PRINCIPLES AND PRACTICE OF AUDITING

UNIT-I
INTRODUCTION OF AUDITING:
The origin of auditing can be traced to Italy. Around the year 1494, Luca Paciolo introduced the
double entry system of bookkeeping and described the duties and responsibilities of an Auditor.
MEANING:
The term ‘audit’ has been derived from the Latin term ‘audire’ which means ‘to hear.’
In early days a person had to listen to the accounts read over by an accountant to check them.
He was known as the auditor.
DEFINITION:
Lawrence R. Dicksee – “An audit is an examination of accounting records undertaken
with a view to establishing whether they correctly and completely reflect the transactions to which
they purport to relate.”

Objectives of Auditing:

The objective of an audit is to express an opinion on financial

statements.

PRIMARY OBJECTIVES:

1. To Examine the Accuracy of the Books of Accounts

An auditor has to examine the accuracy of the books of accounts, vouchers and
other records to certify that Profit and Loss Account discloses a true and fair
view of profit or loss for the financial period and the Balance Sheet on a given
date is properly drawn up to exhibit a true and fair view of the state of affairs of
the business. Therefore the auditor should undertake the following steps:
Verify the arithmetical accuracy of the books of accounts.
 2. To Express Opinion on Financial Statements
After verifying the accuracy of the books of accounts, the auditor should
express his expert opinion on the truthness and fairness of the financial
statements. Finally, the auditor should certify that the Profit and Loss Account
and Balance Sheet represent a true and fair view of the state of affairs of the
company for a particular period.

Secondary Objectives

1. CLERICAL ERROR
Errors that are committed in posting, totalling and balancing of accounts
are called as Clerical Errors. These errors may or may not affect the agreement
of the Trial Balance.

Types of Clerical Errors:

Errors of Omission:
When a transaction is not recorded or partially recorded in the books of
account is known as Errors of Omission. Usually, it arises due to the mistake of
clerks. Error of omission can occur due to complete omission or partial
omission.

Errors of Commission:
(1) Error of Recording,

(2) Error of Posting,

(3) Error of casting, or Error of Carry-forward.

2. ERROR OF DUPLICATION
Errors of duplication arise when an entry in a book of original entry has been
made twice and has also been posted twice. These errors do not affect the
agreement of trial balance, hence it can’t located easily.
Example: Amount paid to Anbu, a creditor on 1.10.2016 for Rs. 75,000
wrongly accounted twice to Anbu’s account.

ERROR OF COMPENSATION (or) COMPENSATING ERRORS 3.

When one error on debit side is compensated by another entry on credit side to
the same extent is called as Compensating Error. They are also called as Off-
setting Errors. These errors do not affect the agreement of trial balance and
hence it cannot be located.
Example: A’s account which was to be debited for Rs. 5,000 was credited
as Rs. 5,000 and similarly B’s account which was to be credited for Rs. 5,000
was debited for Rs. 5,000.

4.ERROR OF PRINCIPLE
An error of principle occurs when the generally accepted principles of
accounting are not followed while recording the transactions in the books of
account. These errors may be due to lack of knowledge on accounting principles
and concepts.
Example – 1: Repairs to Office Building for Rs. 32,000, instead of debiting to
repairs account is wrongly debited to building account.
Example – 2: Freight charges of Rs. 3,000 paid for a new machinery, instead of
debiting to Machinery account wrongly debited to Freight account.
Differences Between Accountancy and Auditing

1. Meaning
Accountancy: It is the process of recording, classifying, summarising and
interpreting all the financial transactions.
Auditing: It is the process of examining books of accounts and reporting on the
financial statements.
2. Objectives
Accountancy: Its main objective is to find out profit earned or loss suffered by
a company and to show the financial position of the company for a particular
period.
Auditing: Its main objective is to examine the correctness of the accounts and
financial statements and certify that whether the company exhibits a true and
fair view of state of affairs of the concern.
3. Nature of Employment
Accountancy: An accountant is a permanent employee of the organisation.
Auditing: An auditor is an independent person and is not an employee of the
organisation.
4. Qualification
Accountancy: An accountant does not require any formal qualification.
Auditing: An auditor should be a qualified chartered accountant certified by the
Institute of Chartered Accountants of India.
5. Reports
Accountancy: Accountant is not required to submit the report on the financial
statements prepared by him.
Auditing: Auditor should submit the report certifying the truth and fairness of
the financial statements.
6. Remuneration
Accountancy: An accountant is remunerated in the form of salary.
Auditing: An auditor is remunerated in the form of professional fees.
7. Commencement of work
Accountancy: Accountancy starts where Book-keeping ends.
Auditing: Auditing starts where Accountancy ends.

What are the different types of audits?

1. Internal audits
2. External audits
3. Financial statement audits
4. Performance audits
5. Operational audits
6. Employee benefit plan audits
7. Single audits
8. Compliance audits
9. Information system audits
1. Internal Audits
Internal audits assess internal controls, processes, legal compliance, and the
protection of assets. The internal audit process can be a helpful tool for businesses
to evaluate risk and identify actionable ways to improve performance.
Internal audits are performed by individuals within the organization. While these
individuals aren’t independent of the organization, they should be independent of
the activities they’re auditing.
2. External Audits
A third party – such as an independent CPA firm – conducts external audits.
Once the audit is complete, a report is distributed to shareholders and stakeholders
outside of the organization.
Example: A manufacturer of car parts is a publicly-traded company. Publicly
traded companies and corporations that sell their shares to the public are required
to have an external auditor audit their financial statements.
Next, learn about specific types of audits that can be performed internally,
externally, or both.
3. Financial Statement Audits

1. Identify and assess risks of material misstatement, whether due to fraud or

error
2. Obtain sufficient audit evidence about whether material misstatements exist
3. Form an opinion on the financial statements or determine that an opinion
can’t be formed
Example: If a small business holds a loan or line of credit with a bank, the bank
may require the business to undergo a financial statement audit.
4. Performance Audits
Performance audits cover a wide variety of assessments. An entity may request
or require a performance audit to evaluate any of the following objectives:

1. Program effectiveness and results

2. Internal controls
3. Compliance with certain requirements
4. Prospective analysis
Examples of performance audits include:

 Ensuring government services and benefits are delivered to citizens based on

eligibility
 Providing conclusions on current and projected trends and the potential
impact on the business
 Analyzing the cost-effectiveness of a program or activity based on benefits
provided and results achieved
5. Operational Audits
Many companies conduct operational audits internally. However, companies
may hire an external specialist. Organizations can benefit from working with a
CPA, as they have expert knowledge, training, and experience in performing
audits. Some accounting firms also have management advisory service (MAS)
specialists or Certified Management Accountants (CMA) that can offer their
expertise.
Example: A business may have an auditor review its human resources
department. The auditor will investigate department procedures and how
efficiently it uses resources. The final report should include a full department
review and identify opportunities for improvement.
6. Employee Benefit Plan Audits
Example: If your company offers a benefit plan (including 401(k), 403(b),
and employee stock ownership plans), a defined benefit pension plan, or a
health plan to more than 100 eligible participants, you may need an audit.
7. Single Audits
Single audits are report cards. They inform federal agencies if there are
problems with how grantees use federal funds. Single audits are highly complex
as auditors must perform the audit in accordance with GAAS and GAGAS.
Plus, the auditor must review the entire entity’s compliance and internal
controls, not just a specific division or program.
8. Compliance Audits
A compliance audit is when an entity is audited to determine if it complies with
a government’s rules, standards, and requirements. A government sets the
requirements and hires an auditor to evaluate the entity’s compliance with
them.
Example: A compliance audit can determine if a mill is following the
Environmental Protection Agency (EPA) guidelines for waste disposal. The
EPA would send their internal auditor or hire an audit firm to assess the
business and report their findings.
9.Information System Audits
Information system audits evaluate the management controls within a
company’s information technology (IT) infrastructure. An audit will determine
if the systems are safeguarding assets, maintaining data integrity, and operating
effectively.
ADVANTAGES AND DISADVANTAGES OF AUDITING:
For the Owner and Shareholders
 Sole proprietor of a business and partners of firm can rely and depend on audited
financial statements.
 Auditing is helpful for valuation and business settlement at the time of admission of
new partner, retirement or death of a partner. This avoids the risk of any dispute in a
firm.
 Audited financial statement is the only way out for shareholders to judge the
performance of the management of the company.

For the Management

 Auditing is helpful in detecting frauds and prevention of errors.
 It helps to keep the staff vigilant; as eventually the work done by them goes for an
audit.
 Insurance claim can be easily estimated from audited accounts.
 Management can take advantage of expert advice of Auditor in financial matters.
 Comparison of financial statements of different years becomes easier.
 Assessment of Tax Liabilities is easy.

For the Government

Taxation authorities and all other Government authorities rely on audited financial
statements; even the courts accept these as evidence when the situations call for.

For the Creditors

Creditors of an organization also rely on audited financial statements and accordingly grant
credit limit to business entities.

For Others
 Audited accounts are easily accepted by insurance companies for settlement of claims.
 Audited financial statements are acceptable by bank and financial institutions

LIMITATIONS OF AUDITING:

 Rely on Experts − An Auditor has to rely on experts like engineers, valuers and
lawyers for estimation and valuation of fixed assets and estimation of contingent
liabilities.
 Efficiency of Management − An Auditor does not comment on the efficiency of
management working in client organization; no comments on future performance of
an organization can be made through audited financial statements.
 Checking of All Transactions − It is not possible for an Auditor to check all business
transactions especially in big organizations where the number of transactions is very
high. An Auditor has to rely on sampling and test checking.
  Additional Financial burden − An organization has to bear additional financial
burden on account of any fees and other such expenses for conducting an audit.
 Not Easy to Detect Some Frauds − It is not easy for an Auditor to detect deeply laid
frauds like forgery, misstatements and non-recording of transactions.

