UNIT 1

PRINCIPLES OF AUDITING
Auditing – origin – objectives – types – advantages and limitations –
qualities of an auditor – audit programmes
Auditing :-
Auditing is concerned with making an analytical and certifiable
examination of the books of accounts, checking and verification of
evidence in support of entries appearing in the book of account and
ascertaining the authenticity of insertions in the financial statements.
An auditor is to report whether in this opinion, the profit or loss
account represents a stress and fair picture of the profit or loss and the
balance sheet,a tree and fair picture of the financial position of the
business.
Origin of Authority:-
The auditing has its origin in the necessity in the development of
some systems to put a check on the persons where duties where to record
receipts and disbursements of money on the behalf of owners.
In the ancient days auditing was confined to public accounts only.
With the development of tracks and commerce the need for
recording transaction was put by businessman. He started taking the
services of the other for recording these transactions.
This system of doubts entry was capable of all kinds of mercantile
transactions. He also described and responsibilities of an auditor. With the
development of facilities, communication and transport means, the concept
of corporate management had taken birth. The management and the owner
were separated.
Share holders need an independent person having expert in edge of
accounts to report on the working of the company and the truthfulness of
the profit or loss and financial position disclaimed by the management.
 In these days independent firms of professional account have come
into existence to audit the accounts of mercantile firms,still the
government accounts and audit are with separate government departments.
Functions of Auditing:-
1. Reversing systems and procedures of business
2. Examining documentary evidence to establish the accuracy of
the transactions.
3. Reversing the system of accounting and internal control.
4. To verify the evaluation and existence of assets.
5. To examine the mathematical accuracy of accounting
statements.
6. To see whether the statutory requirements have been come.
7. Reporting as to what extinct, accounts exhibit truth.
8. To make recommendations for improvements in internal
accounting systems.
9. To verify the distinction between capital and revenues.
Objectives of Auditing:-
This main object of the audit is to find the reliability of financial
position and profit and loss statements. The main objective is not detection
of frauds and errors, enters the auditor is appointed for only this purpose.
a. Main object of Audit:-
The main object of an audit is to verify and establish that
at a given date balance sheet presents tree and fair view of
financial position of the business and the profit and loss
account gives the true and fair view of profit or loss for the
accounting period. It is to be established that accounting that
accounting statements satisfy degree of reliability.
It is requested under companies act that whether the accounts
are kept according to the act and whether they show true and
fair view of the state of affairs of the company.

The auditor has to conduct an independent review financial

statements about their reliability; to form such as opening the
 auditor must examine the system of internal control and into
check, arithmetical accuracy of books of accounts validity of
transaction entered in the books of accounts, validity of
transaction entered in the books and confirm the existence and
values of assets and liabilities.
b. Subsidiary objects of an audit:-
1. Detection and prevention of fraud:-
According to SAP-A issued by ICAI fraud refers to intentional
misrepresentation of financial interfere by one or more
individuals among management, employees or third parties.
Fraud may involves,
a. Manipulation, falsification or alteration of reserve document
b. Misappropriation of assets.
c. Suppression or omission of effect of transaction from
records or documents.
d. Recording of transaction without substance.
e. Misapplication of accounting policies.

Types of Audit:
Types of audit

Basis

Scope Nature of activity Form of org Who conducts Legal Necessity

Private Govt
General specific
Independent Internal

Commercial Non-Commercial Statutory Non statutory

 Partial
Company Sale trader
Occasional Co-operative Firm
Intension Trust Individuals
Cost Banking co Others
Mgt Insurance co
Performance Electricity co
Standard Statutory Corporate
In depth
Post and vouch Method of examination
Operational
Cash
Continuous Balance sheet

On the basis of scope:-

Is audit examination can be general on specific? A general audit can
be independent or internal. On the other hand, specific audit concentrates
on a particular areas object or may be period.
On the basis of nature of activity:-
The activities which the subject matter of audit may be commercial
or non-commercial. The nature of activity will determine the scope and
approach of the audit whole audit of profit more organisation can be called
commercial audit the audit of non profit organisation involved in
promotion of education, health or environment etc, on non-profit basis.
On the basis of form of organisation:-
On the basis of form of org the audit may be classified as private &
government. The method of appointment and reporting will differ
considerately in these two types of audit.
On the basis of who conducts the Audit:-
On the basis the audit is classified independent or internal audit. An
independent audit is conducted by an independent, professionally qualified
person who is not an employee of the organisation by hiring his service.
On the other hand, internal audit is conducted by employees of the
organisation to enable better exercise of management control.
On the basis of legal necessity:-
On the basis the audit can be classified into statutory and non-
statutory audit. Where law, through some act requires compulsory audit of
an organisation or activity such audit is called statutory audit. Where audit
is conducted without any legal necessity or requirement, the audit is called
non-statutory audit.
On the basis of method of examination:-
When the auditor and his staff is constantly engaged in the work
during the whole year or period at regular or irregular intervals, the audit is
known as continuous audit. On the other hand, the audit conducted after
annual closure of accounts is known as completed audit. Periods call audit,
annual audit or final audit. When the audit is concerned with the items of
balance sheet only it is called balance sheet audit.
Advantages of Audit:-
For the enterprise:-
 Employee in charge of maintenance of books of accounts and
other records and regular, careful and systematic in their work.
 Errors and frauds, if any, committed by employees of the
business are promptly detected. In any case, knowledge of an
impending audit exercise a moral check on the employees who
might otherwise be tempted to commit defalcation and
embezeder.
 Loans and credit can easily be obtained on the basis of audited
accounts which are widely regarded as a reliable index to state
of affairs of the enterprises.
 In case a sunning business is proposed to be said purchased
consideration can easily be determined on the basis of audited
accounts.
  Audited statements or accounts provide a mutually satisfactory
basis for the resolution of disputes as to higher wages and
bonus payments to workers.
 In case of loses or damage to business property, audited
accounts facilitate the determination of claims against the
insure
 Weakness of the existing system of internal check and internal
control may be detected such that remedial steps can be
initiated.
 Audit is means to ascertain whether the undertaken is in fact
maintaining the registers and books of account as required
under the law.
 The enter can benefit from the professional competence and
experience of the auditor who is always at hard to appraise the
efficiency of various control measures and to suggest
improvement therein.
For owners of the enterprise:-
In a sole proprietary business in the care of which audit is not
compulsory audited statements of accounts provide a proof that all
business transactions have been duly accounted for and there is no
error or fraud.
In a partnership firm, audited accounted serve as an evidence of
proper management of the affairs of business by the active partner
and employees of the firm. Such account are also of great helps into
settlements of accounts in case of admission retirement or death of a
partner.
In a joint stock company, shareholder duly on the audited
statements of accounts to satisfy themselves that the affairs of the
company are being smoothly run and their investments is safe.
In the case of trusts, cooperative societies, etc. audit serves as
an evidence for the beneficiaries / members etc that their interest are
being properly and efficiently looked after.
For others:-
Audited statement of accounts are also edited upon by outsides for
various purposes. In other case of banks, for example audited statements
of a business serve as reliable guide to make decisions as to loan to that
business. Insurers also ruly on audited statements to settle claims in
respect of damage to re loss of business assets. For determination of
liability under income-tax, sales tax, wealth tax etc. tax authorities
unquestioningly accept the audited statements.

