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Published by: Japjiv Singh on Apr 01, 2011
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 In other words he examines analytically and critically the accounts and financial statements prepared by the accountant. . An auditor examines the financial statements prepared by the accountant and verifies the items therein with the help of relevant documentary evidence and explanation and information given to him. where accountancy ends.INTRODUCTION Auditing ±  Auditing begins.


.  It is a critical examination of the supporting documents to understand the substance / essence of the transaction & to ensure that accounting of the transaction is done as per substance/ essence of the transaction. amount. name of the party.VOUCHING  Vouching consists of comparing the entries in the books with particulars in the voucher as regards date.  But vouching is not a mere comparison of the entry with the supporting document.

pertain to the entry under audit. 3. . Transactions are authorized. Transactions represented by the entries have : . Transactions have been allocated properly between capital &revenue. Transactions represented by the entries are not ultra vires the entity. 2.actually occurred . 5.during the period under the audit.VOUCHING What are the Objectives of vouching ? 1. . 4. Transactions have been recorded in the correct amounts.

2. it is possible that payments pertaining to earlier or later period is included in the accounts of the current period. Cancelled. Authorization.the amount entered should be checked with the amount on the vouchers. Addressed to the client all vouchers should be in the name of the client . 3.vouchers examined should be cancelled by initials /firm s stamps to avoid the same voucher being produced again in support of another payment. 5. . The date of the voucher should fall during the period under audit. Otherwise.if they are addressed in the name of an employee / official etc.the date on the voucher should be seen . 4. it could be a personal expense and not a business expense. Amount.voucher should be authorized by competent authority. Date.POINTS TO BEAR IN MIND WHILE VOUCHING 1.

accuracy & existence of an item or entry.  it involves physical inspection of certain assets as shown in the balance sheet really exist. It is more than checking arithmetical accuracy of the record of assets & liabilities.VERIFICATION Verification of assets & liabilities.  Verification of assets & liabilities implies obtaining and examining evidence in respect of assets and liabilities.  Verification goes beyond books of accounts and documentary evidence. Introduction:  Verification means confirmation of the truth . .

Whether they are free from any change other than those disclosed in the books . . 3. 6. 4. Whether the assets are owned by the company. 2. 5. Whether they are shown in the books of accounts. Whether they are actually lying with the company or the balance sheet date.VERIFICATION Scope of verification/ verification includes: 1. Whether they are properly valued or the balance sheet date. Whether they are acquired in connection with the object of the business.

The auditor must satisfy himself whether all the assets shown in the balance sheet are at proper values.  It is an important part of auditors duty.  If the assets are over or under valued. . the main object of proper valuation of assets is to represent a true and fair view of the state of affair of concern through the balance sheet. the financial statement will not disclose true & fair view of the state of affairs & the profitability of the company .  Thus.VALUATION  Valuation of assets means determining the fair value of assets on the basis of generally accepted accounting principles (GAAP).

VALUATION Methods of valuation of assets : 1. On arriving. the assets are valued at actual cost including installation charges if any. at such a value. freight etc are taken into account. expenses such as commisions . 3. Cost price : In this method. the replacement value means the amount of money which could be required to replace an existing asset by purchasing a new asset of the same type . Replacement value: Here. Market value : Market value is the price which exits in the market on the balance sheet date . . 4. 2. Cost of market value whichever is lower : This method of valuation is generally used for valuation of current assets.

7. assets of no use to the business are valued at the amount for which they can be sold in the market as if they were scrap. Generally . Going concern/ book value / written down value : Going concern value is the estimated present value of the asset. Under this. 5. Realizable . Scrap value: Scrap value means realizable value of assets which are receivable after long use. 6. fixed assets are value at going concern value. assets are valued according to be anticipated sale value of assets. Under this. It is equivalent to cost less depreciation written off up to date.VALUATION value: It means the amount of money which will be realized in the market from the sale of assets.

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

VERIFICATION Nature of work: It examines the assets & liabilities in the balance sheet Time : It is done at the end of the year Basis: It includes personal as well as documentary examination Valuation: It includes valuation .VOUCHING Nature of work: It examines the entries relating to transactions Time : It is done throughout the year Basis: It is based on documentary examination Valuation: It does not include valuation.

Execution: Verification is executed by auditor. Proof : It proves the existence.VERIFICATION v/s VALUATION Verification Meaning: verification means determining the accuracy of assets and liabilities shown in the balance sheet. receipts & payments. Scope: The scope of verification is wide. Proof: It certifies the correct value of Asset & Liability Evidence : Certificate from owners/directors. ownership & title Evidence : Title deeds. Valuation Meaning: valuation means testing the accuracy of the asset and liabilities. Nature: The nature of valuation is subjective. Scope: The scope of valuation is limited Execution: Valuation executed by the client's staff. . Nature : The nature of verification is objective.