Preparation Before Commencement of Audit

1. Appointment of the auditor:
The auditor can examine his appointment the shareholder have right to
appoint an auditor .a copy of resolution shows the decision of management for
appointment.
2. Time of Audit:
The audit can consult the management for fixing time of audit the stating
data is fixed with the consent of management. The time allocated utilized for
proper audit work.
. Time required:
The auditor can decide the time required for completion of audit work he can
engage sufficient audit clerks to complete work in time otherwise the cost of
audit increases.
5. Audit staff:
The auditor can arrange audit staff on the basis of work load. The number of
audit Clerks can be engaged on the basis of audit work. There should be no
extra burden of work on audit staff.
6. Audit duties:
The auditor cannot fix audit duties such duties are usually stated in audit
engagement letter. The duties stated in company’s ordinance cannot be
overlooked.
7. Nature of business:
The auditor can check the nature of business. The nature may relate to
manufacturing, trading or services. The auditor must know the nature of
activities in order to conduct audit.
8. Business History:
The auditor should record the history of business. He can record year of
establishment nature and number of products available in market.
9. Types of product:
The business may produce different products of successful working. One
product or service is not sufficient to compete in the market the auditor should
note the types of product.
10. List of officers:
 The auditor can ask for list of officer their duties and specimens signature he
must know authority and responsibility of officer.it is essential for completion
of audit work.
11. Copies of documents:
The auditor can collect copies of document like memorandum of association
and articles of association. He can examine all such document for the purpose of
audit.
12. Books of account:
The auditor can obtain lists of books of account he can check that legal
requirement are followed in preparing books of account.
13. Internal control:
The internal control system is tested to rely on it. Audit sampling is
possible if it is effective the business work flow under proper accounting and
administrative control.
14. Certificates of clients:
The auditor can obtain certificate from client, the confirmation of
accounts from debtors and creditor is possible. The client can issue stock
valuation certificate for the auditor.
15. Old reports:
The auditor should examine old audit report. he can note the weakness stated
in previous report he can check that weak point stated in old report are net
repeated during this year.

Audit Note Book

Meaning

Audit Note Book is a register maintained by the audit staff to record important
points observed, errors, doubtful queries, explanations and clarifications to be
received from the clients. It also contains definite information regarding the
day-to-day work performed by the audit clerks.

Example:
Following are the queries made in the
Audit Note Book:
Voucher No.75 Paid towards advertisement expenses for 1. Rs. 3,50,000.
Voucher No.170 Rent paid 2. Rs. 22,000.
Voucher No.98 Material purchased and received in Stores for 3. Rs. 58,375
Voucher No.245 Machinery purchased for 4. Rs. 7,28,000.

Contents of Audit Note Book

1. A list of the account books normally used and maintained.
2. Names of the principal officers, their duties and responsibilities.
3. Nature of business carried on and important documents relating to the
constitution of business like
Memorandum of Association, Articles of Association, Partnership deed etc.,
4. Extracts of minutes and contracts affecting the accounts.
5. Extracts of correspondence with statutory authorities.
6. Copy of audit programme.
7. Accounting methods, internal control and internal check system in operation.
8. Routine queries like missing receipts and vouchers etc.
9. Details of errors and frauds discovered during the course of audit.
10. Points to be included in audit report.
11. Details of all important information to be used as reference for future audits.
12. Date of commencement and completion of audit.

Advantages of Audit Note Book

1. Facilitates Audit Work: It facilitates the work of an auditor as all

important details about the audit are recorded in the note book which the audit
clerk cannot remember everything at all the time. It helps in remembering and
recalling the important matters relating to the audit work.
2. Preparation of Audit Report: Audit note book helps in providing required
data for preparing the audit report. An auditor examines the audit note book
before preparing and finalizing the audit report.

3. Serves as Documentary Evidence: Audit note book serves as a

documentary evidence in the court of law when a suit is filed against the auditor
for his negligence.

4. Serves as a Guide: When a audit assistant is changed before the

completion of audit work, audit note book serves as a guide in completion of
balance work. It also acts as a guide for carrying on subsequent audits.

5. Evaluating Work of Audit Staff: It helps to assess the work performed by

the audit staff and helps in evaluating their level of efficiency.

6. Fixation of Responsibility: Audit note book helps in fixing responsibility

on concerned clerk who is responsible for any undetected errors and frauds in
the course of audit.

7. No Dislocation of Audit Work: An audit note book contains all important

details about audit hence any change in the audit staff will not disturb or
dislocate the audit work.

Disadvantages of Audit Note Book

1. Fault-finding Attitude: It leads to development of a fault-finding attitude in

the minds of the staff.

2. Misunderstanding: Very often maintenance of audit note book creates

misunderstanding between the client’s staff and the audit staff.

3. Improper Preparation: Since it serves as evidence in the court of law, it

needs to be prepared with great caution. When the note book is prepared
without due care it cannot be used as evidence against the auditor for
negligence.
4. Adverse Effects on Subsequent Audits: Since audit note book is used in
performing subsequent audits, any mistakes in the note book may have adverse
impacts on the next audit.

Audit Working Papers

Meaning

Papers and documents which contain important facts about accounts which are
under audit are called as Audit Working Papers. Working papers provide the
basis of conclusions and summarizations of the report prepared by the auditor at
the end of the audit work

Definition

Institute of Chartered Accountants of India defines audit working paper as,

“working paper must include audit program, queries, explanations given for the
queries, schedules for the important items like depreciation, inventories,
confirmation from third parties, certificates issued by the management,
banks,etc..”.

Objectives of Audit Working Papers

1. Planning and Organizing Audit Work: Working papers provide a means

of planning, organizing and reviewing the audit work. They are the evidence for
conducting the audit work against the generally accepted auditing standards and
practices.

2. Support for Auditor’s Opinion: Working papers provide support for the
report of the auditor. When the auditor’s opinion on financial statement or
recommendations given by the auditor is questioned working papers support the
opinion or recommendations given by the auditor.

3. Division of Labour: Working papers help in dividing the audit work

among the audit staff so that each staff is responsible for his work to the auditor.
4. Use as a Permanent Record: Working papers are the permanent record of
the auditing procedure employed and the financial records examined during the
conduct of audit.

5. Basis for Evaluation and Training of Audit Staff: Working papers provide
a means to test whether the auditor and his staff have done their job as per the
standards. Training to the staff can be provided by reviewing the working
papers of past years.

Importance (or) Advantages Of Audit Working Papers

1. Planning the Audit Work: It acts as the process of planning for the auditor
so that he can estimate the time that is required for conducting the audit work.

2. Helps in Fixing Responsibility: It helps in fixing responsibility and to

measure the work being performed by the audit assistants.

3. Helps in Drawing Conclusions: Working papers are necessary to draw

conclusion from the evidence obtained.

4. Helps in Preparing Audit Report: The auditor prepares and finalises the
audit report taking into account the informations or extracts contained in the
working papers.

5. Documentary Evidence: It is a valuable documentary evidence in the Court

or Tribunal of law when a charge of negligence is brought against the auditor.

6. Permanent Record: Working papers are the permanent record of the work
done by the auditor during a particular period of time.
 Audit Program
MEANING

An audit programme is a detailed, written statement designed by the auditor

indicating the work to be performed by the audit assistants, specifying the time
limit for completion of work, instructions and guidance to the audit staff. In
short, it is a tool for planning, directing and controlling the audit work.

Definition

Prof. Meigs defines an audit programme as, “an audit programme is a detailed
plan of the auditing work to be performed, specifying the procedures to be
followed in verification of each item and the financial statements and giving the
estimated time required.”

Features (or) Characteristics of an Audit Programme

1.It is a set of procedures to be adopted to conduct the audit more
efficiently.
2. It is a written scheme designed by the auditor.

3. It is a blue print of the audit work.

4. It facilitates delegation of work, based on the capabilities of audit staff.

5. It acts as evidence in future for the audit work being performed.

6. It specifies the work to be done by the audit staff, the manner and time
limit for completion of the work.

Objectives of Audit Programme

1. To provide clear instructions to the audit assistants specifying the nature of

work to be performed and fixing the time span for completion of each work.

2. To facilitate coordination among various parts of audit work.

3. To ensure uniformity in the performance of audit work and to avoid
duplication and repetition of work.

4. To attain a fair allocation of work among audit team.

5. To fix responsibility and accountability of each audit assistant.

6. To serve as a guide for planning the audit work in future.

7. To serve as evidence in future showing the date of completion of audit

work, methods or procedures undertaken, persons involved in completion of
audit work etc.

Contents of an Audit Programme

The following are the details of an audit programme:

1. Name of the client.

2. Nature of operations and business of client.

3. Review of system of internal check.

4. Date of commencement of audit work.

5. Duration of audit work.

6. Accounting system followed in client organization.

7. Review the report of the previous auditor.

8. Review the remarks, instructions or objections raised in the previous audit

report.

Advantages of an Audit Programme

An audit programme can give the following advantages:

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

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

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

audit assistants by clearly defining the scope of work.
3. Helps in Future Planning: Audit programme serves as a basis for
planning the audit work for subsequent year.

