLlon
need for
separaLe sLaff
SeparaLe sLaff ls noL necessary. lL ls an lnLegral
parL of Lhe regular operaLlon
SeparaLe sLaff of Lhe lnLernal audlL deparLmenL ls
necessary
Scope lL operaLes as a bullL ln devlce as far as sLaff
organlzaLlon and [ob allocaLlon aspecLs of Lhe
conLrol sysLem are concerned
lL lnvolves revlew of Lhe adequacy and operaLlons
lnLernal conLrol on a regular basls Lo ensure LhaL
all slgnlflcanL conLrols are operaLlng effecLlvely
naLure lL ls merely an arrangemenL of book keeplng and
clerlcal duLles
lL lnvolves evaluaLlng Lhe quallLy and operaLlng
effecLlvely
CrlenLaLlon rocedure orlenLed ConLrol orlenLed

Do|ng an aud|t |n and CIS (LD) env|ronments |s s|mp|er s|nce tr|a| ba|ance a|ways ta|||es? Ana|yze
sentence

ln Lu envlronmenL Lhe Lrlal balance may Lally, buL lL does noL necessarlly mean LhaL Lhe [ob ls of an audlLor
becomes slmpler. 1here ls sLlll Lhe posslblllLy of
a. Lrror of compleLe omlsslon
b. CompensaLlon error
c. uupllcaLe of enLrles
d. Lrror of prlnclple and
e. uellberaLely covered fraud
AudlL ob[ecLlve ls expresslon of oplnlon on Lrue and falr vlew of Lhe flnanclal sLaLemenLs, noL [usL ensurlng
arlLhmeLlcal accuracy
8esldes Lallylng a Lrlal balance, Lhere are oLher audlL lssues llke esLlmaLlon of depreclaLlon, valuaLlon of
lnvenLorles eLc., where Lhe audlLor ls requlred Lo exerclse hls sklll and [udgmenL.
ln vlew of Lhe above, lL may be concluded LhaL a Lallled Lrlal balance ln Lu envlronmenL need noL necessarlly
slmpllfy Lhe audlL funcLlon

Comment on the overa|| ob[ect|ve and scope of an aud|t does not change |n LD env|ronment
1he prlnclpal ob[ecLlve of an audlL of flnanclal sLaLemenLs ls Lo ensure LhaL Lhe flnanclal sLaLemenLs reflecLs a
Lrue and falr vlew
1he scope of an audlL of flnanclal seLLlemenLs ls deLermlned by Lhe audlLor havlng regard Lo Lhe Lerms of Lhe
engagemenL, Lhe requlremenL of relevanL leglslaLlon and Lhe pronouncemenLs of Lhe lnsLlLuLe
8ef. lCAl Module,

9714259022 1
1he overall ob[ecLlve and scope of an audlL does noL change ln an Lu envlronmenL buL Lhe use of a compuLer
changes Lhe processlng, sLorage and reLrleval of lnformaLlon and may affecL Lhe organlzaLlon and procedures
employed by Lhe enLlLy Lo achleve adequaLe lnLernal conLrol
1he compuLerlzaLlon of accounLs would also have an lmpacL on Lhe lncrease ln frauds and error, Lhus when
audlLlng ln an Lu envlronmenL, Lhe audlLor should have sufflclenL undersLandlng of compuLer hardware,
sofLware and processlng sysLem Lo plan Lhe audlLlng procedure.
1he audlLor should also have sufflclenL knowledge of Lu envlronmenL Lo complemenL Lhe audlLlng procedures,
dependlng upon Lhe parLlcular audlL approach adopLed.
1hus, lL ls clear from Lhe above LhaL overall ob[ecLlve and scope of audlL does noL change lrrespecLlve LhaL
wheLher Lhe accounL lnformaLlon ls generaLed manually o Lhrough Lu.

Descr|be the |nterna| contro| |n LD env|ronments.
1hey can be classlfled lnLo
1. Cverall conLrol affecLlng Lhe Lu envlronmenL - Ceneral Lu ConLrol
2. Speclflc conLrols over accounLlng appllcaLlon - Lu appllcaLlon conLrol
Genera| LD Contro|
lL seeks Lo esLabllsh a framework of overall conLrol over Lhe absoluLe LhaL Lhe ob[ecLlve of lnLernal conLrol are
achleved
1ype of ConLrol uescrlpLlon
CrganlzaLlon and
managemenL conLrol
lL lncludes pollcles and procedure relaLlng Lo conLrol funcLlon
ApproprlaLe segregaLlon of lncompaLlble funcLlon

AppllcaLlon sysLem
developmenL &
MalnLenance conLrol
1o provlde reasonable assurance LhaL sysLems are developed and malnLalned ln an
auLhorlzed and efflclenL manner
1. 1esLlng, converslon documenLaLlon of new sysLem
2. Changes Lo appllcaLlon sysLem
CompuLer operaLlon
conLrol
1o conLrol Lhe operaLlon of sysLem and provlded reasonable assurance LhaL,
1. 1he sysLem are used for auLhorlzed purpose only
2. Cnly auLhorlzed programs are used
3. rocesslng error are deLecLed and lmmedlaLely correcLed
SysLem sofLware conLrol AuLhorlzaLlon, approval, LesLlng and documenLaLlon of new sofLware and sysLem sofLware
modlflcaLlon
use for auLhorlzed program only
uaLa enLry and program
conLrol
An auLhorlzaLlon sLrucLure ls esLabllshed over LransacLlon enLered lnLo a sysLem
Access Lo daLa program ls resLrlcLed Lo auLhorlzed person only
ConLlnulLy conLrol CffslLe backup daLa and compuLer program
rovlslon for offslLe processlng ln Lhe evenL of dlsasLer

LD app||cat|on contro|
lL seeks Lo esLabllsh a speclflc conLrol procedures over Lhe accounLlng appllcaLlon and provlde reasonable
assurance LhaL all LransacLlons are auLhorlzed, recorded and processed compleLely, accuraLe and on a Llmely
basls Lhey are lnclude followlng

1ype of ConLrol uescrlpLlon
ConLrol over lnpuL 1ransacLlon are properly auLhorlzed before belng processed
1ransacLlon are noL losL, added, dupllcaLed or lmproperly changed.
lncorrecL LransacLlon are re[ecLed, correcLed and lf necessary resubmlLLed on Llmely basls
ConLrol over processlng
and compuLer daLa flles
1ransacLlon lncludlng sysLem generaLed LransacLlon are properly processed by Lhe
compuLer
ConLrol over ouLpuL 8esulLs of processlng are accuraLe
8ef. lCAl Module,

9714259022 17
Access Lo ouLpuL ls resLrlcLed Lo auLhorlzed person only
CuLpuL ls provlded, aL Lhe proper Llme Lo Lhe approprlaLe personnel.

D|fferent des|gns and procedura| aspects of CIS]LD env|ronment.
2. ConslsLency of performance
luncLlon exacLly as programmed
oLenLlally more rellable Lhan manual sysLem
3. rogrammed conLrol
Can have lnbullL lnLernal conLrol procedure wlLh llmlLed vlslblllLy
4. Slngle polnL updaLlng
A slngle lnpuL Lo Lhe accounLlng sysLem may auLomaLlcally updaLe all records assoclaLed wlLh Lhe
LransacLlon
Lrroneous enLry wlll be reflecLed ln varlous accounLs
3. SysLem generaLed LransacLlon
Some LransacLlon may be lnlLlaLed by Lhe sysLem lLself wlLhouL Lhe need for an lnpuL documenL (llke
lnLeresL)
6. uaLe securlLy problems
Large volume of daLa and Lhe compuLer programs used Lo process such daLa may be sLored on a
porLable or flxed sLorage medla

Insta||at|on of computer system |n ent|ty created both prob|ems and benef|ts of aud|tor

8eneflLs of CAA1's
1. lncrease ln Lhe effecLlveness and efflclency of audlLlng procedure
2. Savlng ln Llme:- Lhe audlLor can save Llme by revlewlng Lhe ClS conLrol Lhrough CAA1 Lhan Lhrough oLher audlL
procedures
3. LffecLlve LesL checklng:- LesL checklng and examlnaLlon ln depLh

roblems of CAA1's
1. AudlL Lrall dlsappearance
2. Lack of vlsual observaLlon
3. lnLernal sLorage:- dlfflculL Lo deLermlnlng procedure followed
4. Change ln programs
3. SysLem [argon:- Lhe source code llsLlng provlded Lo Lhe audlLor may noL agree wlLh Lhe ob[ecL code used by
sysLem

Aud|t 1ra||
lL refers Lo a slLuaLlon where lL ls posslble Lo relaLe one-Lo-one" basls. 1he orlglnal lnpuL along wlLh Lhe
flnal ouLpuL
1hus audlL Lrall can be deflned as Lhose documenLs, records, [ournals, ledgers, masLers flle eLc., LhaL
enables an audlLor Lo Lrace Lhe LransacLlon from Lhe source documenL Lo Lhe summarlzed LoLal ln
accounLlng reporLs or vlce-versa
L.g. sequenLlally numbered sales lnvolce coples would normally be llsLed reglsLer Lor daybook and
subsequenLly flled elLher ln numerlcal or chronologlcal sequence. lf lL would be posslble Lhan be
posslble, Lo Lrace a parLlcular lnvolce from Lhe daybook Lo Lhe orlglnal n flle or vlce-versa, by reference
Lo Lhe number or Lhe daLe of Lhe lnvolce

8ef. lCAl Module,

9714259022 18

1he use of computer system fac|||t|es by a sma|| enterpr|se may |ncrease the contro| r|sk
1. Law sLaff sLrengLh
users of compuLer may be able Lo perform Lwo or more funcLlon slmulLaneously
2. Lack of lnLernal check
1he prlnclpal LhaL one person should noL record a LransacLlon lndependenLly ls noL followed slnce lL ls noL cosL-
effecLlve
3. AudlL rlsk
1o overcome such rlsks ln case of small companles uslng compuLer faclllLles, Lhe audlLor may perform subsLance
LesLs ln deLall and Lake large samples.