Limitation of auditing

Conceptual restriction:-
Auditing has traditionally been regarded as a practice subject dealing
mainly with procedures and techniques of checking, ticking, vouching, etc.
As a result, several vital aspects such as finances managerial efficiency
and effect ions business ethics etc are ignored as being outside its scope. In
the circumstances, it hardly be expected to do justice to its objects.
Postmodern on prepared accounts:-
Auditing begins where accountancy ends. The auditor may be no
where around when the accounts are being finalised. Therefore it may not
be possible for him to discover clever manipulatiom in the books and
accounts at the prepastory stage. Thus, many questionable facts may
remain undiscovered even after the accounts at the preparatory stage.
Thus, many questionable facts may undiscovered even after the accounts
have been audited.
Dependence on incidence information:-
Books of accounts of a business , however complete they may be
in every respect , do not tell the complete story asto transaction recorded
this in. As such an auditor has of necessity to seek additional information,
classification and explanation from various personal of the enterprice.
Inadequate or faulty evidence:-
Though an auditor will be well within his right to tap external for
evidence to support the proposition made in the accounting statements,
such evidence may not always be wholly reliable.
Application of faculty technique:-
 Collection of adequate evidence in support of any proposition made
in the books of account depends on the types of audit techniques employed
for the purpose. Where an audit technique is not consistent with the nature
or type of the business enterprise or with the method of record – keeping
followed by it, it will not provide the right kind of evidence and even
audited accounts may not tell the entire story.
Formation of faulty judgement:-
The auditor judgement as to correctness and fairness of the
propositions in the books of account is based on an objective evaluations
and critical review o the evidence collected by him through appropriate
audit technique.
Qualities of an auditor:-
Only the qualified character accountant can be appointed as auditor
of a limited company. He must have adequate skill and qualities to
conduct his work efficiently. Above all be should be a man of integrity and
character. The auditor must possess the following qualification and
qualities.
1. The auditor must have thorough knowledge of principles and
practice of all aspects of accountancy. He must be familiar with al systems
of accountancy in are.
2. He has to be factful because for certain transaction no or
inadequate information may be available he has to extract such
information factfully from his clients.
3. He must have through knowledge of audit care laws as per
the various cases divided by costs in and outside India. These divisions are
helpful in conducting audits and determining the scope of his powers and
duties.
4. He should have adequate knowledge of financial
management industrial administration and business organisation.
5.An auditor must be honest (ie) he must not certify what he
does not believe to be true and he must take reasonable care and skill
before he believes what he certifies is true.
6.While discharging his duties , he must act impartially and not
influenced by others directly or indirectly.
 7. He should be able to understand the technical details of
business whose accounts he is going to audit. For this purpose he may
make certain enquires from the client as well as visit place of work of his
client .
8.He must have upto date knowledge of companies act and
mercantile laws.
9.He must have thorough knowledge of principles of economic
and economics legislation because there affect the business where account
he has to audit.
10.He must be familiar with principles and practice of cost
accountancy for performing cost audit.
11.He should be hardworking , systematic and methodical
12.He must have adequate common sense.
13.He must have capacity to hear arguments of others.
14.He should not disable the secrets of his clients
15.He should have adequate skill and courage to write .audit
report correctly, clearly, concisely and forcefully.
Audit programs:-
Proper implementations of any plan depend upon a good programs.
Even a computer gives a good solution. If it is provided with correct and
sound programs. Therefore auditor should chalk out a programs according
to the requirement of each case as to what work is to be done by seniors or
juniors staff and the time by which the work is to be finished. While
preparing audit programs the auditor must keep in mind side and
composition of the organisation and nature and extent of internal control.
Audit program represents an outline of procedure to be followed to
support an opinion on financial statements. It is the auditor’s plan of
action. It provides a plan of the work of examination and a set of audit
procedures. Specifically designed for each audit.

Advantages of Audit programme:-

Some of the important advantages of conducting an audit programs
according to predetermined audit program are,
 1. The auditor can be certain that the audit staff will cores the
whole of the ground and if in future years, different members
of the staff are engaged upon the audit, they can see the
reference to the programme exactly what work they are
required to perform.
2. Audit assistants know their clear cut duties
3. Efficiency of the audit assistants increases.
4. It enables the auditors to keep in touch with the work done and
general progress of the work
5. Fixing of the responsibility of audit assistant become easier.
6. It serves as an evidence, infancy tome an action is brought
against the auditor alleging negligence in the performance of
his duties.
7. The routine gets systematic.
Disadvantages of audit programme:-
An audit programme lends to introduce monotony in the work, which
may not result into mechanical performance by the staff without any sense
of responsibility
1. The task becomes mechanical as a result initiative and efficiency
are adversely effected.
2. The task may be finished hurriedly to complete it within the
schedule time.
3. It does not serve any purpose in the audit of a small organisation.
4. It tends to introduce vigidity
5. Inefficiently audit assistants may also take shelter behind the
programme.