4. Serves as a Guide: It serves as a valuable guide for the audit staff in

execution of the audit work for succeeding years.

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

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

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

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

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

of the audit staff.
Concept of Cost Audit in India – Why is it Important?

Definition of Cost Audit

The ICWAI (The Institute of Cost Accountant of India) defines Cost Audit as a

“system of audit introduced by the government of India for the review, examination,
and appraisal of the cost accounting records and attendant information required to be
maintained by specified industries.”

Types of Cost Audit

1. To Assist Management:

The main purpose of this audit is to give proper, relevant and accurate information to the
Management to assist in taking the important decision. In this Audit, a report is submitted
suggesting certain ways to reduce the cost of production, guidance to the management for
increasing the efficiency in the manufacturing unit, any loss making unit and to make the
improvement in the accounting plan.

2. On behalf of Government:

Government may appoint the cost auditor to conduct audit wherever required:

a. If the Government feels to carry out the audit as per the Companies Act, 2013

b. To analyses the certain amount of cost if the government is approaching certain financial
help.

c. To fix a certain amount of cost while preparing for the tender.

3. On behalf of Tribunals:

Sometimes, Labor Tribunals may direct the cost auditor to settle the disputes for more wages,
bonuses, shares in profit, etc. The Income tax department may direct the audit of cost account
to get the correct profit.

4. Cost Audit under Statute:

As per the Companies Act, 2013 there are certain classes of Companies that need to carry the
audit to get the accounts audited.

5. Statutory Cost Audit:

As per the statutory rules and Act it is mandatory for the Company to carry out the Audit.
 Benefits of Cost Audit in India

 It helps in the detection of errors and fraud.

 Systematically smoothens the work of accounting.
 Brings the Cost of product at the minimum level.
 Helps to maintain the standard budgetary cost.
 Enables the management to take the decision accurately.
 Keep the management aware that the Accounts are prepared according to Cost
Accounting standards or not.

Management Audit
Scope of Management Audit
Management audit is a method of independent and systematic evaluation of the management activities
at all levels of management to ascertain the functions, efficiency and achievement of the management
(i.e. policies) as compared to standards set by the company.

 Evaluate the Efficiency of the Management: Management· audit evaluates and appraises
the efficiency of the management at all levels.
 Implementation of Principles and Policies of the Management: Management audit review
whether principles and policies formulated by the management have been successfully
implemented or not.
 Find Variances: It detects the variances in efficiency with the standards set by the
management.
 Analyze the Reasons for Variances: Management audit analyze the reasons for
inefficiencies of the management for not fulfilling the targets.
 Recommend Suggestions for Improvement: It gives suggestions for improvement in the
areas e.g. production, sales, purchase, finance, human resources, administration etc.

Objectives of Management Audit

 Verifying the Efficiency: Management audit aims at to assess the efficiency at all levels of
management and implementation of policies.
 Gives Suggestion for Increase in Efficiency: Management audit highlights the
inefficiencies in different areas of management and gives his valuable suggestions and means
to improve the efficiencies.
 Asses the Effectiveness of Planning and Policies: Management audit examine and evaluates
the plans and policies and judge whether planning and policies are properly implemented.
 Helps to Increase Profitability: Management audit helps the management to increase
profitability by giving remedies to maximize the organization’s resources in an efficient way.
 Helps to Co-Ordinate Activities: Management audit detects the interrelationship among the
activities, evaluates the authority and responsibility and gives valuable suggestions for
improvement of co- ordination among the activities and the employees.
 Gives Valuable Advice: By scanning the management efficiency and detecting the weak
spots of different levels of management, the management auditor gives valuable advice to the
top management regarding different policies and future course of action.


UNIT II
Internal Control
Definition: Internal Control can be defined as a system designed, introduced and
maintained by the company’s management and top-level executives, to provide a
substantial degree of assurance in achieving business objective, while complying
with the policies and laws, safeguarding the assets, maintaining efficiency and
effectiveness in regular operations and reliability of financial statements.
Objectives of Internal Control System
To ensure that the business transactions take place as per the general and specific
authorisation of the management.

To make sure that there is a sequential and systematic recording of every transaction, with the
accurate amount in their respective account and in the accounting period in which they take place. It
confirms that the financial statement fulfils the relevant statutory requirements.

To provide security to the company’s assets from unauthorised use. For this purpose, physical
security systems are used to provide protection such as security guards, anti-theft devices, surveillance
cameras, etc.

To compare the assets in the record with that of the existing ones at regular intervals and report to
the those charged with governance (TCWG), in case any difference is found.

To evaluate the system of accounting for complete authorisation of the transactions.

To review the working of the organization and the loopholes in the operations and take necessary
steps for its correction.

To ensure there is the optimum utilization of the firm’s resources, i.e. men, material, machine and
money.

To find out whether the financial statements are in alignment with the accounting concepts and
principles.
 An ideal internal control system of an organization is one that ensures best possible utilization of the
resources, and that too for the intended use and helps to mitigate the risk involved in it concerning the
wastage.

1. Preventive Controls: These controls are introduced in the firm to stop errors and irregularities from
taking place.
2. Detective Controls: These controls are implemented to reveal errors and irregularities, once they take
place.
3. Corrective Controls: These controls are designed to take corrective action for removing errors and
irregularities after they are detected.
4.[1.]
Internal Check
Internal Check is an integral function of the internal control system. It is an arrangement of duties of
the staff members in such a way that the work performed by one person is automatically and
independently checked by the other.

Objectives Of Internal Check

Following are the main objectives of Internal Check −
 To protect business from carelessness, inefficiency and fraud.
 To ensure and produce adequate and reliable accounting information.
 To keep moral pressure over staff.
 To minimize the chances of errors and frauds and to detect them easily on early stage
if it is committed.
 To divide the work in such a way that no business transaction should be left
unrecorded.
 To fix the responsibility of every clerk according to the division of work

Principles of Internal Check

 Responsibility − Allocation of business work amongst the various staff members
should be done in such a way that their duties and responsibilities should be
judiciously and clearly divided.
  Automatic check − Automatic checking of work of one employee by another forms
part of a good Internal Check system.
 Rotation − Transfer or rotation of employees from one seat to another must be
followed under good system of internal control.
 Supervision − Prescribed procedures and Internal Check should be strictly supervised.
 Safeguard − To safeguard files, securities, cheque books is also recommended in
Internal Check.
 Formal Sanction − Without formal sanction, no deviation should be allowed from the
established procedures.
 Reliance − Under good system, too much reliability on one employee should not be
there.
 Review − From time to time, system of Internal Check should be reviewed to
introduce improvement.
Internal Check With Regard To Sales

1. Number the order and keep it in the Orders Received Book with all of the details.
2. A copy of the order with all essential information should be sent to the Despatch
Department.
3. The Despatch Department should take the necessary procedures to ensure that the goods
are packed in accordance with the order.
4. The Despatch Department's statement of goods should be compared to the customer's
order, and then an invoice will be created in triplicate using carbon paper.
5. The invoice should be double-checked by a responsible person, especially the rates
charged and the computations completed.
6. Entries should be made in the Sales Day Book using a copy of the invoices.
7. Records should be kept in the Products Outward Book when goods are dispatched.
8. The customer may be issued two copies of the invoice, one of which will be returned after
it is signed. It'll suffice as a delivery receipt. For future reference, the third duplicate will be
kept.
9. For all the products returned by customers, entries should be made in the Goods Inward
Book. Credit notes should be prepared, and the responsible official should double-check and
initial them.
10. Keep track of sales returns in the Sales Return Book by using credit notes.
Internal Check With Regard To Purchases
1. Buy Requisitions: The method for issuing purchase requisitions should be established. When a
department needs products, the head of the department should fill out a requisition slip, sign it, and
send it to the purchasing department. The request sheet should provide specific information regarding
the quality, quantity, and delivery deadline.
2. Inquiry: The purchasing department inquires about the terms and circumstances of various
suppliers' purchases. Tenders are often requested for these purposes. However, it should be mentioned
who will open and accept the tenders. As a general rule, the lowest tender should be approved and a
choice made.
3. Purchase Order: Orders are placed by the purchasing department and should be noted in the
purchase order book. Prepare four copies of the purchase order. One copy will be forwarded to the
vendor, the second to the retail department, the third to the accounting department, and the fourth to
the buying department. Before the authorized person or director signs the purchase order, it should be
reviewed by a responsible official.
4. Goods Receipt: Upon receiving goods, the buying department shall thoroughly inspect them before
sending them to the stores, with an entry in the goods inward (receipt) book. The receiving
department should be notified of the arrival of the goods.
5. Making Payments: The procurement department should double-check invoices before sending
them to the accounting department for payment. The invoice should be compared to the purchase
order and incoming inspection report by the accounting department, and the calculations should be
double-checked. The invoice should be entered into the purchase book by the accounting department.
Only the responsible official should write a check to pay the invoice.
Internal Check with regard to Cash Transactions
CASH RECEIPTS:
1. Cash receipts should be handled by a separate staffer known as a cashier.
A preliminary note of the amount should be created as soon as cash is received. The cashier
should not be allowed to keep money on his person. He should not be allowed to spend
money or make entries in the ledger or other books of primary accounting.
2. Every day, all receipts should be deposited in the bank. Bank reconciliation statements
should be prepared regularly to reconcile bank and cash balances.
3. Bank pay-in slips should not be generated by the same individual who is responsible for
actual bank deposits.
4. Printed receipts should be used to acknowledge all receipts. All receipts should have their
counter-foils kept in good condition. Receipts that have not been utilized must be preserved
with a competent officer.
5. Rather than tearing out soiled receipts, they should be annulled. If any changes are made to
the receipts that have already been written, they must be appropriately initialed.
6. Copies of previously issued receipts must be indicated as duplicates.
7. From time to time, a few responsible members of the firm should conduct a surprise
physical check to verify the cash balance.
CASH PAYMENTS:
1. The person in charge of making payments should not be involved in cash receipts.
2. Except for small cash payments, all payments should be made by chance cheques as much
as practicable. Order cheques should be drawn for payment, and they should be crossed as
much as possible.
3. Arrangements should be taken to guarantee that payment vouchers are not offered for
payment again and that such vouchers be stamped as paid before the cheques are signed.
4. An official should check the statements received from creditors and cross-reference them
with invoices and ledger accounts, and only then should checks be made in the creditors'
favor.
5. Only directors and senior executives should be able to approve payments of a particular
kind.
6. Bank reconciliation statements should be made from time to time by authorities other than
the cashier to reconcile bank and cash balances.
7. Bank checks shall be kept in possession of responsible authority and kept under lock and
key.
8. For each payment, receipts should be acquired that is signed and stamped.
9. The receipts should be appropriately organized and stored using a file system.
10. Monthly or recurring payments should be paid on set dates to assure the availability of
cash discounts.
Internal checks- Wages
Wages are very important item of expenditure. The system of internal check for wages should
be devised in a planned and careful manner. There are great possibilities of frauds in a
concern employing a large number of workers. A sound system of internal check in payment
of wages may avoid errors and frauds which may be revealed from time and piece wages
records.