 ACCORDING TO DE PAULA. of the profit or loss for the financial year.PRIMARY OBJECTIVE OF AN AUDIT  The basic primary objective is expression of opinion as to truthfulness and fairness of financial statements.  This object has statutory recognition in India and has been clearly stated in section 227 of the companies Act 1956.´The main object of an audit is to ascertain that the balance sheet and profit and loss account of undertaking do show true and fair view of its financial position and earningsµ. It requires the auditor of a company to state whether in his opinion the accounts give a ´true and fair viewµ in case of balance sheet. of the state of company·s affairs as at the end of financial year and incase of the profit and loss account. .

management . employees or third parties may get involved in committing frauds to obtain an illegal advantage of personal gain.  A true and fair view cannot be expressed by the auditor on the basis of accounts which have material misstatements resulting from errors and fraudulent manipulations.SECONDARY OBJECTIVE OF AN AUDIT  Pretention and preventions of frauds and errors is a major secondary objective of an audit.  Fraud refers to intentional misstatement which is material to the financial statements.  Fraud generally involves either misappropriation of assets that maybe called employee .

.  The term does not represent any actual account bearing that name.  Such a condition exists where the assets are omitted or undervalued or where liabilities are over-stated. the amount by which the net worth has been deliberately understated a hidden reserve.SECRET RESERVE  In a dictionary for accountants Eric L.  thus a reserve which is not disclosed in the balance sheet of the entities called a secret reserve . hidden reserve or an inner reserve .Kohler defines the secret reserve as.

SECRET RESERVE Some of the ways of creating secrete reserves are given below: ‡ By writing off excessive depreciation on fixed assets ‡ By undervaluing the closing stock ‡ By charging capital expenditure to reserves ‡ By surprising sales ‡ By making excessive provisions for bad debts ‡ By making excessive provisions for contingencies .

 It is one of the methods of manipulating accounts . if there are losses they are under stated.  In window dressing.  A sound financial position is painted on the face of the balance sheet by concealing the actual state of affairs.WINDOW DRESSING  Window dressing is the art of showing a substantially better financial position of the company that it is in reality. assets are over valued . . liabilities are under valued and profits are over stated or. but it does not necessarily involve misappropriation of cash or goods .

Charging inadequate depreciation on fixed assets. 7. Over valuing closing stock at the end of the year . Showing fictitious credit sales & thereby over valuing debtors. Providing inadequate reserves for bad and doubtful debts. 3. Creating inadequate provision for outstanding expenses. Charging revenue expenditure to capital account 4. .DIFFERENT WAYS OF WINDOW DRESSING 1. 2. 5. 8. Showing actual liabilities as contingent liabilities. 6. Showing fictitious assets.

2. More goodwill can be demanded in the case of absorption and in the case of admission of a new partner .OBJECTS/BENEFITS OF WINDOW DRESSING 1. It helps in getting more remuneration to the managerial personnel when it is given on the basis of percentage of net profit. . It helps in getting more favourable credit terms on purchase from suppliers . It helps in getting easy finance facilities like bank overdraft or loan from bank and other financial institutions 4. 3. It helps by attracting more applicants for shares or debentures in case of fresh issue of shares . 5.

the money received from the first customer is misappropriated by the cashier.TEEMING & LADING ‡Teeming and lading is one of the methods of misappropriation of cash. ‡The money received from the subsequent customer is then credited to the account of the first customer and this process continues till such a time that the cashier is able to replace the money misused by him. . or such time that the cashier is caught. ‡Under this method.

v. . ii. The auditor should scrutinize the Debtor s Accounts. iii. The auditor should verify the system of internal control and check regarding receipt of cash from customers and the deposits take place into bank. iv.TEEMING & LADING ‡The auditor can detect such a fraud by taking the following steps : i. He should get the balance confirmation certificates from debtors. especially those accounts which show part payment. He should co-relate the dates of cash receipts from debtors with the date on which the amount is deposited into the bank. He should check the discount allowed column in the cash book with the prevailing discount rate.



ACKNOWLEDGEMENTS We are heartily thankful to Professor Afsha Kirkire . We offer my regards and blessings to all of those who supported us in any respect during the completion of the project. guidance and support from the initial to the final level enabled us to develop an understanding of the subject. . Professor Ashok Vanjani and our co-ordinator Professor Deshpande. Lastly. whose encouragement.


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