Examples of an Audit programme:-

Audit programme for cash:-
1. Account for numerical sequence of cash receipts and payment.
2. Check posting of cash book
3. Check rough book and petly cash book if any
 4. Check the vouchers for cash transaction.
5. Check posting into personal accounts.
Audit programme for purchase / purchase returns:-
1. Examine and review system for purchase
2. Check authority and authorisation for ordering goals
3. Check the approval of goals by the department ordering if
4. Check the entries in stock register
5. In case of forward transaction check the provision for losses.
Audit programme for sales/ sales returns:-
1. Check the entries for sale tax if any
2. Check the provisioning for bad and doubtful debts
3. Check the system of accounting for goals sold on sale or return
basis.
Audit programme for independent audit:-
An audit programme for independent audit will emphasis on future
like existence, valuation,accounting principles and disclosure cut off and
compliance
For example a programme for audit of keep officers salaries
expences will focus on:
1. All officers are properly employed
2. Salaries are authorised by compelient authority
3. Salaries were all paid and recorded in the expence account
4. Salaries were not improperly classified in other account
5. Individual officers and the company complied with their
respective duties under employment contracts
Audit programme for internal audit:-
Internal audit staff is well advised to develop long range planning
programmes as well as individuals assignments audit programme. The
internal audit unlike independent audit is characterised by an ongoing
everyday association with company matters and management. A long
range planning programme is necessary for scheduling assignments
assigning staff personal supports the finding allocations for the internal
audit function. This involves top management requests for audit
assignment and coordinating with management is operating plans.
The internal auditors pay particular attention to their audit objectives
as a means of a aligning the audit with the needs of management.
Objectives:
1. Auditing is concerned with making an analytical and critical
examination of the books of accounts
2. Loans and credit can easily be obtained while auditing
3. Qualified character accountant can be appointed as auditor for a
limited company
4. Auditors should not disclose the secrets of his clients
5. Audit programme represents an outline procedure to be followed
to support an opinion on financial statements.
Most repeated questions:
1. Define auditing and explain its function
2. Explain the qualities of an auditor
3. Audit programmer
4. Types of an audit. (important one)
One mark Question:
1. ________is concerned with making an analytical and certifiable
examination of the books of accounts, checking and verification
2. Qualified character accountant can be appointed as auditor for a
_________company
3. Auditors should not disclose the secrets of_______.
4. In a ___________ in the care of which audit is not compulsory
audited statements of accounts
5. This main object of the audit is to find the reliability of financial
position and ___________
Assignment topic:
1. What would be the auditing procedure in limited company
2. Stake holder meeting
 UNIT – II
Internal control – internal check and internal audit – audit note book –
working vouching – voucher –vouching of cash book – vouching of
trading transactions – vouching of impersonal ledger
Internal control:-
The system of internal control means a plan of organisation laying
down appropriate division of functional responsibilities and a proper
authorisation and record of business transactions by persons who are
competent to discharge their assigned duties. Internal control goes beyond
the accounting functions of the organisation and incorporates both
accounting and administrative controls.
Definition:-
Accounting controls comprise the plan of organisation and all
methods and procedures that are concurred mainly with and relate directly
to safeguard of assets and the reliability of financial records.
Objectives of internal control:-
According to SAP-6 issued by the institute of chartered accountants
of India, internal controls relating to the accounting system are meant to
accomplish the following objectives:
 To ensure that transactions are executed in accordance with
management’s general or specific authorisation.
 To ensure that all transactions are promptly recorded in the
correct in the appropriate accounts and in the accounting period
in which there are executed so as to do permit preparation of
financial information within a framework of recognised
accounting policies and practices and relevant statutory
requirements. It error and to maintain account ability for
events.
 To ensure that assets are safeguard from authorised access use
or disposition.
  To ensure that the recorded assets are company with the
existing assets at reasonable internals and appropriate action is
taken with regards to any difference.
Characteristics of an effective internal control system:-
1. A plan of organisation, providing for appropriate division of
functional responsibilities.
2. A system of authorisation and recorded procedures adequate
to provide reasonable accounting control over assets,
liabilities revenue and expenses
3. Sound practices in the performance of duties and functions
of each of the organisational departments.
4. Personnel of a quality which is commensurate with their
responsibilities.
Plan of organisation:-
For any system of internal control, an appropriate plan and structure
of the organisation is essential. Division of functional responsibilities in
the organisation will naturally differ on the basis of nature of the business,
operational methods, size, number of departments, division and so on.
Responsibilities of each department should be clear defined in
accordance with the policies and procedures formulated by the
management. There should be appropriate delegation of authority to
individuals and departments so that the responsibilities assigned to them
may be discharged efficiently.
 Potential for human error contributes its own share to weaken
the internal controls
 Possible collusion between persons operating the internal
control and employees of the client enterprises oroutricle
parties may render the controls ineffective.
 Sometimes, persons responsible for exercise control may
themselves circumvent the control procedures.
 Change in conditions may render the control procedure
inadequate or altogether superfluous
  Top management of the client enterprise nay manipulate
transactions or estimates and judgement to defeat the objectives
of internal control.
Advantage of internal control:-
 Proper division of work : Work is allocated among the
members of staff keeping in view their qualification and
experience
 Efficiency and economy: Division of work based on expective
purites efficiency of the staff and leads to overall economy in
operations.
 Early detection of errors and fraud: As the work of each worker
is in the ordinary course checked by another, errors and fraud
are detected early.
 Prevention of errors and fraud due to moral check: Assurance
as to subsequent checking of each employees work by another
acts as an effective impediment to commission of errors and
fraud.