Aud|t k|sk
AudlL rlsk ls Lhe rlsk LhaL an audlLor may glve an lnapproprlaLe oplnlon on flnanclal lnformaLlon whlch ls maLerlal
mlssLaLed.
Such rlsk may exlsL aL overall level, whlle verlfylng varlous LransacLlon and balance sheeL lLems.

Components of Aud|t k|sk
1. lnherenL 8lsk :- 8lsk LhaL maLerlal error wlll occur
2. ConLrol 8lsk:- ls Lhe rlsk LhaL Lhe cllenLs' sysLem lnLernal conLrol wlll noL prevenL or correcL such errors, Lo assess
rlsk
3. ueLecLlon rlsk:- rlsk ls LhaL an audlLors procedure wlll noL deLecL a mlssLaLemenLs LhaL exlsLs ln an accounL
balance or class of LransacLlon LhaL could be maLerlal on oLher balance or class
lnherenL and conLrol rlsks cannoL be conLrolled by Lhe audlLor, Lhe audlLor can assess Lhem and deslgn
Lo subsLanLlve procedure on accepLable level of deLecLlon rlsk, Lhereby reduclng audlL rlsk Lo an
accepLable law level.
8ef. lCAl Module,

9714259022 19
Vouch|ng

Vouch|ng
vouchlng ls deflned as Lhe examlnaLlon of all documenLal evldence whlch ls avallable Lo supporL Lhe genluses of
LransacLlon enLered ln cllenL's books.

Ior Answer the Vouch|ng quest|on use th|s pattern.
1. Whlle examlnlng a voucher
a. 1he daLe of Lhe voucher falls wlLhln Lhe accounLlng perlod
b. 1haL Lhe voucher ls made ouL ln Lhe cllenL's name
c. 1haL Lhe voucher ls duly auLhorlzed
d. 1haL Lhe voucher comprlsed all Lhe relevanL documenLs whlch could be expecLed Lo have been recelved
on broughL lnLo exlsLence on Lhe LransacLlon havlng been enLered lnLo
e. 1haL Lhe accounL ln whlch Lhe amounL of Lhe voucher ls ad[usLed ls Lhe one LhaL would clearly dlsclose
Lhe characLer of Lhe recelpLs or paymenLs passed LhereLo on lLs lncluslon ln flnal accounL

Aud|t of Cash 1ransact|on
1. Ceneral conslderaLlon
a. lnLernal conLrol sysLem
b. CorrecLness of book keeplng records
c. CbservaLlon of accounLlng prlnclples
d. Lvldence of LransacLlon
e. valldlLy of LransacLlon
f. ulsclosure ln Lhe flnal accounLs
2. CasLlng or LoLallng of accounL s maLched or noL
3. 8ank reconclllaLlon sLaLemenLs duly slgned by Lhe accounLanL

Aud|t of 1rad|ng 1ransact|on
1. Ceneral conslderaLlon
a. CorrecLness of book keeplng records
b. Cbservance of accounLlng prlnclples
c. Checklng of sLock and record
2. lnLernal conLrol ln respecL of Lradlng LransacLlon
a. 1radlng ls a chaln of buslness process buylng, Laklng dellvery of goods boughL, maklng proper
arrangemenLs for Lhelr sLorage and lssulng Lhem on sale
b. 1he funcLlon of audlL ln Lhls background, ls Lo ensure LhaL Lhere ls no leakage of goods or cash
c. Also ensure LhaL goods purchased have been recelved and are of Lhe Lype dealL ln by Lhe flrm, Lhe
parLles are normal and Lhe goods have been duly accounLed
3. lnLernal conLrol ln respecL of servlce
a. 1he lnLernal conLrol check should provlded for Lhe regulaLlon of Lhe charges for Lhe servlce rendered,
elLher accordlng Lo an agreemenL enLered lnLo wlLh Lhe parLles, Lo whom Lhe servlce have been proved,
or on Lhe basls of cosLs lncurred ln provldlng Lhe servlce.
b. lL ls Lhe duLy of Lhe audlLor Lo verlfy LhaL an approprlaLe lnLernal check exlsL ln respecL of dlfferenL Lypes
of LransacLlon enLered lnLo by Lhe cllenL ensure LhaL all Lhe lncome recelvable has been properly
accounLed for and adequaLe precauLlon have been Laken Lo conLrol expenses.
4. CuL-off arrangemenL
a. lf agreemenL ls for long Llme Lhan verlfy LhaL necessary worklng of each perlod correcLly ascerLalned

8ef. lCAl Module,

9714259022 20
3. 8alance sheeL audlL
a. A balance sheeL audlL conslsLs of Lhe verlflcaLlon of all lncludlble balance sheeL lLem, LogeLher wlLh Lhe
examlnaLlon of expense and lncome accounLs whlch are so closely relaLed Lo Lhese lLems LhaL lL cannoL
be properly verlfled wlLhouL such analysls and LesL
6. LxLernal conflrmaLlon
a. LxLernal conflrmaLlon ls Lhe process of obLalnlng and evaluaLlng audlL evldence Lhrough a dlrecL
communlcaLlon from a Lhlrd parLy ln response Lo a requesL for lnformaLlon abouL a parLlcular lLem
affecLlng asserLlon made by managemenL ln Lhe flnanclal sLaLemenLs

now w||| you vouch]Ver|fy the fo||ow|ng?
1. kecovery of bad debts
1oLal amounL of bad debLs
All recoverles of bad debLs have been properly recorded
Lxamlne noLlflcaLlon from courL, leLLer from collecLlng agencles for amounL recovered
Check credlL manager's flle and amounL has been deposlLed ln bank maLched wlLh each oLher or noL.

2. 8orrow|ng from banks ]term |oans]overdrafts
8econclle Lhe balances ln Lhe overdrafL or loan accounL wlLh LhaL shown ln Lhe pass book and conflrm Lhe lasL
menLloned balances by obLalnlng a cerLlflcaLe from Lhe bank showlng Lhe balance ln Lhe accounLs as aL Lhe end
of Lhe year.
CbLaln a cerLlflcaLe from Lhe bank showlng a parLlcular of securlLles deposlLed wlLh Lhe bank as securlLy for Lhe
loans or of Lhe charge creaLed on an asseL or asseLs of Lhe concern and conflrm LhaL Lhe same has been correcLly
dlsclosed and duly reglsLered wlLh reglsLer of companles
verlfy Lhe auLhorlLy under whlch Lhe loan or drafL has been ralsed
Accordlng Lo companles acL.,1936 assure LhaL maxlmum amounL of loan LhaL Lhe company can rasle has noL
been conLravened
AscerLaln Lhe purpose for whlch loan has been ralsed and Lhe manner ln whlch L has been uLlllzed.

3. kece|pt of cap|ta| subs|dy
8efer Lo appllcaLlon made for Lhe clalm of subsldy Lo ascerLaln Lhe purpose and Lhe scheme under whlch Lhe
subsldy has been made avallable
Lxamlne documenLs for Lhe granL of subsldy and noLe Lhe condlLlon aLLached wlLh Lhe same relaLlng Lo lLs use,
See LhaL condlLlons Lo ne fulfllled and oLher Lerms especlally wheLher Lhe same s for a speclflc asseLs or ls for
seLLlng up a facLory aL a speclflc locaLlon
Check relevanL enLrles for recelpL of subsldy
Check compllance wlLh requlremenLs of AS 12 on accounLlng for governmenL granLs" l.e wheLher lL relaLes Lo
speclflc amounL or ln Lhe form of promoLers' conLrlbuLlon and accordlngly accounLed for as also compllance wlLh
Lhe dlsclosure requlremenLs.

4. rov|s|on for |ncome tax
CbLaln Lhe compuLaLlon of lncome prepared by Lhe audlLee and verlfy wheLher lL ls as per Lhe lncome Lax acL.,
1961 and rules made hereunder
8evlew ad[usLmenLs, expenses, dlsallowed speclal rebaLes, eLc. wlLh parLlcular reference Lo Lhe lasL avallable
compleLed assessmenL
Lxamlne relevanL records and documenLs perLalnlng Lo advance Lax, self assessmenL Lax and oLher demands
CompuLe Lax payable as per Lhe laLesL appllcable raLes ln Lhe flnance acL.
Lnsure LhaL overall provlslons on Lhe daLe of Lhe balance sheeL ls adequaLe havlng regard Lo currenL year
provlslon, advance Lax pald, assessmenL orders, eLc.