I.Maintenance of Wages Records

1. Time Records: It is a record maintained by the gate keeper who records the entry time and
exit time of each worker. Foremen of each department also maintain records for time spent by
an employee. When wages are paid on the basis of time spent by a worker, the record
maintained by the gate keeper and record maintained by foremen of each department are
summarised for payment of wages.
2. Piece-work Records: This record is maintained by the foremen who records the actual
work done by each employee. Each person is provided a job card who records the work done
by him. Finally, the record maintained by the foremen and job card are used in determining
wages.
3. Overtime Records: Overtime should be sanctioned in advance by a responsible person.
Employees should be issued overtime slips bearing the name and number of worker. Such
slips should be issued and initialed by some responsible official. At the end of the week such
slips should be sent to the wage office.
4. Pass-out Records: The workers should not be allowed to leave the factory without the
written permission. For this, a pass-out slip is issued to the worker by same authority. Such
slips are handed over to the gate keeper. The wage office should also be given copy of it.
II. Preparation of Wage Sheet:
The wage sheet should not be prepared by one clerk alone. A set of clerks should compare the
records maintained at the gate and the wage office and enquire about differences, if any. The
following points should be taken into account.
1. Base: The wage sheets should be prepared with the help of attendance register, overtime
slip and pass-out slip.
2. Separate Sheets: Separate wage sheets should be used for time-workers and piece-
workers.
3. Checking: The wage sheet should be inspected and counter signed as correct by the works
manager and foreman.
4. Signature: The wage sheet should be counter signed by those employees who has
prepared it.
5. Approval: Each and every wage sheet should be approved by factory manager or
managing director.

III. Payment of Wages:

1. The person who is in-charge for payment of wages should not have connection with the
preparation of wages sheet.
2. Each worker should be asked to receive his wages personally in the presence of his
foreman to identify him.
3. No payment is made to someone on behalf of a worker who is absent.
4. Wage payment should be made by cash department, not by other persons.
5. The amount of wages for each employee should be placed in an envelope bearing the name
and number of person.
6. Special arrangements should be made for payment to the absentees.
7. Exact amount of money should be drawn from the bank for payment of wages.
8. Advances to workers should be discouraged and if it becomes unavoidable, they should be
given through the petty cashier.
9. If casual workers are also employed in the factory a separate record should be maintained
about them.
10. Undisbursed wages should be deposited immediately into the bank.

Advantages And Disadvantages Of

Internal Audit
The main purpose of internal audit is to provide the company with independent
assurance that its risk management, corporate governance, and internal control processes are
operating effectively.
1. To Discover Errors And Frauds
One of the main benefits of internal audit is that helps to discover accounting errors and
frauds so that they can be rectified before the final audit.
2. To Maintain Proper Accounting
It helps to maintain proper accounting system in the organization. It ensures accuracy
and authenticity of accounting records.
3. Provides Base For Final Audit
Internal audit examines and verifies entire books of accounts and locate mistakes and
frauds. So, conduction of final audit becomes easier.
4. Increase Employees Efficiency
Internal audit alerts the staffs by checking their performance regularly. It helps to
increase their efficiency and also helps to minimize errors.
5. Proper Utilization Of Resources
Internal audit ensures proper utilization of resources by detecting their misuse. It
helps to increase operational efficiency and productivity.
6. Valuable Suggestions
It gives suggestions and instructions regarding the financial and operational activities
of the organization. So it helps to maintain better management, proper supervision and
effective control.
DISADVANTAGES OF INTERNAL AUDIT

1. High Cost: The cost of establishing and operating an internal audit in an organization is
very expensive.
2. Unsuitable for Small Organization: Internal audit due to involvement of high cost is not
suitable for small organizations.
3. Unreliable Opinion: Internal auditor’s are employees of the organization and hence the
report given by them may not be true and fair. Often, external auditor has reservations about
the opinions expressed by the internal auditor.
4. Ineffectiveness: When the records of operations are not checked immediately after they
are completed or when there is time lag between two audits, internal audit may become
ineffective.
5. Lack of Expertise: Internal audit staff lacks the required skill and expertise as they are not
professionally qualified chartered accountant.

Differences Between Internal Check and Internal Audit

 UNIT III
What is Vouching?

Vouching is the act of reviewing documentary evidence to see if it properly supports entries
made in the accounting records. For example, an auditor is engaged in vouching when
examining a shipping document to see if it supports the amount of a sale recorded in the
sales journal.

Definition

According to Ronald A Irish – “Vouching is a technical term which refers to

the inspection of documentary evidence supporting and substantiating a
transaction”.
Objectives of Vouching

The main objectives of vouching are:

 To examine that all transactions and entries have been properly accounted
for in the appropriate books of accounts.
 To ensure that adequate documentary evidence exist to all the transactions.
 To ensure that the transactions and entries relate to the business and to the
period under audit.
 To ensure that there is no omission of any record.
 To evaluate the collected evidence and vouchers by determining the
authenticity and validity of the documentary evidence.
 To ensure that the transactions and entries are properly authenticated by
the responsible officer.

Importance of Vouching
The importance of vouching is to determine that:
 Classification: Transactions have been classified & disclose in accordance
with accounting policies.

 Accurate amount: Accurate amount has been recorded.

 Pertains to entity: Transactions pertain to an entity that took place during the
relevant period.

 Actual occurred: Transactions which have actually occurred have been

recorded.

 Proper Accounts: Transactions is recorded in proper account to the proper

period.

Procedures of Vouching
1.Reading Out
The vouching is a task of the auditor. The junior audit can read out the contents of the
vouchers. He can inform the senior auditor about the data name of organization, number of
voucher and amount of vouchers.

2. Comparison
The senior can head the contents called out by junior auditor. He tally each and every item
stated in the voucher with entries in the books of accounts. Thus comparison is a part of
vouching procedure.
3. Ticking
The senior auditor can use various ticks or symbols to clear the items checked. The ticks may
be an abbreviation of words. Such ticks or symbols may differ from auditor to auditor
because these are code words.
4. Stamping
The senior auditor instead of signature or initials he can use stamps for checking the vouchers
can use the rubber stamps. The rubber stamp may have the wording checking and cancelled
on it.

5. Signatures
The senior auditor can vouch the entries with the help of vouchers. He can put his signature
or initials on every voucher for safety measures. The signed vouchers cannot be presented
again for another entry.

6. Query
The voucher may be missing. The entries may be doubtful due to over writing and erasing.
The audit staff can make the word “Q” against such entry. This entry is recorded in working
papers.

7. Management
The audit staff can be giving sometime to the management for clearing the objections. The
doubtful entries are handed over in written form. The management can examine the record in
detail.

8. Reply
The management may reply after one or two days about the doubtful entries. The auditor can
examine the reply of the managers. The auditor can judge whether the reply is right or wrong.
9. Clearance
The audit staff can clear the query for which proper answer is made available. The auditor
may not be satisfied with the answer of objections. He can inform the management about this
query.

10. No Satisfactory
The auditor may reject the unsatisfactory reply. He has skill, training and experience. He can
use all available means to test the truth. He can note down poor clarification in working
papers.
Difference between Vouching and Routine Checking

Basis Routine checking Vouching

Objective Ensure arithmetical accuracy of Examine the accounting transactions

entries made in the books of recorded in the books of accounts by
 original entry as well as Ledger using documentary proof

Concerned with castings, posting, Accuracy, authenticity, and

Concerned with
and balancing completeness of transactions

Routine checking can help to detect Vouching can detect well-planned

Frauds and errors
only minor cases of fraud. frauds and errors

A wider scope; includes routine

Scope Narrow scope
checking

Performed by Junior staff in an organization Performed by the auditor and his staff

Compensating errors
Does not reveal Reveals
and errors of principle

Mechanical in nature and

Depth A thorough and detailed process
monotonous

What is Voucher?
A voucher implies a source document, generally prepared for the purpose of future reference
that keeps a record of the ground on which the transaction took place. Hence, it acts as
documentary evidence of that transaction as it backs the entries recorded in the journal.
Features of Vouchers

 It is written documentary evidence.