 Authorisation, record and control procedures:- The

objectives of authorisation, record and control procedures
should to ensure that (a) every time of expenditure has
been properly authored and accounted for (b) every time
of receipts has in fact been received and duly accounted
for (c) there is proper use today of the funds and other
assets of the enterprise and there is no misapplication or
misuse of the same,
 Sound practices:- Along with proper procedures, there
should be inherent safeguards in the system of internal
control. There should be in this form of an effective
system of internal check laying down that no single
persons should alone handle a transaction completely
from beginning to end
 Quality of personnel:- The need for competent personnel
for proper functioning of the internal system is paramount
 as only them the prescribed procedures can be carried out
in an efficient manner.
Limitations of internal control:-
According to SAP-6 internal controls can only provide reasons
assurance as to the accomplishment of their objectives. They cannot be
absolutely effective in this task because of limitation which are inherent to
any system of internal control. These limitations are as follows:
o Operation of an internal control system involves expenditure
of both time and money. Managements concern with matching
the costs with benefits of the system may have the effect of
weakening the controls.
o Ordinarily, internal controls are concerned more with
transactions of a sound time nature than usual transactions
which may call for greater attention.
Early preparation of final accounts:
It is easy to place reliance in the books and accounts of an enter prise
with a strict system of internal check. Consequently it can prepare its final
accounts without going into the veracity of the data all over again.
Increased profitability for owners:
Overall efficiency and economy of operations leads to increases
earnings for the owners of the enterprise.
Disadvantages of internal check:
 Complacency among high officials:- Persons incharge of their
control functions are inclined to be less serious because of their
belief that under are effective system of internal check, the
possibility of an error or fraud check nothing can go wrong.
 Costly for small business:- Establishment an internal check
system involves additional costs which a small business may not
be able to afford.
 Risky for the auditor:- A n auditor is inclined to skip detailed
checking of books and accounts in the case of an enterprise
 operating an effective internal check system. However, he cannot
escape liability for negligence if he fails to apply proper
compliance and substantive procedure to test the efficiency of
internal check.
Internal checks as regards cash payments:
There should be an effective system of internal check regard to all
payments eg: payment in cash, by cheque and bank transfers. The
following points should be carefully noted in this regard:
 Ordinarily, the persons in charge of making payments should have
nothing to do with the receipt of cash
 All payments should, as far as possible, be by cheques excluding,
of course, petty cash payments which should be in charge of a
separate person.
 Unused cheque- books should be under the custody of a
responsible person.
 Persons responsible for preparing cheques should be clearly
specified. Before passing a bill on invoice for payments it should
be ensured that the enterprise has in fact secured the goals or
service as stated there in
 Only persons duly authorised in this behalf should sign cheques
limitations as to amount up to which cheques could be prepared
and signed in the ordinary course, should be clearly.
 Each cheque should be accounted for and the cancelled cheques
should be carefully preserved.
Petty cash payments:-
 Petty cash payments should be under the charge of a person
other than the one looking after payments by cheques.
 The petty cash book should be written up daily and the balance
should be agreed with the cash in hand at the case of each day.

Internal check as regards wages:-

  All appointments, removal and fixation or alteration of wages
rates should be in writing and authorised by a competent
official.
 Records as to time and piece wages of permanent asnd casual
workers should be properly checked.
 The method by which debuctions are to be made from workers
renumeration should be clearly notified.
 Close attention should be given to overtime payments which in
any case should be made only on written authority from the
head of the department concerned.
Internal check as regards sales:-
Persons authorised to accept orders and to pass there an for
necessary production or supply should be clearly specified.
Only a senior official should have authority to grant credit
facility.
There should be a proper procedure to follow the goods sent an
approval, sales or return ,free of charge etc.
Issue of credit notes for price adjustment, error in invoices or
special allowances should be authorised by a senior official.
Credit notes should be pre numbered and unused forms should
be in proper custody.
Authority to deal with customers enquires credit us accounts
and writing off ofbad dents, should not with a senior person.
There should be control accounts as regards debtor’s ledger.
Internal check as regards purchases:
o The department must maintain a list of approved with whom
orders for making purchases are regularly placed.
o The purchase cycle should begin with the placing of a
requisition by a responsible person with the purchase dept.
o Upon receipt of a requisition the purchase department should
send letter of inquiring to the listed suppliers for quotations of
the price, freight, and delivery terms.
INTERNAL AUDIT
 Internal audit may be defined as the continuous and systematic
process of examine and reporting on the administrative systems and
accounting methods of a company or group of companies. It is generally
carried out by employees of the company with a view (a) to confirming
that the policies of management are being properly executed and drawing
attentions to these areas where policies appear to be inadequate (b) to
verifying that the information used by management to control the
undertaking is both adequate and accurate.
Internal audit is performed by employees of the enterprise, especially
appointed for this purpose though sometimes outsiders may also be hired
for the purpose. In either care an internal auditor is not independent of the
owner/management which has appointed him.
Objects:
1. Evaluation of accounting and administrative systems and controls:-
Internal audit is concerned with ensuring effective and efficient
system of accounting control standard cost control, budgetary
control and other administrative controls.
2. Compliance with established policies and procedures:-
It is concerned with reporting to the management as to the
compliance with predetermined policies, procedures and
standard & performance.
3. Safeguarding of business uses:-
It ensures proper accounting and custody of business assets. It
reports to the management about utilisation of exiting assets
and adequacy of return from investment.
AUDIT-NOTE BOOK
Audit note book is a diary or register maintained by audit staff to
note errors, doughtful queries and difficulties. The purpose is to note down
various points which need to be either classified with the client or the chief
auditor. The audit note book is also used for recording important points to
be included in the auditor’s report. It is a complete record of doubts and
their classification.
Advantages of audit note book:
 1. It ensures infirmity and helps in knowing the amount of work-
performed.
2. Important matters relating to the audit work many because
recalled.
3. Facilities the preparation of the audit report.
4. In case the assistant in charge is changed, no difficulty is faced in
continuing the incomplete work.
5. The responsibility of errors undected can be fixed on clerk
concerned.
AUDIT WORKING PAPERS
The term audit working papers designate the files of analysis
summaries, comments and correspondence built up by an auditor during
the course of the field work of an audit engagement. These papers contain
essential facts about accounts which are under audit.
Classification of working papers:-
Working papers can be classified into three categories:
1. Permanent file papers
2. Audit administrative
3. Audit evidence papers
Permanent file paper:
The permanent file contains papers of continuing interest over many
years audits of the same client. The file can be used for after year. It is a
ready source of information for the first time familiarisation with the client
for the staff sent for the audit.
Audit administrative paper (current file):
Administrative record contains the fruit of early planning phases of
the audit. Usually there papers are bound together with the current year’s
audit evidence papers. All the work done in the course of audit programme
preparation is a part of audit administration and is documented in the
working papers.
Audit evidence papers:-
 The current year audit evidence working papers contains the record of
the procedures followed the tests performed the evidence obtained and the
decisions made in the course of audit
VOUCHING
Vouching may be defined as “Such an examination of the ledger
entries as will satisfy an auditor not only that the entry is supported by
documentary evidence but that it has been properly made upon the books
of account”.
Vouching does not mean merely the inspection of receipts with the
cash book but includes the examination of receipts with the transactions of
a business, together with documentary and other evidence of sufficient
validity to satisfy an auditor that such transactions are in order have been
properly authorised and are correctly recorded in the books of accounts.
Objects of vouching:-
 All transactions connected with the business have been
properly recorded in the books of a account.
 The entries in the books of accounts pertain to transaction
which is genuinely connected with the business.
 The vouchers in support of the entries are legally valid in the
sense that they are authentic, properly dated, addressed to the
business of the client and are not fraudulent in any respect.
 The vouchers have been carefully processed through each
stage of an effective system of internal check.
 The vouchers have been properly authorised.
Vouchers
Vouchers may be defined as any document which evidence
transactions or an entry in a book of account. It may be in the form of a
money receipt, invoice, cash memo, bank paying-in-slip, agreement or
contract, a resolution passed at a meeting of the board of directors or share
holders, the minutes of a meeting, careers with parties and so on.
Kind of vouchers:-
 A voucher may be primary or collateral. A primary voucher is an
original evidence of a transactions or entry. Thus, written responses to
confirmation requests as to debtor’s or creditor’s accounts, purchase
invoices or cash memos for goods purchased or statement prepared by the
bank are examples of primary vouchers. Collateral vouchers may be in the
form of copies of sales invoices, receipts issued to debtors or resolutions
passed at the meetings of the board or share holders.
Vouching of each transaction:
In a business concern, cash book is maintained to account for
receipts and payments cash. Auditor should see that all receipts have been
recorded in cash book and no fictions payment appears on the payment
side of cash book. In most of the cases, frauds asrise by manipulating the
receipts and payments of cash.
Before an auditor begins his work, he should study the internal
control in existence and verify its effectiveness and adequacy. He should
find out chances of frauds in the system and the circumstances for
concealment of incomes, introduction of frictions payments, manipulation
of accounts etc.
Audit if each transaction involves the following:-
Internal control system evaluation:-
a. It shall not leave any cash receipts unaccounted for and permit
any cash payment without goods or services being received.
b. The person authorising the payment must have financial power.
It should be verified under what conditions it can be exercise.
c. All receipts shall be immediately recorded and acknowledge.
d. All cheques must be crossed “Account pay only “immediately.
e. Cash receipts issued and amount credited to divisions shall be
reconciled daily.