8ef. lCAl Module,

9714259022 21
S. Goodw|||
Lnsure LhaL goodwlll has been recorded ln Lhe books only when some conslderaLlon ln money or money's worLh
has been pald for. Coodwlll arlses form buslness connecLlon, Lrade name or repuLaLlon of an enLerprlse of from
oLher lnLanglble beneflLs en[oyed by an enLerprlse
Check Lhe vendor's agreemenL on Lhe basls of whlch asseLs of Lhe runnlng buslness have been acqulred by Lhe
company aL a prlce exlsLlng ln Lhe book value of Lhe asseLs or where a speclflc sum has been pald for Lhe
goodwlll
See LhaL only Lhe amounL pald Lo Lhe vendors noL represenLed by Langlble asseLs has been deblLed Lo Lhe
goodwlll accounL. 1herefore, lL ls noL prudenL LhaL goodwlll should be shown ln Lhe company's accounL by way
of wrlLlng up Lhe value of asseLs on revaluaLlon or wrlLlng back Lhe amounL of goodwlll earller wrlLLen off by Lhe
company
See wheLher goodwlll has been wrlLLen off as a maLLer of flnanclal prudence

6. 8u||d|ng
verlfy Lhe cosL by reference Lo Lhe archlLecL's cerLlflcaLe as well as Lhe conLracLor's recelpLs for amounLs pald ln
case of bulldlng ls compleLed durlng Lhe year. lf Lhe bulldlng has been consLrucLed by Lhe cllenL's own
organlzaLlon, lL wlll be necessary for Lhe audlLor Lo verlfy LhaL Lhe basls upon whlch cosL of maLerlals, wages and
Lhe supervlslon charges have been allocaLed Lo Lhe accounL and same are reasonable
Check wheLher depreclaLlon has been provlded on a consLanL basls\
Conflrm Lhe exlsLence of bulldlng elLher Lhrough physlcal observaLlon or oLher documenLary evldence
Check Lhe LlLle deeds and verlfy LhaL bulldlng ls owned by Lhe enLlLy
Lxamlne lease deed, lf Lhe bulldlng ls leasehold, Lo ascerLaln Lhe cosL, amorLlzaLlon eLc. and also ensure LhaL all
convenLs ln Lhe lease deed have been fulfllled by Lhe cllenL
lf revaluaLlon has Laken place see Lhe basls of revaluaLlon and ensure LhaL Lhe dlsclosure of Lhe same has been
made.
ln case of a company, check LhaL presenLaLlon and dlsclosure has been as per Lhe parL of companles acL, 1936

7. Sa|e of |nvestments
See LhaL sale of lnvesLmenL has been made on Lhe proper auLhorlzaLlon of board or oLher compeLenL auLhorlLy
AscerLaln Lhe meLhod of selllng lnvesLmenL. lL may be elLher Lhrough broker, dlrecLly or Lhrough a bank. See Lhe
broker's sold noLe
See LhaL Lhe dlfference beLween Lhe carrylng amounL and Lhe sales proceeds, neL of expenses, ls recognlzed ln
Lhe & L accounL. Lnsure LhaL when only a parL of Lhe holdlng of an lndlvldual lnvesLmenL ls sold, Lhe carrylng
amounL s allocaLed on Lhe basls of average carrylng amounL of Lhe LoLal holdlng of Lhe lnvesLmenL.
See LhaL proper dlsclosure as requlred by AS 13 re made as follows
a. lnLeresL, dlvldends, renLals on lnvesLmaneLs ls Lo be shown ln & L accounL aL gross value and 1uS as
advance Lax pald.
b. Showlng separaLely proflL and loss on dlsposal and charges ln carrylng amounL of currenL and long Lerm
lnvesLmenLs.

{these some occounts ond detoi/s which ore importont is mentioned but other occounts ond ossets vouchinq for detoi/
study p/eose refer the proctice modu/e of lc4l, best book for vouchinq ond verificotion of ossets)

Wh||e conduct|ng the aud|t of the accounts of a manufactur|ng company, you d|scover that the rate
of gross prof|t on sa|es has sharp|y r|sen |n compar|son to the prev|ous year. State the steps you
wou|d take to sat|sfy yourse|f
1here ls several posslble cause of Lhe sharp lncrease ln Lhe raLe of gross proflL on sales as compared wlLh LhaL of
Lhe prevlous year, Lhe mosL llkely causes are as under,

8ef. lCAl Module,

9714259022 22
1. lncrease ln sales prlce
1he selllng prlce of Lhe flnlshed producLs may have been lncreased. Lnqulrles should be made by audlLor
as Lo wheLher Lhere have been general or speclflc prlce lncrease and Lhe reasons for Lhe same. 1he
audlLor should obLaln coples of Lhe company prlce llsLs prevalllng aL dlfferenL polnL of Llme and make
Lhe relevanL comparlson
2. 8educLlon ln cosL of manufacLurlng
1he cosL of manufacLurlng may have reduced subsLanLlally. 1he audlLor sould examlne Lhe sLock and
purchases records ln respecL of large purchases of raw maLerlals, comparlng currenL cosLs wlLh Lhose ln
Lhe prevlous year and deLalled lnformaLlon supporLlng Lhe posslblllLy should be soughL from Lhe
company.
3. AlLeraLlon ln sales-mlx
1he mlx of sales may have been alLered, resulLlng ln Lhe sales or more proflLable lLems. ueLalled sales
analysls should be made for Lhe perlod ln order Lo ascerLaln wheLher Lhe more proflLable llnes
consLlLuLed a large proporLlon of he LoLal sales
4. lmpacL of auLomaLlon
1he mechanlsm or auLomaLlon of cerLaln manufacLurlng processes may have resulLed ln conslderable
savlng ln labour cosL and Lhls posslblllLy could be easlly verlfled by comparlsons of wages records.
3. Advance Lo cuL-off procedure
1he company cuL-off procedure as regards closlng sLock and work-ln-progress should be lnvesLlgaLes, as
any change ln Lhe procedure as compared wlLh Lhe prevlous year would cause a dlfference ln Lhe gross
proflL raLlo.
6. ManlpulaLlng sales
1he posslblllLy of lLems whlch have been senL Lo cusLomers on 'sale or reLurn' basls belng lncluded ln
sales should be lnvesLlgaLed, as Lhls would glve effecL for lncrease n Lhe raLe of gross proflL.

8ef. lCAl Module,

9714259022 23
Ver|f|cat|on

Genera| cons|derat|on for va|uat|on and ver|f|cat|on of assets
AudlLor should follow
1. LxlsLence
1o conflrm LhaL Lhe asseLs were exlsLence on Lhe daLe of balance sheeL by
hyslcal conflrmaLlon
Comparlson of asseLs reglsLer wlLh genral ledger balances
CbLalnlng conflrmaLlon from cusLodlans of asseLs.
2. AsseLs musL be held for buslness
3. Cwnershlp
4. Charge
AscerLaln LhaL no un auLhorlzed charges have been creaLed all Lhe charges are duly reglsLered and
dlsclosed
3. CosL
1o ascerLaln LhaL Lhe asseLs are shown aL Lhe hlsLorlcal cosLs
6. Carrylng amounL
1o ensure LhaL asseLs have been correcLly valued regardlng physlcal condlLlon
l. CompuLaLlon cosL as per generally accepLed accounLlng prlnclples
ll. Charglng of depreclaLlon on a sclenLlflc basls
7. ulsclosure
roperly dlsclosed ln balance sheeL
8. Sale of asseLs
When asseLs are sold, lLs sale proceeds should be vouched by reference Lo Lhe agreemenL, Lerms and
condlLlon of sale.

Comments on f|xed assets have been reve|ued and the resu|t|ng surp|us has been ad[usted aga|nst
the brough forward |osses
1he revaluaLlon of flxed asseLs ls a normally accepLed pracLlce whlch lnvolves wrlLlng up Lhe book value
of flxed asseLs
AS 10 on 'accounLlng for flxed asseLs' requlres LhaL an lncrease ln neL book value arlslng on revaluaLlon
of flxed asseLs ln normally credlLed dlrecLly Lo owner's lnLeresL under Lhe headlng of revaluaLlon reserve
and ls regarded as noL avallable for dlsLrlbuLlon"
1hus, creaLlon of revaluaLlon reserves does noL resulL lnLo any cash lnflows and represenLs unreallzed
galns.
As a maLLer of prudence, revenue losses can be ad[usLed agalnsL revenue reserves only and noL Lhe
caplLal reserves
1herefore, Lhe accounLlng LreaLmenL followed by Lhe enLlLy ls noL correcL and audlLor should quallfy Lhe
audlL reporL by menLlonlng Lhe above facL.

Subsequent events and cons|derat|on of SL by the aud|tor
SA 360 on subsequenL evenLs", deflnes Lhe Lerm as evenLs occurrlng beLween Lhe daLe of flnanclal sLaLemenLs
and Lhe daLe of audlLor's reporL, and facLs LhaL become known o Lhe audlLor afLer Lhe daLe of audlLor's reporL.\
SubsequenL evenLs also refer Lo slgnlflcanL evenLs whlch occurred up Lo Lhe daLe of reporL of Lhe audlLor LhaL
componenL
1hus, subsequenL evenLs whlch occur afLer Lhe daLe of balance sheeL Llll Lhe audlL reporL s slgned by Lhe audlLor
SA 360 requlres LhaL Lhe audlLor should conslder Lhe effecL of subsequenL evenLs on Lhe flnanclal sLaLemenLs
and Lhe audlLor's reporL
8ef. lCAl Module,

9714259022 24
Powever Lhe exacL manner of LreaLmenL would be depend upon wheLher Lhe evenL falls ln Lhe caLegory of
'ad[usLlng evenL' or 'non-ad[usLlng evenL'.
1herefore, an dlsclosure ls requlred Lo conslder all subsequenL evenLs whlle dlscharglng hls duLles and
deLermlne wheLher Lhose shall have Lo be ad[usLed or lmply requlred Lo be dlsclosed.