 It supports the entry, that appears in the company’s books of account
 It states complete details of the transaction
 It justifies the correctness of the entries made in the books.
 It is pre-numbered, which helps in simplifying the audit trail.
 It is for internal accounting control, which makes certain that every transaction is duly
authorized.
 It is prepared as and when the transaction takes place.
 It contains true and complete details of the transactions
Classification of Vouchers
On the basis of Recording of Transactions:

1. Transaction Voucher: Transactions having a single debit and credit are simple transactions,
and the vouchers prepared for these transactions are Transaction vouchers.
2. Compound Voucher: Transactions having more than one debits or credits and single debit or
credit are compound transactions and the voucher prepared for these transactions are
Compound vouchers.
 3. Complex Voucher: Transactions of more than one debits and more than one credits are
known as complex transactions and the voucher prepared for the same is a complex
voucher/journal voucher.
On the basis of source:

1. Primary Vouchers: The written documentary proof, existing in original form is regarded as a
primary voucher. It may include purchase invoices, counterfoil of cash receipts, and so forth.
2. Collateral Vouchers: If the original written documentary proof is not present, but their
copies are available, these are called collateral vouchers. In such cases, copies of such
documents are provided for auditing purposes. Photocopies of the demand draft are one
common example of collateral vouchers.
Contents of Voucher
As the voucher is documentary proof stating the facts of the transaction, so it has to be prepared with
great caution and care. A printed voucher is generally preferred. The contents of the vouchers include:
Name and Address of the Firm: Every Voucher must contain the name and address of the company,
in printed form, at the top.
Voucher Number: Vouchers bear a unique serial number, for the purpose of easy identification. This
also helps in differentiating with other vouchers and entering their reference in the account books
Date: A voucher carries a particular place to indicate the date on which the voucher is written when
the transaction took place.
Details of Party to be Debited: This section contains the name and address of the party with whom
the transaction is performed by the company and payment has been made.
Details of Party to be Credited: The payment made via cash or cheque/demand draft. So, the cash or
bank account is credited, along with the number and date of issue of the cheque and demand draft.
Revenue stamp: In every voucher, as per law, every payment of Rs. 500 or more, revenue stamp
needs to be affixed. and the receiver of the payment must touch a certain part of that stamp.

Vouching of Cash Receipts (Debit Side of Cash Book)

Opening Balance of Cash Book
Opening balance of cash book represents cash in hand at the start of the year and should
verified from the balance sheet of last financial year.
Cash Received from Debtors
Consider the following points for verification of cash received from debtors −
 The carbon copies or counterfoils of cash receipt book should be verified.
 Cash receipt should be serially numbered.
 Cash received should be entered on the same date when the cash is actually received.
 The discount allowed to customers should be properly authorized by a responsible
officer.
 Correspondence with customer and ledger account should be tallied
Repayment of Loan by Others
Repayment of loan by others may be verified in the following ways −
 Calculation of interest received and interest should be credited to interest received
account.
 Verification from bank statement if directly deposited by party into bank.
  Checking of carbon copies or counterfoils of cash receipts.
 To ensure that there should be no violation of Income Tax rules as payment of loan
exceeding Rs. 20,000/- cannot be repaid in cash. It should be through Cheques,
Demand Draft, NEFT, RTGS or any other available banking channels.
Rent Received
 To check rental agreement or lease deed.
 In case where the rental income is received from more than one property, separate
account for each property should be maintained.
 The Auditor should verify that the rent for all the twelve month is received or not.
 The amount of rent should be verified from the rent deed or the lease deed.
 If TDS (Tax Deducted at Source) is deducted by the party, there should be proper
accounting of TDS.
Sale of Investments
 To check bank statement if the sales proceeds have reached the bank account.
 To verify broker commission, note or debit note, if investments are sold through
broker.
 To ensure separate accounting is being done for capital receipts and revenue receipts.
Dividend or profit or loss on sale of investment is a revenue receipt and the sales
proceeds of the investment cost should be booked as capital receipt.
Subscription
Subscriptions are received from the members of a club and the following points need to be
considered by the Auditor while vouching subscription −
 Subscription register should be verified.
 Verification of subscription received during the year and the subscription receivable.
 Counterfoil of cash receipt should be verified.
Sale of Fixed Assets
 To check minutes of the meetings of the Board of Directors.
 Sale agreement or sale contract.
 Verification of agent account if sale is made through an agent.
 Profit or Loss on sale of fixed assets should be booked to revenue account.
 Authorization of sale of fixed assets.

Vouching of Cash Payments (Credit Side of Cash Book)

Opening Balance
The opening balance of cash book can never be credited because cash of company cannot be
in negative but the credit bank balance represents the overdraft account from bank or
utilization of cash credit limit as sanctioned from bank.
Payment to Creditors
Payment to creditors may be examined by the following −
 Receipt issued by the creditors.
  If the creditor is paid amount as full and final settlement, the balance amount, if any
stands in the ledger account of the creditor; this amount should be credited to discount
received.
 If any advance payment is made to creditor that should be clearly mention.
 Statement of account of creditor.
Payment of Salaries
Depending upon the adequacy of internal control system in an organization Auditor will
decide his audit Program. It is very important for Auditor to check the following −
 Attendance record of employee and salary register.
 Appointment letter of new employees.
 Comparison of current month salary with last month’s salary and if there is any
abnormal change in amount, Auditor should verify the same.
 Alteration in amount of deductions on account of advance, loan, fine, funds, insurance,
TDS, etc.
Payment of Wages
At the time of vouching of wages paid, the Auditor should verify the following points to
avoid misappropriation of cash −
 Adequacy of Internal Control System.
 Payment of wages at higher rate than allowed.
 Payment shown to ex-workers in the current month.
 Lower or non-deduction of advance or other deductions due.
 Payment to fictitious workers.
 Payment to workers who were absent from duty.
 Wages sheet should compare with wages register.
Purchase of Plant and Machinery
The Auditor should pay attention to the following −
 Purchase invoice of machinery.
 Freight inward charges, installation charges, erection and commissioning charges
should be capitalized.
 Treatment of Excise duty according to the excise rules.
Purchase of Land & Building
Purchase of Land and Building can be vouched as follows −
 Study of Lease hold agreement, if land is purchased on lease hold basis.
 Payment should be as per lease term.
 All the expenses incurred to acquire lease hold property should be debited to
respective property account.
Rent Paid
Consider the following points for the verification of rent by the auditor −
 Rent Deed.
 Rent receipt from Land lord.
  Provision for un-paid rent at the end of the year.
Insurance Premium
Consider the following points for the verification of Insurance Premium −
 Insurance policy issued by the Insurance Company.
 Insurance premium receipt
 Insurance premium should not be related to any official of the company.
Income Tax
Consider the following for the verification of Income −
 Advance Tax Challan
 Self-Assessment Tax challan
 Income Tax demand notice
 Assessment order
Excise Duty
Consider the following for the verification of Excise Duty −
 Rate of Excise Duty
 Excise records and sale invoice for verification of excise duty
Commission on Sale
Consider the following for the verification of Commission on Sale −
Agreement of sale.
Rate of commission on sale.
VOUCHING OF CASH SALES :-
Cash sales can be vouched by the auditor in the following way :
1. Internal Check :-
Auditor should evaluate the internal check and if it is proper system then he should
rely on it.
2. Checking Of Memos :-
Auditor should check the cash sales memos and compare it with the daily summaries
of salesman and cashier.
3. Entry In Cash Book :-
Auditor should also check the figures of the salesman and cashier summaries entry in
the cash book.
4. Checking Of Cash Register :-
If cash register is used, auditor should check the total daily rolls with the entries in the
cash book.
5. Checking Of Cash Book :-
Auditor should compare the cash book with the general ledger.
6. Checking Of Price Lists :-
Auditor should obtain and verify it price lists and other instructions by the authorize
persons regarding the cash sales.
7. Guidance To Client :-
If internal check system is not effective than auditor should inform the client about the
dangers of frauds. He should also suggest some measures.
Deferred Revenue Expenditure
Some non-recurring and special nature of expenditure for which heavy amount is incurred and the
benefits for the same spreads to upcoming years, such expenditure is to be treated to assets of a firm.

Revenue Expenses Which are Treated as Capital Expenditure

Let us now discuss in brief the revenue expenses which are treated as capital expenditure.
Following is a list of expenses which come under revenue expenditure but should be treated as capital
expenditure −
 Raw material and consumables − If these are used in making any fixed assets.
 Cartage and freight − If these are incurred to bring in fixed assets.
 Repairs & renewals − If incurred to enhance life or efficiency of the assets.
 Preliminary expenditure − This is the expenditure incurred during the formation of a
business.
 Interest on capital − If paid for construction work before the commencement of production
or business.
 Development Expenditure − In some businesses, long-term development and heavy amount
of investment is required before starting production especially in Tea and Rubber plantation;
such expenditure should be treated as capital expenditure.
 Wages − If paid to build up assets or for erection and installation of Plant and Machinery.

Deferred Revenue Expenditure

Some non-recurring and special nature of expenditure for which heavy amount is incurred and the
benefits for the same spreads to upcoming years, such expenditure is to be treated as capital
expenditure and will show as assets of the firm. Part of the expenditure should be debited to Profit &
Loss account every year. For example, if heavy amount is paid for the advertisement of a product, the
benefit of which are expected four years down the line, then it should be debited as 1/4 of the part in
Profit & Loss account as revenue expenses and balance 3/4 will be shown as assets in Balance Sheet.