2. Correctness of accounting records:-

 Vouching of cash transactions involve checking of records to
verify that entries have been made as per the accounting system which is
regularly followed.
a. Omission or commission of a transaction
b. Errors of principle
c. Compensating errors.
3. Evidence of transaction:-
Whether evidence available for transaction recorded in cash book
is acceptable or not?
4.Whether the transaction made is according to provision of law, rules and
regulation, resolution passed at a meeting of board of directors or share
holders?
Vouching of trading transactions:
I. Vouching of purchase book:
The main aim of vouching of purchase book is to see that all
purchase involves are entered in purchase book and the goods entered in
the purchases book are actually received by the business and the client
pays for only those goods which are delivered by the suppliers.
II. Vouching of purchase return:
Sometimes the purchased goods are returned back to the
supplier for the various reasons. The goods purchased may not
correspond to the quality or the specification ordered. The auditor
should see that there exists a proper system to record such returns. In
such cases the purchase sends back the invoice or alternatively a
credit note may be obtained from the supplier.
III. Goods received on sale or return basis or consignment basis:
Sometimes the goals are received from the supplier on sale
or return basis. Such goods shall be treated as purchase unless
receiver decides to purchase such goods. Similarly goods received on
consignment basis belong to the consignor and no part of such goods
shall be treated as purchase.
IV. Forward purchase:
 In certain business forward contracts are made for future
purchases of raw materials at an agreed price, it in known as forward
purchases. A provision for any loss expected is to be made if such an
agreement involves huge amounts and there are chances of losses
from such transaction.
V. Vouching of credit sales:
Usually the sale is big organisation are made an credit banks.
VI. Sales return:
The sales return are the returns made by the customers. On
the return of goods by the customers, a credit note is issued to the
customer, a credit note is issued.
VII. Forward sales:
In such sales it is agreed to sell a quantity of goods of a
specified price on a future date. The auditor should verify that no
profit from such sales is taken into account before date of settlement
and delivery of goods.
VIII. Hire purchase sales:
In such sales, hire purchase price is payable in instalments,
ownership of the goods is transferred to the purchases on the
payment of last instalment. Various methods are followed for
recording such transactions. The amount of profit on instalments
which are not yet due or realised, a provision shall be created for
such profit and in the balance sheet it shall be deducted from the
divisions.
Vouching of impersonal ledger
The ledger containing the accounts other than debtors and
creditors accounts, is known as impersonal ledger. This ledger
contains nominal accounts, real accounts, capital and some personal
accounts other than debtors and creditors accounts. The balances of
all incomes and expenses accounts are ultimately taken to profit and
loss account and in case of real or capital accounts to the balance
sheet. There are given below.
a. Prepaid expenses like salaries, commission, rent, interest
b. Accured incomes like interest, commission etc
 c. Accured liabilities like compensation to employees, pension,
graduity, lease, rent, taxes etc
As the number of accounts appearing in the impersonal ledger
is not large, auditor should be to check all the entries in detail.
The entries in the impersonal ledger are made from subsidiary
books ie sales book, purchase book, cash book and journal
proper. The possibilities of rendering misleading accounts by
recording ficitious vouchers are great in case of revenue
expenses critically, otherwise profit and loss account may not
give true and fair view of profit and loss.
The audit of impersonal ledger involves the following steps:
1. Reviewing the adequacy of internal control system in operation. The
system should be such as reduces the chances of fraud and mistake to
the minimum.
2. The opening balances of impersonal ledger should be checked from
the statements of audited accounts of the previous year.
3. Postings are made from all the subsidiary books into the impersonal
ledger. At the regular intervals of time summaries from sales book,
purchase book, sales returns book and purchase return book are
posted to the impersonal ledger, entries from cash book and journal
are alse posted to the impersonal ledger, while checking the postings,
the auditor should see that correct amounts are posted in the correct
accounts on the correct side. No entry should be left un posted or
posted twice
4. After checking the posting the next stop checking of totals and
cashing. The auditor should be careful that correct amounts are
carried forward on the correct side.
Objectives:
1. Internal control means a plan of organisation laying down
appropriate division of functional responsibilities.
2. Internal audit is performed by employees of the enterprises
especially appointed for this purpose
 3. Audit note book is a diary or register maintained by audit staff to
note errors , doubtful queries and difficulties
4. Audit working paper is the files of analysis, summaries, comments
and correspondence built.
5. Voucher may be defined as any document which evidence
transactions or an entry in a book of accounts.
Most repeated question:
1. Advantages and disadvantages of internal control
2. Define internal audit and its objectives.
3. Define audit note book and its advantages
4. Briefly explain the vouching of cash transaction.
Objective Type Question
1. _______may be defined as any document which evidence
transactions or an entry in a book of accounts.
2. ______ is a diary or register maintained by audit staff to note
errors , doubtful queries and difficulties
3. _______is the files of analysis, summaries, comments and
correspondence built.
4. The ledger containing the accounts other than debtors and creditors
accounts, is known as ________.
5. ________ is payable in instalments, ownership of the goods is
transferred to the purchases on the payment of last instalment
Assignments:
1. Any top five companies recent CEO’s history
Books referenced:
Principles and practise of auditing – Dinker Pagare.
 UNIT-3
Verification and valuations of assets and liabilities – auditor’s position
regarding the valuation and verification of assets and liabilities –
depreciation – reserves and provisions – secret reserves.
VERIFICATION OF ASSETS AND LIABILITIES
Meaning:-
Verification means the procedures normally carried out of the year
end to confirm the ownership, valuation and existence of items of the
balance sheet date. It also involves confirming that presentation in the
financial statements is in accordance with legislations.
The examination of the books of accounts with a view to ascertaining
their arithmetical accuracy is not enough. The auditor must verify that the
various items appearing in the balance sheet are in the possession of the
concern.
In the simple words, verification means “proving the further
confirmation”.
Definition:-
Spicer and Pegler:-
Have defined verification in the following words. The
verification of assets implies on enquiry into the value, ownership and
title, existence and procession and the presence of any charge on the
assets.
Distinction between verification and vouching:-
 Vouching and verification are considered to be one and the
same thing. But it is not so. The statement is
“Vouching proves the accuracy of book entries but with of the
balance sheet can be certified only on verification of assets on liabilities
shown there in “is a correct statement. This means that a clear line of
demarcation can be drawn between the two. while vouching is to examine
the correctness and authenticity of the transaction recorded in books of
prime entry, verification is to confirm of the value of assets and liabilities
it is not merely the duty of the auditor to see that assets have been acquired
but he has to certify that such assets:
1. Exist with the business
2. Are the property of the client and
3. Are valued at proper figures on a particular date, namely the date
of balance sheet.
Verification of liabilities:-
Verification of liabilities like that of assets is very much necessary to
form an opinion as to the truth and fairness of the financial statements. The
objectives of verification of liabilities as per standard auditing practices
(SAP) are, to form an opinion with regard to the following:
1. Balances in the creditor’s accounts reflect a true position as to the
liabilities of the business.
2. All liabilities of the client’s business, including they’re not