Comments on assets purchased under h|re-purchase system were ref|ected at the|r fu||-va|ue and
the outstand|ng |nsta||ments payab|e have been |nc|uded under sundry cred|tors
AsseLs acqulred under Lhe P sysLem should be recorded aL Lhe full cash value wlLh correspondlng llablllLy of Lhe
same amounL.
ln case cash value ls noL readlly avallable, lL should be calculaLed presumlng an approprlaLe raLe of lnLeresL.
Plre purchased asseLs are shown ln Lhe balance sheeL wlLh an approprlaLe narraLlon Lo lndlcaLe LhaL Lhe
enLerprlse does noL have full ownershlp Lhereof.
1hus, Lhe LreaLmenL followed by Lhe company ls correcL

Cutstand|ng assets
lL ls well accepLed accounLlng prlnclpal LhaL all expendlLure perLalnlng Lo Lhe year alone should be charged
agalnsL year's revenue and all lncome wheLher recelved or noL should be accrued for Lhe year.
lollowlng Lhls prlnclples one has Lo make cerLaln ad[usLmenLs ln Lhe books of accounL and ouLsLandlng asseLs
are boughL Lo book ln LhaL process.
lf expendlLure made on cerLaln revenue heads, Lhe beneflL of whlch ls Lo be derlved even afLer Lhe year ls over
and ad[usLmenL ls made Lo Lhe year an ouLsLandlng asseLs ls creaLed.
Cenerally, ouLsLandlng asseLs are Lhose lLems for whlch amounLs are yeL Lo be recelved Lhrough servlce eLc.,
have been rendered, or lLems for whlch beneflL of servlce wlll be recelved laLer.
Lxample: lnsurance amounL ls pald ln advance Lhen proporLlon Lhereof ls appllcable o Lhe perlod subsequenL Lo
Lhe daLe of Lhe balance sheeL should be calculaLed and shown as an ouLsLandlng asseLs.

Ver|fy the stock |y|ng w|th th|rd part|es
CbLaln conflrmaLlon from Lhe Lhlrd parLy lncludlng Lhe Llme perlod and reasons Lhereof
LvaluaLe condlLlon of goods and see wheLher adequaLe provlslon has been made
Check wheLher subsequenLly Lhe goods lylng wlLh Lhlrd parLy were sold or recelved back afLer Lhe explry of
sLlpulaLed Llme perlod
Lnsure LhaL Lhe goods have been lncluded ln Lhe closlng sLock Lhrough lylng wlLh Lhlrd parLy.

8ef. lCAl Module,

9714259022 25
Company Aud|t

ersons qua||f|ed to be appo|nted as aud|tor of company
1. CharLered AccounLanL holdlng a cerLlflcaLe of pracLlce
2. All Lhe parLners of a CA flrm ln lndla are quallfled for appolnLmenL Lhan lLs flrm name Lo be Lhe audlLor.

D|squa||f|ed for be|ng Aud|tor
1. A body corporaLe
2. A offlcer or employee of Lhe company
3. A parLner or employee of an offlcer or employee of Lhe company
4. A person who lndebLed Lo company amounL exceedlng 8s. 1000, or who glven such guaranLee or provlded any
securlLy ln connecLlon wlLh Lhe Lhlrd person Lo company
3. A person holdlng any securlLy of Lhe company afLer 1 year from Lhe commencemenL of buslness. SecurlLy means
whlch carrylng voLlng rlghLs.
Cther
1. A person who dlsquallfled from Lhe body corporaLe whlch ls elLher
a. Poldlng
b. Subsldlary
c. Co-subsldlary company
2. A person who become dlsquallfled regardlng any above dlsquallflcaLlon afLer hls appolnLmenL.
3. A person who shall noL be quallfled for appolnLmenL lf he ls oLherwlse dlsquallfled.

Appo|ntment of Aud|tor by Shareho|ders
1he shareho|der of the company appo|nt aud|tor at each annua| genera| meet|ng. procedure as fo||ows
CerLlflcaLe from audlLor :- before appolnLmenL of re-appolnLmenL, Lhe company shall obLaln a cerLlflcaLe whlch
saLe LhaL Lhe appolnLmenL, lf made wlll be wlLhln Lhe celllng llmlLs
1he audlLor shall hold appolnLmenL from on annual general meeLlng Lo Llll Lhe concluslon of nexL ACM.
1he company shall glve lnLlmaLlon of appolnLmenL Lo concerned audlLor wlLhln 7 days of appolnLmenL
1he appolnLed audlLor shall communlcaLe Lo Lhe prevlous audlLor and enqulre wheLher Lhere ls any professlonal
reason why Lhe appolnLmenL should noL ne accepLed.
1he audlLor on recelpL of Lhe lnLlmaLlon from Lhe company abouL hls appolnLmenL ls requlred Lo send a wrlLLen
communlcaLlon Lo Lhe 8CC ln form 238 wlLhln 30 days of Lhe recelpL of lnLlmaLlon.

Appo|ntment of I|rst Aud|tor
SecLlon 224(3) speclfled LhaL 8oard of dlrecLor shall appolnL Lhe flrsL audlLor of a company. AppolnLmenLs shall
be made wlLhln one from Lhe daLe of lncorporaLlon.
1he company need noL send any lnLlmaLlon Lo Lhe flrsL audlLor.
lf Lhe board falls Lo appolnL flrsL audlLor, Lhe company ln general meeLlng ls empowered Lo make Lhe
appolnLmenL.
1he company may remove Lhe flrsL audlLor by passlng a Crdlnary resoluLlon aL a general meeLlng. no speclflc
noLlce ls requlred for such removal.

ke-appo|ntment of ket|r|ng Aud|tor
A reLlrlng audlLor can be reappolnLed excepL under Lhe followlng clrcumsLances
lf Lhe reLlrlng audlLor ls dlsquallfled for re-appolnLmenL
lf Lhe reLlrlng audlLor has glven Lhe company a noLlce ln wrlLlng of hls unwllllngness Lo reappolnLed.
lf a resoluLlon has been passed aL LhaL ACM appolnLlng anoLher audlLor lnsLead of reLlrlng audlLor.

8ef. lCAl Module,

9714259022 2
I|||ng of casua| vacancy
ln case of a casual vacancy arlslng on accounL of reslgnaLlon only Lhe company ln ACM can flll Lhe vacancy.
vacancy may arlse due Lo a varleLy of reasons whlch lnclude deaLh, reslgnaLlon, dlsquallflcaLlon & dlssoluLlon of
Lhe audlLor flrm eLc.
LxcepL reslgnaLlon lf oLher cause ls responslble for vacancy Lhen board of dlrecLor can flll Lhe vacancy.

kefusa| of acceptance of appo|ntment
When Lhe exlsLlng audlLor whlch has been re-appolnLed aL ACM refuses Lo accepL Lhe appolnLmenL, lL does noL
amounL Lo casual vacancy or vacancy by reslgnaLlon.
Slnce, Lhe audlLor are appolnLed aL ACM, subsequenL refusal Lo appolnLmenL does noL empower Lhe 8Cu Lo
appolnL a AudlLor
ln Lhese clrcumsLances, appolnLmenL shall be made by cenLral governmenL.

Appo|ntment of Aud|tor by centra| Government.
AppolnLmenL mad by CC ln case Lhe AudlLor noL appolnLed ln ACM.
SecLlon 224(3) provldes LhaL where aL Lhe ACM, no audlLor ls appolnLed or re-appolnLed Lhe cenLral governmenL
may appolnL a person Lo flll Lhe vacancy
lor Lhls company shall glve noLlce of Lhe facL wlLhln 7 days Lo Lhe cenLral governmenL for such facL.
lf company falls Lo glve such noLlce, 1he Company and every offlcer whlch ls ln defaulL shall be punlshable wlLh
flne.

Appo|ntment of aud|tor by a Spec|a| keso|ut|on (Sk)
1he audlLor ln Lhe case of a company ln whlch noL less Lhan 23 of Lhe subscrlbed share caplLal ls held, wheLher,
slngly or ln comblnaLlon by a publlc flnanclal lnsLlLuLlon or a governmenL or CC, SC
Any flnanclal lnsLlLuLlon esLabllshed by a provlslon or sLaLe acL ln whlch a sLaLe governmenL holds noL less Lhan
31 of Lhe subscrlbed caplLal
A naLlonallzed bank or an lnsurance company carrylng on general lnsurance buslness.
Cther o|nts
lf company noL appolnL audlLor by S8 ln lLs ACM, Lhe CC shall have Lhe power Lo flll Lhe vacancy
lor deLermlnlng 23 holdlng, Lhe maLerlal daLe shall be Lhe daLe of ACM ln whlch Lhe S8 ls requlred Lo passed.
ln cases where Lhe holdlng ls less Lhan 23 as on Lhe daLe of noLlce buL exceeds 23 as on Lhe daLe of ACM, lL ls
advlsable for Lhe company Lo ad[ourn Lhe meeLlng, lssue anoLher noLlce Lo Lhe member and appolnLmenL of
audlLor by S8 ln Lhe ad[ourned meeLlng.