Auditor’s Duty regarding Deferred Revenue Expenditure

Let us now understand an Auditor’s duty regarding deferred revenue expenditure. The duties are listed
below −
 The Auditor should investigate the whole transaction in totality to understand the treatment of
the transaction.
 The Auditor should check the complete details of transaction, like total expenditure incurred
initially, year wise amount written off and the amount carried forward to next year.
 Carried forward amount should be shown in Balance Sheet.
 The Auditor should ensure that the amount of exceptional loss should not be mixed with the
deferred revenue expenditure.

Capital and Revenue Profit

Premium received on issue of shares and profit on sale of fixed assets is main example of capital
profit and should not be treated as revenue profit. Capital profit should be transferred to capital
reserve account which is used to set off capital losses in future if any.
Capital and Revenue Receipts
Sale of fixed assets, capital employed or invested and loans are example of capital receipts. On the
other hand, sale of stock, commission received and interest on investment received are examples of
revenue receipts. Revenue receipts will be credited to profit and loss account and on the other hand
capital receipts will affect the Balance-sheet.
Auditor’s Duty regarding Capital and Revenue Receipts
 Knowledge about the nature of business is very important for an Auditor to decide the nature
of transaction; for example, purchase of motor vehicle is a revenue expenditure for a motor
vehicle dealer whereas, it is a capital expenditure for any other businessman.
 The Auditor should study and verify the complete transaction by obtaining relevant data and
documents relating to transaction.
 He may discuss any doubtful or controversial point with concerned official of a company
before reaching to any conclusion.
 The Auditor should observe the classification of transactions according to correct accounting
principles.
s

Deferred Revenue Expenditure

Let us now understand an Auditor’s duty regarding deferred revenue expenditure. The duties are listed below −
 The Auditor should investigate the whole transaction in totality to understand the treatment of the
transaction.
 The Auditor should check the complete details of transaction, like total expenditure incurred initially,
year wise amount written off and the amount carried forward to next year.
 Carried forward amount should be shown in Balance Sheet.
 The Auditor should ensure that the amount of exceptional loss should not be mixed with the deferred
revenue expenditure.
capital expenditure and will show as assets of the firm. Part of the expenditure should be debited to Profit &
Loss account every year.

Capital and Revenue Profit

Premium received on issue of shares and profit on sale of fixed assets is main example of capital
profit and should not be treated as revenue profit. Capital profit should be transferred to capital
reserve account which is used to set off capital losses in future if any.

Capital and Revenue Receipts

Sale of fixed assets, capital employed or invested and loans are example of capital receipts. On the
other hand, sale of stock, commission received and interest on investment received are examples of
revenue receipts. Revenue receipts will be credited to profit and loss account and on the other hand
capital receipts will affect the Balance-sheet.
Auditor’s Duty regarding Capital and Revenue Receipts
 Knowledge about the nature of business is very important for an Auditor to decide the nature
of transaction; for example, purchase of motor vehicle is a revenue expenditure for a motor
vehicle dealer whereas, it is a capital expenditure for any other businessman.
 The Auditor should study and verify the complete transaction by obtaining relevant data and
documents relating to transaction.
  He may discuss any doubtful or controversial point with concerned official of a company
before reaching to any conclusion.
 The Auditor should observe the classification of transactions according to correct accounting
principles.

UNIT – IV

Verification: Meaning, Definition, Objectives

Meaning
Verification means the act of assuring the correctness of value of assets and liabilities in the
organization. It refers to the examination of proof of title and their existence or confirmation
of assets and liabilities on the date of Balance Sheet.

Definition
Spicer and Pegler defines Verification as, “An inquiry into the value, ownership and title,
existence and possession and the presence of any charge on the asset”.

Objectives
The objectives of verification are as follows:
1. To show the correct value of assets and liabilities.
2. To know whether the Balance Sheet exhibits a true and fair view of the state of
affairs of the business.
3. To find out the ownership, possession and title of the assets appearing in the
Balance Sheet.
4. To find out whether assets are in existence.
5. To detect frauds and errors, if any while recording assets in the books of the
concern.
6. To find out whether there is an adequate internal control regarding acquisition,
utilization and disposal of assets.
7. To verify the arithmetic accuracy of the accounts.
8. To ensure that the assets have been properly recorded.

Valuation: Meaning, Definition, Objectives, Methods

Meaning
Valuation means finding out correct value of the assets on a particular date. It is an act of
determining the value of assets and critical examination of these values on the basis of
normally accepted accounting standard. Valuation of assets is to be made by the authorized
officer and the duty of auditor is to see whether they have been properly valued or not.
Definition
R.Batliboi, “A company’s Balance Sheet is not drawn for the purpose of showing what the
capital would be worth if the assets were realized and liabilities paid -off, but to show how
the capital stands invested”.

Objectives of Valuation
1. To assess the correct financial position of the concern.
2. To enquire about the mode of investment of the capital of the concern.
3. To assess the goodwill of the concern.
4. To evaluate the differences in the value of the asset as on the date of purchase and
on the date of Balance Sheet.

Methods Of Valuation
Valuation of various assets can be made by using different methods of valuation of fixed
assets. Some of the major methods are as follows:

1. Cost Price Method

In this method, valuation of assets is made on the basis of purchase price of the assets. This
price refers to the price at which an asset is acquired plus expenses incurred in connection
with the acquisition of an asset. It is a very simple method of valuing assets.
2. Market Value Method
Valuation of assets can be made on the basis of market price of such assets. But if same
nature of assets is not available in the market, it is very difficult to determine the value of
such assets. So, there are two methods related to it. They are:
i. Replacement Value Method
It represents the value at which a given asset can be replaced. This method of valuation of
assets can be done only in the case of replacement of the same asset.
ii. Net Realizable Value
It refers to the price in which such asset can be sold in the market. But expenditure incurred
at the sale of such asset should be deducted.
3. Standard Cost Method
Some of the business organizations fix the standard cost on the basis of their past experience.
On the basis of standard cost, they make valuation of assets and present in the Balance Sheet.
4. Book Value
This is the value at which an asset appears in the books of accounts. It is usually the cost less
depreciation written off so far.
5. Going concern or Historical Value or Conventional Value or Token Value
It is equivalent to the cost less a reasonable amount of depreciation written off. No notice is
taken of any fluctuation in the price of the assets. Reason for this is that these assets are
acquired for use in the business and not for resale.
6. Scrap Value
This method shows the value realized from sale of an asset as scrap. In other words, it refers
to the value, which may be obtained from the assets if it is sold as scrap.

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

 Sovereignty: The auditor should not make his decisions to the will of his clients or any
other person and should keep himself free from any sympathy allegedly and prepare
financial statement of the management in an impartial way.
 Honesty: The auditor should always maintain sincerity while operating his duties.
 Conversation Skills: In the course of managing a process of audit, the auditor has to
collaborate with numerous officers and parties; thus, he should have excellent
conversation skill.
  Maintain Confidentiality: The auditor should maintain the privacy of the books of
accounts unless authorized by the client or enforced by the law.
 Expertise: The auditor must have an awareness about the client’s business and the
current economic conditions, and a consciousness about the laws such as taxation laws,
companies act and partnership act.
 Sensitivity: The auditor has to deal with different persons while performing his duties;
he has to handle his sub-ordinates as well as various clients; thus, he should have the
intelligence to handle them in any situations.
 Coherent Skills: The auditor must have the ability to analyze and illustrate the
problems so that he can appropriately handle them when faced.
Duties of an Auditor

1. Duty to Produce an Audit Report

 Description to members: An auditor must generate a statement to the members, yet he

is not enforced to send a report to every member.
 Review of the auditor’s report: The report prepared by the auditor intends to read in
the general meeting of the company. The report shall be open to any member for
inspection.
 Capacity of audit report: The audit report should reveal the accounts maintained by
the auditor, i.e. profit and loss statement, balance sheet of the company and the
chronicles annexed with these accounts.
2. Duty to Produce Competent Disclosures in an Audit Report

 Report on Appropriate and Impartial View: The auditor shall state whether in his
impression and to best of his knowledge and bestow to the description given to him, the
balance sheet and profit and loss account give:

 The instruction prescribed by the law; and

  An authentic and fair view of the state of affairs of the company.
 Report on Principal Allegation: The audit report should state:
 Whether he has gathered all the material and justification.
 Whether from his point of view, appropriate books of accounts have been
conserved.
 Whether in his view, all accounting standards have assembled.
 Whether any director who has disqualified from being appointed as a director.
 Report on CARO: The auditor has to address all the elements specified in CARO.
 Report on Precise Inquisition: This report describes:
 Whether loans and advances built by the company in support of security have
been perfectly captured, and the circumstances on which they have been formed
are not biased to the concern of the company or the members of the company.
 It states whether the book of entries is unfavourable to the interests of the
company.
 Report on specific inquiries should state whether the retail price of the shares,
debentures, and other guarantees held by the company is below its purchase
price.
3. Duty to Give a Sense for Accomplishment

 The aspect in which competence is made in the auditor’s report should be as such that
no allowance for doubt in the public minds. A qualification should deliver the full
description and not simply create grounds for the impression of enquiry.
 The auditor should appraise, wherever possible, the enact of the financial statement’s
capabilities, if the same is material.
 It states whether it is not achievable to accurately quantify the consequence of the
qualifications he may use the authority estimates or indicate the sense for not
appraising the requirement’s effect.
4. Duty to Endorse the Audit Report
The audit report or any other chronicle mandatory to be signed or validated by the auditor
may be endorsed by:

 A person selected as an auditor of the company.