recorded in the books of accounts, whether intentionally or
otherwise, are disclosed in the financial statements.
3. They are properly valued in accordance with generally accepted
accounting principles and
4. They are properly classified and disclosed.
Valuation of assets and liabilities
Valuation forms an important part of every hand it. It is because the
accuracy of balance sheet depends much upon how correctly to estimation
of the value of various assets and liabilities has been made. Both over-
valuation and under-valuation of assets and liabilities would exhibit wrong
picture of the financial Affairs of a concern. The auditor has to see that the
assets and liabilities appearing in the balance sheet have been exhibiting
their proper value (ie) neither they have been over-valued nor inter-valued.
Auditor and the valuation:-
The valuation of the assets should be done by the responsible officer
of the concern and the auditor has to see whether they have been properly
valued or not. For this purpose he (auditor) can obtain the certificates of
values and other competent persons.
But, does it imply that he will be free from his liability assets are
incorrectly valued by the officers of the company as its suits to the
management? the answer is “no. An auditor is definitely concerned with
values set against the assets because ultimately he is to certify that final
accounts reveal a true and fair view of the state of affairs of the concern. It
has been observed that “Financial accounts are largely a matter of
convention, judgement and opinion not a matter of certainty. The balance
sheet can never show the real financial position, but only a fairest possible
estimate of the financial conditions “
An auditor can never claim that the balance sheet is absolutely
correct.
Verification and valuation of different assets:
1. Intangible assets viz goodwill, patents, trademarks, copyrights etc
2. Fixed assets viz land and building, plant and machinery furniture and
fixtures, motor vehicles etc.
3. Floating assets viz cash in hand and at bank, bills receivables, stock
in trade, sundry debtors, investment etc.
4. Fictitious assets viz preliminary expenses, discount on issue of
shares or debentures etc.
Objectives of verification of book debts:-
1. To establish its accuracy
2. To establish its validity as claims
3. To establish its collectability and determination of its realisable
value
 4. Its fair disclosure in the financial statements in accordance with
legal provisions.
Accuracy: auditor should obtain a schedule of debtors, duly certified by
some responsible officer of the business. Accuracy can be verified by
reference to the credited copy of the schedule of debtors and relevant
ledger accounts.
Validity: this can be established by confirmation of book debts from
debtors. Confirmation requires direct communication with the debtors. The
auditor should carefully determine the method, the time of requesting such
confirmation and the number of debtors to be requested after taking into
consideration.
Collectability: the objective of establishing this is to be satisfied about the
adequacy of the reserve for potential bad debts. It is to be noted that
satisfactory confirmation of a client is not an evidence of its collectability.
Though the amount of reserve for bad and doubtful debts to be provided
would be decided by the management, yet an auditor should examine its
adequacy.
Depreciation
Meaning:-
In the modern context it stands for a gradual and continuous decline
or reduction in the book value of the fixed assets due to wear and tear
obsolesced effusion of time of any other reason.
Definitions:-
ROGO Williams: “Depreciation may be defined as a gradual
deterioration in value due to use”
Causes of depreciation:-
a. Wear and tear: the value of assets decrease due to its constant use.
The more the machinery is in use more will be the wear and tear.
The wear and tear of machinery in use for three shifts will be
much more than the machinery being used in a single shift.
 b. Exhaustion: certain assets lose their value with lapse of time as
they are being used or consumed or something is taken out of
them eg mines. The minerals in mines will be exhausted by
constant extraction so also will be care with plantations.
c. Weather etc: certain assets lose their value due to rain or change
in weather while determining depreciation even these factors need
to be taken into account.
d. Permanent fall in the value of an assets: many times the value of
an assets decline permanently, which ought to be considered while
determining the quantum of depreciation.
Basis of depreciation:-
Perfectly correct amount of depreciation charge is difficult to
determine. Following factors should be kept in mind while determining the
regular or casual amount of depreciation.
1. Value of assets
2. Estimated working life of the asset determined by experts.
3. Repairs and renewals in the ordinary course are presumed. The
absence of repairs can reduce the effective life of an assets. They
should be kept in mind
4. Additions and extension made during the year along with the date
should be considered for determining the depreciation.
5. The provision of companies act and income tax should also be
kept in mind.
6. The interest that could have been earned had the amount not been
inverted in the assets.
7. The working hours for the assets.
8. The skill of the operators handling it
9. A major overhaul which enhance the effective life of the asset
The auditor’s duties regarding depreciation:
An auditor is not a values estimating the working life of various
assets is the job of expert values. Therefore , an auditor cannot estimate
the amount of depreciation.
 a. Adoption of different methods for different types of assets: a
company may adopt different methods of depreciation for different
types of assets provided the same are adopted consistently from year
to year.
b. Change in the method of providing depreciation: when a change in
the method of depreciation is made, depreciation should be
recalculated in accordance with the new method from the date on
which the assets came into use.
c. Pro-rata depreciations: the guidance note recommends that
depending upon the maturity of the amounts involved, a common
may group additions and disposals in appropriate time provides for
the purpose of charging pro-rate depreciation in respect of additions
and disposals of its .
d. Depreciation on revalued assets: where a company has revalued its
fixed assets, depreciation there on should be charged on the revalued
amounts.
e. On the assets acquired during the year, he should ensure that the
depreciation is charged on pro-rate basis.
f. In case of revaluation of assets during the year, he should ensure that
the depreciation is also charged on revalued amounts.
g. That the depreciation complies with the provision of companies act
and income tax.
Reserves and provisions
Reserves:
Reserves is an appropriation of profit which denotes that amount
which is set aside for any known or unknown contingency, liability,
diminution in the value of assets etc. according to the American institute
of accountants “the use of the term reserve be limited to indicate an
undivided portion of the assets is being held or retained for general or
specific purposes:
According to India companies act the expression “reserve” shall not
subject as aforesaid include any amount written off or retained by way of
providing for depreciation, renewals or diminution in value of assets or
retained by way of providing for any known liability?
In other words, it represents that portion of the business profit, which
is meant for accrue in future, in situation of emergency or contingency
general or specific.
Provision:
Provisions refer to the amount charged against revenue for
depreciation, renewals and diminution invalue of assets or amount.
According to Indian companies act provision the expression
“provision” shall, subject to the sub-clause(2) of this act, which may mean
any amount written off or retained by way of providing for depreciation,
renewals or diminution invalue of assets retain by way of providing for
any known liability of which the amount cannot be determined with
substantial accuracy.
Therefore, provisions are charges against earnings and must be
shown in the profit and loss account. In the balance sheet, the part of the
provisions which represent liabilities will be shown under the head of
(current liabilities and provisions). The portion or part representing the
diminution in the value of assets eg depreciation provisions for bad and
doubtful debts are generally deducted from the balance of the concerned
assets.
Distinction between reserve and provision
Many times a terms reserve and provision are used together, giving
an impression that both are one and the same thing. However it is desirable
to understand the difference between the two terms.