Ce|||ng L|m|ts of Company Aud|t
no company shall appolnL a person or flrm as lLs audlLor lf
Such person ls ln full Llme employmenL elsewhere or,
Such person or flrm holds Lhe offlce of audlLor of Lhe speclfled number of companles or more Lhan speclfled
number.
Celllng LlmlL
1. 20 company audlLs/person, of Lhls 20, noL more Lhe 10 shall be ln respecL of companles havlng pald up
caplLal of 23 lakh or more.
2. lor parLnershlp flrms, Lhe celllng llmlL shall be 20 company audlL per parLner, who ls noL n full Llme
employmenL elsewhere.
3. When a CA ls parLner ln a number of flrm, all Lhe flrms ln whlch he ls parLner or proprleLor wlll be
LogeLher enLlLled Lo 20 company audlL on hls accounL.

8ef. lCAl Module,

9714259022 27
Computat|on of ce|||ng ||m|t
Inc|uded Aud|t Lxc|uded Aud|t
arL audlL as a unlL 8ranch of company
!olnL audlLor personally one unlL Co-operaLlve socleLles, LrusL whlch are noL company
non-proflL companles lorelgn company
Company llmlLed by guaranLee, noL havlng share caplLal
rlvaLe llmlLed company
1ax audlLs, lnLernal audlL, speclal audlL for lnvesLlgaLlon

kemunerat|on to aud|tor
1he expresslon remuneraLlon" shall lnclude any sums pald by Lhe company ln respecL of audlLor's expenses
1he company audlLor's remuneraLlon ls flxed by..
1. 8y Lhe dlrecLor when appolnLmenL ls made by Lhem
2. 8y Lhe CC when appolnLmenL ls made by Lhem
3. 8y Lhe Company ln CM when appolnLmenL ls made ln CM.
1he & L accounL musL dlsclose Lhe remuneraLlon pald Lo Lhe audlLor ln Lhe followlng manner
1. As audlLor
2. As advlsor, ln respecL of
1axaLlon maLLer
Company law maLLers
ManagemenL servlce
3. ln any oLher manner

kemova| of Aud|tor
rocedure |n the remova| on the exp|ry of term or off|ce
1. Speclal noLlce ls requlrlng for a resoluLlon aL an ACM for.
a. AppolnLmenL as audlLor, a person oLher Lhan reLlrlng audlLor
b. rovldlng expressly LhaL Lhe reLlrlng audlLor shall noL be re-appolnLed
2. 1lme of noLlce :- 14 days before ACM
3. ClrculaLlon of noLlce
Send Lo all Lhe member of Lhe company and also send Lo reLlrlng audlLor also.
4. 8eLlrlng audlLor: Lhe reLlrlng audlLor has Lhe rlghL Lo
a. Maklng a represenLaLlon of reasonable lengLh of company
b. 8educlng such represenLaLlon be clrculaLed among Lhe member
c. 8epresenLaLlon be read ouL aL Lhe ACM and be heard orally aL Lhe ACM
3. Company's uuLles
Where Lhe reLlrlng audlLor makes a represenLaLlon ln wrlLlng Lo Lhe company, Lhe company shall unless
Lhe represenLaLlon ls recelved by lL Loo laLe for lL.
6. SlLuaLlon when represenLaLlon need noL be clrculaLed
a. When represenLaLlon are recelved Loo laLe by company
b. lf Lhe company law board ls saLlsfled LhaL Lhe rlghL of represenLaLlon ls belng mlsused by Lhe audlLor
7. rocedure aL ACM
lf company of represenLaLlon ls noL senL, Lhe audlLor may requlre LhaL represenLaLlon shall be read ouL
aL Lhe meeLlng
8. CerLlflcaLe from appolnLed audlLor,
8efore appolnLmenL aL ACM, a wrlLLen cerLlflcaLe ls Lo be obLalned from Lhe audlLor proposed Lo be
appolnLed LhaL hls appolnLmenL wlll be ln accordance wlLh llmlL.

8ef. lCAl Module,

9714259022 28
What are the powers of an aud|tor of a company?
1. 8lghL of access Lo books and accounLs
A rlghL of access Lo books of accounL aL all Llmes Lo Lhe books and accounLs of Lhe company wheLher
kepL aL Lhe Pead offlce or elsewhere.
AudlLor can lnspecL Lhe books, accounLs & voucher usually durlng Lhe normal worklng Pours.
2. 8lghL Lo obLaln lnformaLlon & LxplanaLlons
AudlLor ls enLlLled Lo requlre from Lhe offlcers of Lhe company such lnformaLlon explanaLlons as Lhe
audlLor may Lhlnk flL for Lhe performance of hls duLles"
lf proper lnformaLlon & explanaLlons noL glven Lhan he has Lhe rlghL Lo lnform Lhe member of Lhe
company.
3. 8lghL Lo vlslL 8ranch offlce and access Lo branch accounLs
Where Lhe accounLs of any branch offlce are audlLed by any oLher person, Lhe company audlLor ls
enLlLled Lo vlslL Lhe branch offlce and lf he deems flL lLs necessary Lhan he can also suggesL LhaL person.
4. 8lghL Lo recelve noLlce and Lo aLLend general meeLlng.
All noLlces and oLher communlcaLlon relaLlng Lo, any CM of a company whlch any Member of Lhe
company ls enLlLled Lo recelve, are requlred Lo be forwarded Lo Lhe audlLor of a company.

Statutory Dut|es of an aud|tor of a company
1. 1rue and falr vlew
rlmarlly Lhe audlLor ls requlred Lo sLaLe wheLher Lhe flnanclal sLaLemenLs of Lhe company presenLs a
Lrue and falr vlew of lLs sLaLe of affalr and worklng resulLs.
2. ulsclosure of lnformaLlon
1he company audlLor shall sLaLe, wheLher ln hls oplnlon and Lo Lhe besL of hls lnformaLlon and accordlng
Lo Lhe explanaLlon glven Lo hlm, Lhe sald accounLs glve Lhe lnformaLlon requlred by Lhe acL ln Lhe
manner so requlred.
3. CbLalnlng lnformaLlon and explanaLlons
1he audlLor has Lhe power Lo seek such lnformaLlon and explanaLlons as Lhe conslder necessary for Lhe
performance of hls audlL
lf Lhe audlLor has noL been able Lo obLaln maLerlal lnformaLlon or explanaLlons, he may have Lo quallLy
hls oplnlon regardlng Lhe LruLh and falrness of Lhe flnanclal sLaLemenLs.
4. roper 8ooks and AccounLs
1he audlLor should sLaLe ln hls reporL "wheLher ln hls oplnlon, proper books of accounL as requlred by
law have been kepL by Lhe company so far as appears from hls examlnaLlon of Lhose books and proper
reLurns adequaLe for Lhe purpose of hls audlL have been recelved from branches noL vlslLed by hlm"
3. ueallng wlLh 8ranch audlL reporL
1he audlLor reporL shall sLaLe wheLher Lhe reporL on Lhe accounLs of any branch offlce audlLed under
secLlon 228 by a person oLher Lhan Lhe company audlLor has been forwarded Lo hlm as requlred
accordlng Lo law and he has dealL wlLh Lhe same ln preparlng Lhe audlLor reporL.
6. 8easons for quallflcaLlons
lf any of Lhe maLLers ln Lhe audlLor's reporL ls answered ln negaLlve or wlLh a quallflcaLlon, Lhe reporL
shall be also sLaLe Lhe reasons for such an answer
1he quallflcaLlon ls requlred Lo answer ln 8o|d or Lype.
7. lnqulry and reporLlng
WheLher loans and advance made by Lhe company on Lhe basls of securlLy have been properly secured
and wheLher Lhe Lerms ln whlch Lhey have been made are noL pre[udlclal Lo Lhe lnLenLs of Lhe company
or lLs member.
WheLher LransacLlon of Lhe company, whlch ls represenLed merely by book enLrles, are noL pre[udlclal o
Lhe lnLeresLs of Lhe company.
8ef. lCAl Module,

9714259022 29
Where Lhe company ls noL an lnvesLmenL company wlLhln Lhe meanlng of secLlon 372 or a banklng
company wheLher so much of Lhe asseLs of Lhe company as conslsL of shares, debenLure and oLher
securlLles have been sold aL a prlce less Lhan LhaL a whlch Lhey were purchased by Lhe company
WheLher loans and advances made by Lhe company have been shown ad deposlLs
WheLher personal expenses have been charge Lo revenue accounLs
WheLher lL ls sLaLed ln Lhe books and paper of Lhe company LhaL any shares have been alloLLed for cash,
wheLher cash has acLually been recelved, wheLher Lhe poslLlon as sLaLed ln Lhe accounL books and Lhe
balance sheeL ls correcL, regular and noL mlsleadlng.
8. Slgnlng/auLhenLlcaLlon
1he audlLor shall slgn Lhe audlLors reporL or slgn auLhenLlcaLe any oLher documenL of Lhe company
requlres by law Lo be slgned or auLhenLlcaLed by Lhe audlLor
9. CerLlflcaLlon of sLaLuLory reporL
CerLlfy Lhe sLaLuLory reporL lssued Lo Lhe members.