 A firm selected as an auditor or by a partner of the firm exercising in India.
Disqualification of Auditor
According to Provisions of Section 141(3) of the Companies Act, 2013 , following persons
shall not be eligible as auditor of the company: ‐

a) A body corporate other than LLP registered under the LLP Act, 2008

b) An officer or employee of the company.

c) A person who is partner or who in the employment, of an officer or employee of the

company.
 d) A person who or his relative or partner

 (i) is holding any security/interest in the company or its subsidiary or of its holding or
associate company or subsidiary of such holding company. It has been further provided that
an relative may hold security or interest in the company of face value not exceeding one lac
rupees.
 (ii) is indebted to the company or its subsidiary, or its holding or associate company or
subsidiary of such holding company, in excess of Rs. 5 lacs rupees
 (iii) has given guarantee or provide any security in connection with the indebtness of any
third person to the company or its subsidiary, or its holding or associate company or a
subsidiary of such holding company for value in excess of Rs. 1 lacs.

e) A person or a firm who (whether directly or indirectly) has business relationship with the
company, or its subsidiary, or its holding or associate company or subsidiary of such holding
company or associate company.

Here the business relationship shall be construed as any transactions enter into for a
commercial purpose except: ‐

 a) Commercial transactions which are in the nature of professional services permitted to be

rendered by an auditor or audit firm by the professional bodies regulated such members.
 b) Commercial transactions which are in ordinary course of business of the company at arm’s
length price as customer.

f) A person whose relative is a director or is in the employment of the company as a director

or key managerial personnel.

g) A person

 (i) who is in full time employment elsewhere or

 (ii) a person or a partner holding appointment as its auditor is at the date of such appointment
or reappointment holding appointment as auditor for more than 20 companies.

h) A person who has been convicted by a court of an offence involving fraud and a period
often years has not elapsed fromthe date ofsuch conviction.

i) Any person whose subsidiary or associate company or any other form of entity is engaged
as on the date of appointment in consulting or specialised services in reference to provision of
Section 144 of the Companies Act, 2013.
Further According to Provisions of Section 141(4) of the Companies Act, 2013, where a
person appointed as auditor of the company incurs any of the disqualification mentioned in
Section 141(3) of the Companies Act, 2013 after his appointment, he shall vacate his office
as such auditor and such vacancy shall be deemed to be casual vacancy in the officer of the
auditor.

It must be noted that the aforesaid provisions are applicable to all types of auditors i.e. cost
auditors, statutory auditors and secretarial auditors.
Procedure for removal of Auditor
[Section 140 and Rule 7 of the Companies (Audit and Auditors) Rules, 2014]
1. Opportunity of being heard to Auditor
> The company shall give notice to the Auditor of its intention to remove from their office in
the company.
> The company shall give a reasonable opportunity of being heard to the concerned auditors
to explain themselves why they shouldn’t be removed from the office
2. Board Resolution
> The Board being satisfied with the reasons of removal shall pass a resolution for the same
and authorise any official for filing an application with the Central Government
3. Central Government/Regional Director approval
> Make an application to the Central Government in e-form ADT-2 within 30 days of passing
Board Resolution along with Board resolution as an attachment
4. Special Resolution
> After obtaining approval of the Central Government, the special resolution has to be passed
at a General Meeting of the shareholders within 60 days of receipt of approval of Central
Government.
> File e-form MGT-14 with ROC for registration of special resolution.
Rights & Powers of Auditor
1. Right of access to Books of account & Vouchers [Sec. 143(1)]
2. Right to obtain information & explanation [Sec. 143(1)]
3. Right to visit branch offices & access to branch account
4. Right to receive notice & attend general meeting
5. Right to make representation
6. Right to report to members
7. Right to sign audit report
8. Right of seeking opinion of an expert
9. Right to receive remuneration
Right of access to Books of account & Vouchers
The auditor has a right to access, at all times the books of accounts & vouchers of the
company, whether kept at head office or elsewhere. It is an absolute right & is not subject to
any restriction, exception or qualification.
Right to obtain information & explanation
An auditor of the company is entitled to required from the officers, of the company such
information & explanation as he may think necessary for the performance of his duties as an
auditor.
Right to visit branch offices & access to branch account
Where the accounts of any branch office are audited by a person other than the company’s
auditor, the company’s auditor is entitled to visit the branches, if he deemed it necessary to do
so for the performance of his duties as an auditor.
Right to receive notice & attend general meeting
The auditor has the right of receiving all the notices & other communications relating to any
general meeting of a company which any member of the company is entitled to have.
Right to make representation
The retiring auditor is entitled to receive a copy of the special notice intending to remove him
or proposing to appoint any other person as auditor. The retiring auditor has a right to make
his representation in writing & request that the same is circulated among the members.
Right to report to members
The auditor has right as well as duty to make a report to the members on the accounts
examined by him & to state whether in his opinion & to the best of his information &
explanation given to him.
Right of seeking opinion of an expert
In respect of any special technical matters, the auditor is entitled to consult & take the
opinion of an expert. He is also entitled to take legal advice so as to discharge his duties
efficiently.
Right to receive remuneration
The auditor has an inherent right to receive remunerations for auditing the accounts of the
company, though such rights accrue only after he has completed the work.
Liabilities of an Auditor
I. Civil Liability
(i) Liability for Negligence
(ii) Liability for Misfeasance
II. Criminal Liability
III. Liabilities to Third Parties

I. Civil Liability
i) Liability for Negligence: Negligence means acting carelessly or failing to perform a duty
enjoined upon a person. An auditor is appointed by the shareholders and he is expected to
safeguard the interests of them.
ii) Liability for Misfeasance: The term ‘misfeasance’ means breach of trust or breach of
duty imposed by law or negligence in the performance of duties, which has resulted in some
loss or damage to a company or its property.
II. Criminal Liability
1. Making default in report wilfully, Section 233: If the auditor wilfully makes a
default in making his report to the share holders according to the provisions of
 Sections 227 and 229. If his default is proved wilful, he will be punishable with fine
which may extend to Rs. 1,000.
2. Not helping the Inspector, Section 240: The auditor of a company is required to
help an inspector appointed by the Central Government to investigate the affairs of
the company. If the auditor does not do so he is punishable with the imprisonment
upto six months or with fine upto Rs. 3,000 or with both.
3. Not assisting the Prosecution, Section 242: When on the basis of report submitted
by an inspector, the Central Government takes action and prosecutes any person
connected with the company affairs, the auditor is required to assist the prosecution. If
the auditor does not do so, he is guilty of contempt of court and punishable with
imprisonment upto six months or with fine upto Rs. 500 or both.
4. In case of not returning the documents, Section 277: In the course of winding up of
a company, the auditor is required to return to the court any documents in his
possession. If the auditor fails to appear before the court, he can be arrested.
5. Public Examination by Court, Section 478: On the application of the official
Liquidator, the company auditor can be publicly examined in the High Court. The
notes shall be taken down and be signed by the auditor. Such signed notes may be
used in evidence against him in any civil or criminal proceedings.
6. Falsifications in Accounts, Section 539: If the auditor is found guilty of distruction,
mutilation, alteration, falsification or secreting of any books, papers or sacurities, he
may be held responsible. Further, if the auditor makes any false or fraudulent entry in
any register, books of accounts or documents of the company, he will be liable for
punishment with imprisonment upto seven years and shall also be liable to a fine.

III. Liability to Third Parties

Negligence is a breach of the “duty to take care”. In all those employments where peculiar
skill is requisite, if one offers his services, he is understood as holding himself out to the
public as possessing the degree of skill commonly possessed by others in the same
employment. Hence, negligence implies acting carelessly or failing to perform a duty.
 Audit of educational Institutions
Study of the trust deed or regulations.
 Examine the previous financial statements.
 Noting of provisions applicable.
 Evaluation of internal control system.
 Examine the minute of the meeting and resolution.
 Verification of students fee register.
 Evaluation of internal control system.
 Examine the minute of the meeting and resolution.
 Verification of students fee register.
 Authorization for fee concessions .
 Verification of cashbook with respect of counterfoils of receipts and payments.
 Examination of capital fund regarding admission fees.
 Verify free studentship and concessions .
  Confirmation of fines for late payment or absence.
 Check hostel dues recovery.
 Verification of rental income or expenses.
 Examine the bank pass book of different nature.
 Verification of investment register and also ask about any interest and dividend from
investment if any.
 Verify grants from any local bodies or Government with reference to memo or
sanction letter.
 Reporting of any arrears.
 Vouch counterfoils of receipts taken from donors.
 Confirmation of any deposits and caution money and its treatment.
 Examination of expenses for library books and sports equipments.
 Checking of acknowledgement letter if any with regards to scholarship.
 Examination of payments with respect to prizes if any.
 Examine the salary register.
 Verify the Provident Fund Register.
 Check annual report with accurate supporting documents.
 Vouching of all establishment expenses.
 Vouch payment for electricity and water bill.
 Examination of payment for hostel maintenance and any other miscellaneous
expenses.
 Inspection of facilities given to students under any schemes associated with
Government.
 Verification of Fixed Assets Register.
 Verify ownership and existence of Fixed Assets .
 Confirmation of statutory compliance i.e. P.F., Income Tax etc. Verification of
separate statements of accounts for different funds. Checking of calculation of salary
payable and deductions.