Reserve Provisions
1. A reserve is created by 1. A provision is debited to
debiting profit and loss profit and loss alc.
appropriation alc 2. It is charge against profit.
2. It is an appropriation of 3. A provision is made for a
profit. known liability.
 3. A reserve is created for
unknown liabilities.
4. Creation of reserve depends
upon the financial policy of
the firm.
5. Creation of reserves is
discretionary and auditor is
not to worry about.
6. Reserves represent
undistributed profit and are
available for distribution
amongst share holders.
7. Reserves are created only if
the company earns profit.
4. Creation of provisions is a
must as there are meant for
meeting known liabilities.
5. Creation of provision is a
must and auditor should
qualify his report if
adequate provision is not
made.
6. Provisions are not available
for distribution amongst
share holders.
7. Provisions are required to be
made even in the absence of
profit.

Secret reserve
At times, companies create a reserve which is not disclosed on the
face of the balance sheet. Such a reserve is called “secret reserve”, “hidden
reserve”, “internal reserve” or inner reserve. It is reserve which is not
apparent on the face of the balance sheet. Such reserve are usually created
by banking, insurance or other financial sector companies, obviously if a
secret reserve exists, the balance sheet cannot reveal the correct picture of
the financial sector cannot reveal the correct picture of the financial affairs
of the business. The actual position of such a company, in reality, is better
than what is revealed on the face of the balance sheet.
Creation of secret reserves:-
1. By writing off excursive depreciation on fixed assets.
2. By undervaluation of the closing stock.
3. By writing down good will to a nominal value.
4. By ignoring the permanent appreciation in the value of assets.
5. By including a fictitious liability.
6. By slowing contingent liabilities as real liabilities.
7. By suppression of sales
8. By inflating purchases.
 9. By over valuing liabilities.
10. By charging capital expenditure to reverence
Objects of creating secret reserves:-
1. To strengthen the financial position of the company.
2. To meet unforeseen emergencies.
3. To avoid competition.
4. To regulate dividend.
Objectives:
1. Verification means the procedures normally carried out at the year
end.
2. Verification means proving the truth or confirmation.
3. Good will is an intangible assets.
4. Depreciation may be defined as a gradual deterioration invalue due
to use.
5. A reserve is an appropriation of profit which denotes that amount
which is set aside for any known contingency.
Important question:
1. Difference between reserves and provisions
2. Briefly explain about the secret reserves.
3. Explain the objectives of verification of book debts.
4. Discuss the auditor’s duties regarding depreciation.
Objective Type Question:
1. ______means proving the truth or confirmation.
2. Good will is an_______.
3. _________ refer to the amount charged against revenue for
depreciation, renewals and diminution invalue of assets or amount.
4. ________is an appropriation of profit which denotes that amount
which is set aside for any known or unknown contingency.
5. __________ may be defined as a gradual deterioration in value due
to use.
Assignment topics:
1. Discuss the issues faced by the auditors while auditing the company.
 2. How the auditor will considerate the auditing work.
Book reference:
Principles of auditing – Pkumar B Sachd J Singh.