S|gn|ng of the aud|tor report
As per Lhe secLlon 229 only Lhe person who appolnL as Lhe audlLor or Lhe audlLor flrm ls so appolnLed,
only a parLner ln flrm pracLlclng ln lndla may slgn Lhe audlLor's reporL.

kespons|b|||ty about the aud|tor's report
lL ls Lhe manager's duLy and responslblllLy Lo send Lhe audlLor's reporL Lo Lhe lndlvldual shareholders of
Lhe company who are all enLlLled Lo recelve noLlce of Lhe general meeLlng of company
lL ls nelLher Lhe duLy nor Lhe responslblllLy of Lhe audlLor Lo send hls reporL Lo Lhe member dlrecLly.

Appo|ntment of 8ranch Aud|tor
2. AppolnLmenL
a. ln case of local 8ranches
l. LlLher Lhe company's audlLor appolnLed
ll. Cr a person quallfled for appolnLed as an audlLor
b. ln case of a forelgn branches
l. LlLher Lhe company's audlLor appolnLed
ll. Cr a person quallfled for appolnLed as an audlLor
lll. An accounLanL duly quallfled Lo acL as an audlLor ln accordance wlLh Lhe laws of a forelgn
counLry.
3. AppolnLmenL of person oLher Lhan company audlLor as branch audlLor
lLs declslon s Laken ln general meeLlng
1he company may elLher appolnL Lhe branch audlLor aL Lhe meeLlng or auLhorlze Lhe 8Cu Lo appolnL
such an audlLor ln consulLaLlon wlLh Lhe company's audlLor.

k|ght of 8ranch Aud|tor
AudlLor's power: - Lo exerclse Lhe same powers and duLles ln respecL of branch offlce audlL as en[oyed
by company's sLaLuLory audlLor ln respecL of company's audlL.
8eporLlng :- Lo prepare a reporL on Lhe accounLs of Lhe branches offlce examlned by hlm and forwarded
Lo Lhe company's audlLor
8emuneraLlon: - Lo recelve such remuneraLlon as Lhe company ln general meeLlng or Lhe board may flL.

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9714259022 30
rov|s|ons re|at|ng to exempt|on from aud|t of 8ranches
1. LxempLlon based on Lhe quanLum of acLlvlLy
8ranch offlce shall be exempLed from audlL lf lL saLlsfles followlng condlLlon
a. Company should be carrylng any manufacLurlng, processlng or a Lradlng acLlvlLy
b. 8ranch offlce should have a average quanLum of acLlvlLy LhaL noL exceed
l. 8s. 2 Lakh or
ll. 2 of Lhe average of Lhe LoLal Lurnover, whlchever ls hlgher.
Pere,
Average quanLum acLlvlLy means Lhe average of Lhe pasL Lhere years or Lhe Lwo years or Lhe one years
as Lhe case may be, dependlng upon Lhe avallablllLy of flnanclal lnformaLlon.
CuanLum of acLlvlLy means
l. AggregaLe value of goods and arLlcles produced, manufacLured or processed or sold and od
servlce rendered
ll. AmounL of expendlLure, wheLher of a revenue or caplLal naLure lncurred by a branch offlce of a
company durlng a llnanclal ?ear.
2. LxempLlon 8ased on Speclflc appllcaLlon
a. 1he company shall make a speclflc appllcaLlon Lo Lhe cenLral governmenL ln Lhe prescrlbed form
b. ConLenLs of appllcaLlon
l. A cerLlflcaLe Lo Lhe effecL LhaL arrangemenLs have been made for Lhe prescrlbed audlL of Lhe
branch offlce slgned by managlng dlrecLor
ll. A wrlLLen sLaLemenL from Lhe audlLor LhaL, ln hls oplnlon arrangemenLs for audlL of branch
offlce accounLs are adequaLe and LhaL Lhe malnLenance of branch offlce accounLs enable Lhe
branch audlLor Lo cerLlfy Lhe LruLh and falrness of Lhe worklng branch
c. lf Lhe CC saLlsfled on Lhe appllcaLlon from Lhe vlslL of branch Lhan CC may be granLed exempLlon
d. CommunlcaLlon of order
l. A copy of Lhe exempLlon order shall be senL Lo Lhe company's audlLor and shall also read before
Lhe nexL CM

Can a company restr|ct r|ghts of |ts statutory aud|tor?
1. need for audlLor rlghLs: - Lhese speclflc rlghLs have been conferred on Lhe audlLor Lo enable hlm Lo carry ouL hls
duLles and responslblllLy prescrlbed under Lhe AcL, whlch cannoL be resLrlcLed on any manner.
2. naLure of ACM resoluLlon: - hence, any such resoluLlon even of passed by enLlre body of shareholder, ls ulLra
vlrus Lhe companles acL, and Lherefore vold.

Under what c|rcumstances can the centra| government (CG) d|rect Spec|a| Aud|t?
1. 1he affalrs of Lhe company are noL belng managed ln accordance wlLh sound buslness prlnclples or pracLlce.
2. 1he company ls belng managed ln a manner llkely Lo cause serlous ln[ury or damage Lo Lhe lnLeresLs of Lrade,
lndusLry or buslness Lo whlch lL perLalns, or
3. 1he flnanclal poslLlon of Lhe company ls such as endanger lLs solvency

Cost Aud|t and Cost Aud|tor
CosL audlL ls Lhe of audlL of cosL record, lL ls an audlL process for verlfylng Lhe cosL of manufacLure or producLlon
of any arLlcle on Lhe basls of accounLs as regards uLlllzaLlon of maLerlal or labour or oLhers lLems of cosL malnLaln by Lhe
company.

1. CosL audlL - Lhe CC may, lf L necessary feels necessary
2. CosL AudlLor :- 8y a CosL accounLanL wlLh Lhe meanlng of lCWA or a CA havlng prescrlbed quallflcaLlon
3. AppolnLmenL: - AppolnLed by Lhe 8Cu wlLh Lhe prevlous approval of CC.
4. ulsquallflcaLlon of belng CosL audlLor
a. A person covered by dlsquallflcaLlon of company audlLor
8ef. lCAl Module,

9714259022 31
b. AudlLor of Lhe company
c. A person who acqulre any dlsquallflcaLlon subsequenL Lo appolnLmenL
3. AddlLlonal audlL
CosL audlL ls noL a subsLlLuLe for annual flnanclal audlL
1he cosL audlL need noL be conducLed every year
6. owers
Same powers and duLles as Lhe company audlLor en[oy
7. Company's duLles
a. AppolnL Lhe cosL audlLor wlLh prevlous approval of CC
b. 1o glve up faclllLles and asslsLance Lo Lhe cosL audlLor
c. 1o glve full lnformaLlon and explanaLlon on every maLLer Lo Lhe CC Lhls conLalned ln cosL audlL reporL
wlLhln 30 days from Lhe daLe of recelpL.

D|st|ngu|sh between qua||f|ed report and adverse report
Cuallfled reporL Adverse reporL
A quallfled reporL ls one where an audlLor glves and
oplnlon sub[ecL Lo cerLaln reservaLlons
ls glven when Lhe audlLor concludes LhaL based on hls
examlnaLlon, he does noL agree wlLh Lhe afflrmaLlons
made ln flnanclal sLaLemenLs/8eporL
1he AudlLor's reservaLlon ls generally sLaLed as sub[ecL Lo
Lhe above, we reporL LhaL Lhe balance sheeL shows a Lrue
and falr vlew.
1he audlLor sLaLes LhaL flnanclal sLaLemenLs do noL presenL
a Lrue and falr vlew of Lhe sLaLe of affalres and worklng
resulLs of Lhe organlzaLlons.
1he accounLs presenL a Lrue and falr vlew sub[ecL Lo
cerLaln reservaLlons
1he accounLs do noL presenL a Lrue and falr vlew on Lhe
whole
A quallflcaLlon ls made ln Lhe audlL reporL when Lhe
audlLor has reservaLlon on speclflc lLem(s) of maLerlal
naLure
An adverse reporL ls glven when Lhe audlLor has hls
reservaLlons on Lhe Lrue and falr vlew presenLed by Lhe
llnanclal sLaLemenLs.

Company prov|de kerox copy of accounts & books |nstead of or|g|na| books becase |ts taken by the
any author|ty ||ke Income tax or exc|se etc.