Audit of Insurance Companies

o Premium Received
o The auditor should check that whether the insurance premium received by the
Insurance Company from the policyholder is set aside in a separate bank
account. Also, such a separate bank account should not be used for financing
day to day expenditure.
o A cover note is a temporary document that is issued before the issuance of the
final policy. The auditor must check that those cover notes should be serially
numbered.
o Claims
o Due importance should be given by the auditor to the claims which are higher
in value as compared to others.
o The auditor should verify whether the provision has been made for all the
unsettled claims and should keep in mind that the amount of provision does
not exceed the insured amount.
o In the case of co-insurance, the agreement should be carefully examined and it
should be verified that claim is only paid for the company’s share in co-
insurance.
o The claim paid by the company should be sanctioned by the appropriate
authority.
o Operating Expenses
o The auditor should check expenses exceeding 5 lakhs or 1 percent of premium
should be separately disclosed.
o Commission
o The commission is paid as a certain percentage of the premium brought in by
the agent. The correctness of the same should be checked by the auditor.
o TDS should be deducted wherever it is due.
o Entries should be checked in the books, whether accounting made on an
accrual basis.
o Investments
o Investments by the insurance company should be made in approved securities.
However, investments in other than approved securities can be made but they
should not exceed 25 % of the total investments and should be made only after
the approval of the board of directors.
o Investment should not be done in the shares and debentures of other
investment or insurance company exceeding 10% of own assets or more than 2
% of the subscribed capital of such investment or insurance company.
o Investment cannot be made in the capital of a private company or the funds of
its policyholders outside India.
o Cash & Bank Balances
o The bank account of the company should be operated by authorized personnel
only. The auditor should check the proper controls in place.
o To reconcile the difference in the books and the balance with the bank, BRS
should be prepared.
o Formulation of various committees
o The auditor should check whether the company has constituted all the required
committees which are required to be constituted namely Risk Management
Committee, Policyholders Protection Committee, Audit Committee
Investment Committee, Corporate Social Responsibility Committee and
Profits Committee, Nomination and Remuneration Committee.
o Relevant Laws Applicable
o he Auditor should have knowledge of relevant law and acts which apply to the
Insurance companies. The following acts contain the provisions which are
relevant during the audit of the insurance companies: The Insurance Act 1938,
 The Companies Act 2013, The Life Insurance Corporation Act 1956, The
Insurance Rules 1939, and The Income Tax Act 1961.
 Special features of co-operative Audit.
 Examination of overdue debts:
 Auditor shall report these overdue debts as for period from 6 months to 5 years and
more than 5 years. Furthermore, analysis is done by the auditor in viewpoint of
recovery of these debts and these are classified as good debt or bad debts.
AUDIT OF CO OPERATIVE SOCIETIES:
Overdue interest:
Overdue interest should be excluded from interest outstanding and accrued due while
calculating profit. In practice an overdue interest reserve is created and the credit of overdue
interest credited to interest account is reduced.

Certification of bad debts:

As per the law, bad debts can be written off only when they are being certified by the auditor
as bad where the law requires it and if not then managing committee of society must
authorize the write-off.

Valuation of assets and liabilities:

They will have to ascertain the existence , ownership and valuation of assets. Fixed assets
should be valued at cost less adequate provision for depreciation.
Adherence to co-operative principles:
The auditor will have to ascertain that how far the objective for which the co-operative
organization is set up , have been achieved in the course of its working. The assessment is not
necessary in terms of profits , but in terms of extension of benefits to its members who have
formed it.

Observations of the provisions of the act and rules:

The financial implications of the infringements which are pointed out by the co-operative
societies Act and rules and bye-laws, should be assessed by the auditor and they should be
reported properly.

Verification of member’s register and examination of their pass

books:
Examination of the entries in member’s pass books regarding the loan given and its
repayment and confirmation of loan balances in person is very much important in co-
operative societies to assure that the entries in books of accounts are free from manipulation.

Special report to registrar:

 During the course of audit if the auditor notices that there is some serious irregularity then he
has report this irregularity to the registrar by drawing his specific attention to the point. The
registrar on receipt of such special report may take necessary action against the society.

Audit classification of the society:

After the judgement of an overall society, the auditor has to award a class to the society. This
specific class is awarded by the auditor as accordance to the criteria given by the registrar. It
is to be noted that if management is not satisfied by the class given by the auditor then they
may appeal to the registrar.

Discussion of draft audit report with managing committee :

On conclusion of the audit , they should ask to the secretary of the society to convene
managing committee meeting to discuss the audit draft report. The audit report should never
be finalized without the discussion with the managing committee.

Audit Report
Audit report is the final stage of audit process. The results of the audit are communicated
through audit report. Audit report is the written opinion of an auditor regarding companies
financial statements. Audit report is a document prepared by an auditor to certify the financial
position and accounting records of a firm.

Meaning of Audit Report

Audit report is the statement included in the financial statements. It contains the opinion of
the auditor in financial statements. The auditor reports to the shareholders who have
appointed him. He has to provide his opinion on the truth and fairness of financial statements.

Definition of Audit Report

According to Cambridge Business English Dictionary, Audit report is defined as a formal
document that states an auditor’s judgment of a company’s accounts.
1. Title of the report
The title of audit report should help the reader to identify the report. It should disclose the
name of the client. The title distinguishes the audit report from other reports.
2. Name of the Addressee
The addressee normally refers to the person who appoints the auditor. If a company appoints
the auditor, the addressee should be shareholders. As per law, the complete address of the
addressee is required. Addressee for the statutory audit shall be shareholders and in case of
Special Audit, it is Central Government.
3. Introductory Paragraph
The introductory paragraph should specify that it is the auditor’s opinion on financial
statements audited by him. The period covered by financial statements should be stated with
exact dates.
4. Scope
This part should include the matter-of-fact relating to the manner in which audit examination
was made. The audit examination should cover company’s accounts, Profit and Loss
Account, Balance Sheet and Cash Flow Statements. The examination should be as per the
relevant law. The auditor should not curtail or limit any examination task.
5. Opinion
The auditor’s opinion on the books of account and financial statements examined by him is
based on the information and free from bias. The auditor has to give his opinion as follows:
 Whether the financial statements are arithmetically correct and correspond to the
figures recorded in the books of accounts.
· In case of unqualified opinion, whether the financial statements represent a true and
fair view of the state of affairs and the results of operations.
· In case of qualified opinion, if the Balance Sheet and Profit and Loss account do not
present a true and fair view, the reasons for what and where is wrong.
6. Signature
The signature part should include the manual signature of the auditor.The personal name and
signature of the auditor should be given. If the auditor is a firm, the signature in the personal
name and firm name should be given.
7. Place of Signature
This should include the location of the auditor or the auditor firm, which is ordinarily their
city.
8. Date of the Report
The date of completion of the audit work should be mentioned in this section.

Contents of Audit Report

As per Sec. 143 of the Companies Act, the auditor’s report shall also state—
a. whether he has sought and obtained all the information and explanations which to the best
of his knowledge and belief were necessary for the purpose of his audit and if not, the details
thereof and the effect of such information on the financial statements;
b. whether, in his opinion, proper books of account as required by law have been kept by the
company so far as appears from his examination of those books and proper returns adequate
for the purposes of his audit have been received from branches not visited by him;
c. whether the report on the accounts of any branch office of the company audited under sub-
section (8) by a person other than the company’s auditor has been sent to him and the manner
in which he has dealt with it in preparing his report;
d. whether the company’s Balance Sheet and Profit and Loss account dealt with in the report
are in agreement with the books of account and returns;
e. whether, in his opinion, the financial statements comply with the Accounting Standards;
f. the observations or comments of the auditors on financial transactions or matters which
have any adverse effect on the functioning of the company;
g. whether any director is disqualified from being appointed as a director under sub-section
(2) of section 164;

Types of Audit Report

The audit report may be of the following types:
1. Clean or Unqualified Report
Clean or Unqualified report will be given by the auditor if the auditor is satisfied that the
accounts, Balance Sheet, Profit and Loss Account and Cash Flow statement do represent a
true and fair view and they are prepared in conformity with the accounting principles and
statutory requirements.
2. Qualified Report
In qualified report the auditor believes that overall financial statements are not fairly stated.
The reasons for giving Qualified Report are be as follows:
i. The books of accounts, Profit and Loss Account and the Balance Sheet do not represent the
true and fair view of the state of affairs and results of the operations, due to lack of
conformity with the accounting principles and statutory requirements,
iii. The information requested by the auditor is not furnished,
iv. Proper books of account are not maintained as required by law,
v. Part of audit examination done by other auditors.
3. Adverse or Negative Report
When there is sufficient basis for the auditor to form an opinion that the whole accounts and
financial statements, do not present a true and fair view of the financial condition and results
of operation, the adverse or negative opinion will be given. The adverse or negative report
will be given on the following grounds:
· When the auditor is not satisfied with the truth and fairness of financial statements,
· Non conformity with the Generally Accepted Accounting Principles,
· Mistakes, discrepancies and material misstatement in the financial statements,
· Omission of a material disclosure.
4. Disclaimer Report
The auditor may disclaim or refuse opinion on the accounts, Profit and Loss Account
and the Balance Sheet, when he does not have sufficient information to base his opinion. In
the scope and opinion paragraph, the auditor should give disclaimer information. This may
happen on the following grounds:
· The auditor has not been able to obtain sufficient information to form his opinion,
· The audit examination is not adequate to form an opinion,
· There are some material un-determined item in audit examination.