SoluLlon for above slLuaLlon
1. 8equlremenLs under companles acL:- Lhe company audlLor should reporL wheLher
a. Pe has obLalned lnformaLlon and explanaLlons requlred for Lhe purpose of hls audlL.
b. roper books of accounLs have been kepL by Lhe company
2. Analysls
a. lL ls an posslble for Lhe audlLor Lo express hls oplnlon on Lhe basls of phoLocoples of Lhe accounLs,
b. Powever, lf Lhe audlLor ls able Lo obLaln sufflclenL approprlaLe audlL evldence on Lhe LruLh and falrness of
flnanclal sLaLemenLs, on Lhe basls of xerox coples provlded Lo hlm, he may also furnlsh a clean reporL
3. Cplnlon
Where Lhe audlLor ls able Lo form an oplnlon on Lhe basls of Lhe phoLocoples of books and records
produced Lo hlm, he shall express hls oplnlon
4. ulsclalmer
Where Lhe audlLor ls noL able Lo express any oplnlon based on Lhe lnformaLlon avallable Lo hlm, he
should lssue a dlsclalmer of oplnlon and any facLual knowledge, wlLh due reasons

8ef. lCAl Module,

9714259022 32
Company Aud|t - 2

now do you ver|fy shares |ssued for cons|derat|on other than Cash?
Shares may be lssued Lo
1. vendors Lowards paymenL of purchase conslderaLlon
2. romoLers Lowards prellmlnary expenses
3. underwrlLers Lowards paymenL of underwrlLlng commlsslon
AudlLor's uuLy
Documents Aspects to be ver|f|ed
MCA Company's power Lo relmburse promoLers prellmlnary expenses, Lo lssues shares oLher
Lhan cash
MlnuLe 8ook ConLracL on Lhe declslon Lo lssue shares for conslderaLlon oLher Lhan cash and Lhe acLual
alloLmenL of shares
8CC 8eLurn Copy of conLracL enLered lnLo wlLh vendor, underwrlLer ls fully flled wlLh Lhe 8CC wlLhln 30
days from Lhe daLe of alloLmenL
ulsclosure See LhaL such shares are dlsclosed as alloLLed for conslderaLlon oLher Lhan cash under Lhe
head shares caplLal on Lhe llablllLles slde of Lhe balance sheeL.

now do you ver|fy shares |ssued at prem|um
AbouL Share remlum
1he company may lssue Lhe shares aL a premlum and company wlLh Lhe requlrmrenL of AcL,
1he values recelved over and above Lhe nomlnal value of securlLles shall be Lransferred Lo a separaLe
accounL called securlLles premlum accounL.
SecurlLles premlum may be applled ln a way whlch speclfled ln sec 78(2).
AudlLor's uuLy
ACA lor any provlslon on Lhe lssue of shares aL premlum
MlnuLe 8ook Lnsure LhaL Lhe raLe of premlum and ln accordance wlLh Lhe board's auLhorlzaLlon and Lhe
raLe menLloned ln Lhe prospecLus
lorm 2 verlfy Lhe reLurn of alloLmenL wlLh Lhe 8CC and noLe Lhe lnformaLlon submlLLed ln Lhe
connecLlon of alloLmenL aL premlum
8alance sheeL 1. LlablllLy slde, under reserve and surplus as securlLles premlum accounL
2. Lnsure uLlllzaLlon of securlLles premlum as per Lhe legal provlslon, Lhe same should
be clarlfy shown under Lhe 8alance sheeL

now wou|d you ver|fy shares |ssued at D|scount
Company can lssue shares aL a dlscounL on Lhe followlng condlLlon only.
1. AuLhorlzed by ordlnary resoluLlon ln CM and sancLlon by company law board
2. 8aLe of dlscounL should be speclfled ln Lhe resoluLlon, raLe of dlscounL should noL exceed 10 unless Lhe CL8
may permlL hlgher 8aLe.
3. 1he lssue should be made wlLhln Lwo monLhs of Lhe sancLlon of CL8, buL noL earller Lhan 1 year afLer Lhe
commencemenL of 8uslness
4. 1he shares should be a class already lssued by Lhe company.
AudlLor's uuLy
MlnuLe book 8esoluLlon passed and Lhe raLe of dlscounL
SancLlon leLLer verlfy wheLher leLLer has been recelved and lssue has been made wlLhln Lhe prescrlbed
daLe wlLhln Lwo monLhs
8ef. lCAl Module,

9714259022 33
lrom CL8 verlfy wheLher Lhe regular procedures for recelpL of shares appllcaLlon money and
alloLmenL have been duly followed.
AlloLmenL reglsLer verlfy wheLher Lhe regular procedures for recelpL of share appllcaLlon money and
alloLmenL have been duly followed
8alance sheeL verlfy wheLher or noL amounL of dlscounL has been wrlLLen off
CLherwlse shown speclfy under Lhe head 'Mlsc. LxpendlLure'

now wou|d you ver|fy Sweat equ|ty shares by a ||m|ted company?
SweaL equlLy shares
means
LqulLy shares lssued by Lhe company,
1o Lhe employees and dlrecLors,
AL a dlscounL or for conslderaLlon oLher Lhan cash,
lor knowlng know-how or maklng avallable rlghL ln Lhe naLure by whaLever name called.
CondlLlon 1. 1he shares should be of a class already lssued,
2. AuLhorlzed by a S8 passed ln a general meeLlng whlch speclfy Lhe number of shares,
currenL markeL prlce, conslderaLlon oLher Lhan class or classes of dlrecLors and
employed Lo whom such shares lssued.
3. lssue Lake place aL leasL one year afLer Lhe commencemenL of buslness
4. 1he lssue should comply wlLh SL8l.
AudlLor's uuLy
MlnuLe 8ook verlfy Lhe resoluLlon has been duly passed
verlfy resoluLlon clarlfy speclfled condlLlon
Correspondence wlLh
alloLmenL
Lnsure LhaL lssue has been made wlLhln Lhe prescrlbed Llme perlod
verlfy SL8l guldellnes have been complled wlLh ln llsLed shares
AlloLmenL 8eglsLer verlfy wheLher Lhe regular procedure for recelpL of shares appllcaLlon money and
alloLmenL has been duly followed.
8alance sheeL verlfy wheLher or noL Lhe amounL of dlscounL has been wrlLLen off
verlfy wheLher Lhe accounL enLrles have been duly recorded ln case of lssue of shares for
conslderaLlon oLher Lhan cash.

now w||| you ver|fy ca||s pa|d |n advance?
1. Calls ln advance: - lf company permlLLed by arLlcles, may accepL from member elLher Lhe whole or parL of Lhe
amounL remalnlng unpald on any shares held by hlm as calls ln advance.
2. no voLlng rlghLs: - Lhe member shall noL be enLlLled Lo any voLlng rlghLs unLll Lhe same becomes presenLly pay
able and duly approprlaLed.
3. ulvldend: - a company lf so auLhorlzed by lLs arLlcles, may pay dlvldend ln proporLlon Lo Lhe amounL of pald
upon each shares.
4. AudlLors' uuLy
ACA Lmpower Lhe company Lo,
a. 8ecelve call ln advance
b. ay dlvldend, Lhe raLe of lnLeresL/ulvldend payable
Cash book Lxamlne Lhe cash book and Lrace Lhe calls recelved ln advance maLched wlLh share reglsLer
Schedule of lnLeresL
on Calls ln advance
Lxamlne Lhe schedule of lnLeresL pald on calls ln advance
Such lnLeresL ls chargeable agalnsL proflLs, buL can be pald ouL of caplLal when proflL noL
avallable.
ln wlndlng up calls ln advance are repayable along wlLh Lhe lnLeresL accrued

8ef. lCAl Module,

9714259022 34
Spec|a| Aud|t

Government Aud|t|ng
CovernmenL audlLlng means,
1he ob[ecLlve, sysLemaLlc, professlonal & lndependenL examlnaLlon
Cf flnanclal, admlnlsLraLlve and oLher operaLlons of a publlc enLlLy
lor Lhe purpose of evaluaLlng and verlfylng Lhem,
resenLlng a reporL conLalnlng commenLs, concluslons and recommendaLlons and expresslng Lhe
approprlaLe professlonal oplnlon ln respecL of flnanclal sLaLemenL.

Comptro||er and Aud|tor genera| of Ind|a
1. AppolnLmenL
8y Lhe presldenL of lndla
Shall noL be removed from offlce excepL proven mlsbehavlor
2. 8emuneraLlon
LqulvalenL Lo LhaL of a supreme courL [udge
3. 8emoval
1he C & AC can be removed from Lhe offlce only when each house of parllamenL decldes Lo do so by a
ma[orlLy of noL less Lhan Lwo Lhlrds of Lhe member of Lhe parllamenL presenL & voLlng
4. owers and duLles
C & AC shall perform such duLles and express such powers ln relaLlon Lo Lhe accounLs of Lhe unlon sLaLes
and of any oLher auLhorlLy as may be prescrlbed under Lhe C & AC acL, 1971
3. AccounL malnLenance: - ln such form as Lhe presldenL may, on Lhe advlce of Lhe C & AC.
6. Submlsslon of accounLs:- submlLLed Lo Lhe presldenL/Covernor who shall cause Lhem Lo be lald before Lhe house
of parllamenL.

Dut|es of C & AG under the Act
1. 1o complle and submlL accounLs
Complle Lhe relaLlng Lo Lhe annual recelpL and dlsbursemenL
Pe shall submlL Lhose accounLs Lo presldenL/governor
2. 1o render asslsLance ln accounLs malnLenance
3. 1o audlL and reporL
Shall be audlL and reporL on
All expendlLure from Lhe consolldaLed fund of lndla Lo ascerLaln wheLher moneys dlsbursed were legally
appllcable Lo purpose when Lhey been applled
All LransacLlon of unlon/sLaLe relaLlng Lo conLlngency funds and publlc accounLs
All Lradlng, manufacLurlng, & L accounL, balance sheeL and oLher subsldlary accounLs kepL ln any
deparLmenL of unlon/sLaLe.
4. 1o audlL recelpLs and expendlLure
1o audlL recelpLs and expendlLure of Lhe body or auLhorlLy shall be LreaLed as subsLanLlally flnanced lf
Lhe amounL of granL or loan ln a year ls..
l. CreaLer Lhan 8s. 23 Lakh
ll. Such amounL ls greaLer Lhan 73 of Lhe LoLal expendlLure of LhaL body.
1hls unlL musL ne audlLed for lLs recelpLs and paymenLs
3. 1o audlL granLs or Loans
1hls applles Lo any speclfy loan or granL glven from consolldaLed fund of lndla/sLaLe/unlon LerrlLory.
1he C & AC shall scruLlnlze Lhe procedure by whlch Lhe sancLlonlng auLhorlLy saLlsfles lLself as Lo
fulflllmenL of Lhe condlLlon of glvlng loans
8ef. lCAl Module,

9714259022 35
6. 1o audlL recelpLs of unlon or SLaLes
7. 1o AudlL accounL of sLores and sLock
8. 1o audlL accounL of CovernmenL companles and corporaLlons.

In the context of government expend|ture aud|t, wr|te |n br|ef, what do you understand by,
1. AudlL agalnsL rules and order
1o ensure LhaL Lhe expendlLure lncurred conforms Lo Lhe relevanL provlslon of Lhe law and ls ln
accordance wlLh Lhe flnanclal rules and regulaLlon formed by Lhe compeLenL auLhorlLy.
2. AudlL of sancLlon
1o ensure LhaL Lhere ls sancLlon, elLher speclal or general accorded by Lhe compLenL auLhorlLy
3. AudlL agalnsL provlslon of funds
1o ensure LhaL Lhere ls a provlslon of funds ouL of whlch Lhe expendlLure can be lncurred and Lhe same
has been auLhorlzed by Lhe compeLenL auLhorlLy.
4. AudlL of proprleLy
1o ensure LhaL Lhe expendlLure was lncurred wlLh due regard Lo Lhe broad and general prlnclples of
flnanclal proprleLy.
3. AudlL of performance
1o ensure LhaL Lhe varlous programmes schemes, pro[ecLs where large flnanclal expendlLure has been
lncurred are belng run economlcally and yleld Lhe expecLed resulLs.

Aud|t of Loca| bod|es
1. SLaLuLory audlLor:- Lhe local fund audlL wlng of Lhe sLaLe governmenL ls generally lncharge of Lhe munlclpal
accounLs.
2. Cb[ecLlves
a. 8eporLlng on falrness of Lhe conLenL and presenLaLlon of flnanclal sLaLemenLs
b. 8eporLlng upon Lhe sLrengLh and weakness of sysLem of flnanclal conLrol.
c. 8eporLlng on Lhe legal and admlnlsLraLlve requlremenLs
d. 8eporLlng upon wheLher value ls belng fully recelved on money spenL.
e. ueLecLlon and prevenLlon of fraud, error and mlsuse of resources.
3. Coverage
a. AudlL agalnsL rules and orders
b. AudlL of sancLlon
c. AudlLs agalnsL provlslon of funds
d. AudlL of proprleLy
e. AudlL of performance
CuLllne Lhe audlL programs of nCC
Sub[ect Ver|f|cat|on matter
ConsLlLuLlon AscerLaln Lhe consLlLuLlon of Lhe organlzaLlon and noLe Lhe legal provlslon affecLlng Lhe operaLlons,
accounLs and audlLs.
MlnuLe book Lnsure LhaL Lhe declslon Laken have been duly complled wlLh,
L.g. operaLlon of bank accounL, sancLlonlng of expendlLure
lncome
verlflcaLlon
ConLrlbuLlon and granLs for pro[ecLs and program have been accounLed.
verlfy ln deLall Lhe lnLernal conLrol sysLem and ascerLaln who are Lhe person responslble for
collecLlon of funds
Lnsure LhaL all collecLlons are accounLed and deposlLed ln Lhe bank dally.
Check fees recelved wlLh membershlp reglsLer
Check Lhe lnLeresL and dlvldends recelved and recelvable wlLh lnvesLmenL held durlng Lhe year
LxpendlLure
verlflcaLlon
verlfy agreemenL wlLh donor/conLrlbuLors supporLlng Lhe parLlcular program or pro[ecL Lo ascerLaln
for underLaklng Lhe program/pro[ecL
Check offlce and admlnlsLraLlve expenses by reference Lo vouchers and supporLlng documenLs
8ef. lCAl Module,

9714259022 3
Loans AscerLaln Lhe borrowlng powers of Lhe nCC for speclflc pro[ecLs.
verlfy wheLher lnLeresL and lnsLallmenLs paymenLs have been properly made along wlLh counLer-
folls.
CbLaln conflrmaLlon from balances from bankers/lenders of loans Laken by nCC
llxed AsseLs vouch all Lhe acqulslLlon/sale or dlsposal of asseLs lncludlng depreclaLlon and Lhe auLhorlzaLlon for
Lhe same.
verlfy wheLher asseLs recelved as conLrlbuLlon have been accounLed based on donor's leLLer
lnvesLmenLs verlfy Lhe lnvesLmenL reglsLer and conducL physlcal lnspecLlon of lnvesLmenL ensurlng LhaL
lnvesLmenLs are ln Lhe name of nCC.
verlfy wheLher accrued lncome on lnvesLmenLs have been duly accounLed for.
CurrenL AsseLs cash ln Pand:- physlcal verlfy Lhe cash wlLh books and accounLs
8ank 8alance:- check Lhe 8ank reconclllaLlon sLaLemenL and ascerLaln deLalls for old ouLsLandlng and
unad[usLed amounL
SLock ln Pand:- verlfy sLock ln hand and obLaln cerLlflcaLe from Lhe managemenL for Lhe quanLlLles
and valuaLlon of Lhe same.

Ment|on the spec|a| po|nts |n the aud|t of an ent|ty from |ncomp|ete records.
AudlL from lncompleLe records may arlse ln Lhe followlng slLuaLlon
1. MalnLenance of records under slngle enLry sysLem
2. AccldenL desLrucLlon of records llke flre, LermlLes eLc.
3. Selzure of 8ecords by auLhorlLles llke exclse, lncome-Lax eLc.
AudlLor conslders Lhe followlng polnLs for Lhe audlL from lncompleLe records.
1. AscerLaln Lhe exacL sLaLus of accounLlng records avallable lncludlng memorandum records
2. ScruLlnlze Lhe openlng balance sheeLs and accounL are accuraLely opened or noL
3. Analyze Lhe personal accounL of debLors Lo obLaln lnformaLlon on credlL sales, sales reLurns, dlscounL
allowed, bllls recelved and also obLaln dlrecL conflrmaLlon from parLles ln respecL of balance due from Lhem.
4. Analyze Lhe personal accounL of credlLors Lo obLaln full lnformaLlon on credlL purchase, purchase reLurn,
dlscounL recelved, and bllls payable and also obLaln dlrecLly conflrmaLlon from parLles ln respecL of balance
due Lo Lhem.
3. verlfy Lhe cash book for varlous recelpLs and paymenLs
6. verlfy flxed asseLs physlcally and obLaln sulLable evldence explaln Lhe LlLle and value of flxed asseLs.
7. erform analyLlcal revlew procedure ln depLh and noLlce derlvaLlon Lo lnvesLlgaLe. 8aLlo analysls and
comparlson shall be of lmporLance Lo ldenLlfy slgnlflcanL varlaLlon and cause for Lhem.
8. ConducL surprlse check Lo verlfy cash ln hand, lnvenLory eLc.
9. CbLaln exLernal evldence, physlcal examlnaLlon, observaLlon and managerlal represenLaLlon.
10. lormulaLe an approprlaLe audlL oplnlon based on above flndlngs. A dlsclalmer of oplnlon may be
approprlaLe ln case Lhere ls any problem ln Lhe scope of audlL.

Aud|t|ng the books of c|nema ha||
(Cnly maln polnLs are covered under maLerlal ls as per audlL language)
1. lnLernal conLrol ln show collecLlon
2. AdverLlsemenL recelpLs
3. 8efreshmenL/resLauranL lncome
4. Cash book verlflcaLlon
3. LxpendlLure verlflcaLlon
6. Advances Lo dlsLrlbuLors
7. Ceneral
a. llxed asseLs and depreclaLlon
b. Sundry credlLor for goods and analyze wheLher Lhey are any abnormal movemenL
8ef. lCAl Module,

9714259022 37
c. lorm and manner of presenLaLlon of flnanaclal lnformaLlon conforms Lo accounLlng sLandards and
appllcable legal rules

Aud|t|ng the accounts of a hosp|ta|
1. Legal sLaLus
2. lnLernal check
3. lncome from servlce Lo paLlenLs
4. Cash collecLlon
3. CranLs and donaLlon
6. lncome from lnvesLmenLs
7. urchases of medlclne and expenses
8. SLock ln Lrade
9. roperLy and lnvesLmenL reglsLer
10. Ceneral
a. llxed asseLs and depreclaLlon
b. Sundry credlLor for goods and analyze wheLher Lhey are any abnormal movemenL
c. lorm and manner of presenLaLlon of flnanclal lnformaLlon conforms Lo accounLlng sLandards and
appllcable legal rules.

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