UNIT-4
Audit of joint stock companies – qualification – disqualification – various
modes of appointment of company auditor – rights and duties –Liabilities
of a company auditor – share capital and share transfer audit –Audit report
– contents and types.
Audit of joint stock companies:-
In the case of a company, examination of its affairs by the auditors is
practically the only safeguard available to the share holder against the
enterprise being run in an in businesslike manner, or money being
misapplied or misappropriated without their knowing anything about it.
Qualification of auditor:-
 The object of the provisions as to qualification of the auditors is to
ensure that only persons of proven worth and standing and under the
discipline of a statutory body are appointed as auditors. Accordingly, only
the following persons will be competent to be appointed as auditors of a
do company.
Practising charactered accountants (sec 226(1)):
A person shall be qualified for appointment as auditor of a company
if he is a charactered accountant within the meaning of the charactered
accountants act of 1949.
Partnership firm as auditor:
In the case of a firm. If all its partners practising in India are
qualified for appointment as auditors, it may be appointed by its firm name
to be auditor of a company. In such a care, any of its a practising partners
can act in the name of the firm.
Certified auditors:
A part from the practising chartered accountants a person holding a
certificate under the restricted auditor’s certificate rule 1956, is also
qualified to be appointed as auditor of a company, such certified auditors
are subject to the rules framed in this behalf by the central government.
Disqualification of auditors
Statutory disqualification: The following persons shall not be
qualified for appointment as auditors of a company
a. A body corporate.
b. An officer or employee of the company.
c. A person who is a partner or who is in the employment of any officer
or employee of the company.
d. A person who is indented to the company for an amount exceeding is
1000 or who has given any guarantee of any third person to the
company for an amount exceeding is 1000.
Other disqualification: according to sec C226 (4) a person shall
not be qualified for appointment as auditor of a company if he
is statutorily disqualified for appointment as auditor of any
 other body corporate which is disqualified for appointment as
auditor of any other body corporate which is.
a. A subsidiary of that company;
b. The holding company of that company;
c. A subsidiary of the company’s holding company;
d. If he would be so disqualified if that body corporate were a
company.
Appointment of auditors
Appointment of first auditor(sec 224(5)):
The first auditor of a company shall be appointed by the board of
directors within one month of the date of registration of the company. The
auditor so appointed shall hold office unfiled the conclusion of the first
annual general meeting.
Appointment of the first auditors should be by a valid resolution of
the board meeting. Merely naming them in the articles will not be
recognized as appointment under the act.
In case the board does not exercise its power in this regard, the first
auditor shall be appointed by the company in its general meeting. But
whether appointed by the board or by the company, information to the first
auditor about the fact of his appointment as such is not a necessary
condition. The first auditor is also not required to inform the register about
his acceptance or refused of the said appointment.
Appointment by company (ie) share holders:
Every company shall, at each annual general meeting, appointment
auditor to hold office from the conclusion of that meeting until the
conclusion of the next annual general meeting, and shall, without seven
days of the appointment give intimation thereof to every auditor so
appointed.
Ordinarily, the power to appoint auditor lies with the share holders of
the company in general meeting. Only in exceptional circumstances can
the appointment be made by the board, such as, appointment of the first
auditor, or auditors to fill casual vacancy, or appointment by the central
government.
Reappointment of auditor:
Ordinarily at any annual general meeting, the refining auditor shall
automatically be reappointed. Neither the board not the share holder can
refuse to reappoint him. However, in the following cases, the retiring
auditor shall not be reappointed:
a. If he is not qualified for reappointment.
b. If he has given the company a notice in writing of his unwillingness
to be reappointed.
c. If a resolution has been passed at the meeting (a) to appoint
somebody other than him; (b) to provide expressely that he shall not
be reappointed (or)
d. If a notice has been given of any resolution proposing the
appointment of some other person in the place of the retiring auditor.
Appointment by central government (SEC 224(3))
Where at any general meeting, no auditor is appointed our
reappointment, the central government may appoint a person to fill the
vacancy. This power of the central government is as a consequence of the
company’s failure to appoint an auditor at its annual general meeting. In
such a case, the company is required, within seven days of its failure to
appoint or reappoint an auditor to apply to the regional director to whom
the central government’s power to appoint an auditor in such an event has
been delegated under.
Appointment of auditors of government companies:
Appointment of auditors in the case of government is subject to the
provisions of sec 619 which override sec 224 to 233 dealing with
appointment etc of the auditors
Classes of capital:
Two kinds of capital ; namely;
 a. Preference share capital:- it is that part of paid up share capital which
carries a preferential right as to the payment of dividend at a fixed
rate and also a preferential right to the repay next of the paid up
capital.
b. Equity share capital:- it means all share capital which is not
preference share capital.
Auditor’s report
An auditor’s report is the format result of all the effort that goes into
an audit. Communicating the auditor’s finding to interested users is part of
all audits. Thus, the final phase of an audit involves preparing that
communication.
According to Lancester “ a report is a statement of collected and
considered facts, so drawn up as to give clear and concise information to
persons who are not already in possession of full facts of subject matter of
the report”.
Importance of auditor’s report:
The true ownership of the company rests in the share holders and not
in the management. One of the reports on which the share holders depend
for forming their opinion about the management is the auditor report.
Although, the auditor’s report does not guarantee also the accuracy of the
detailed accounts of the company, yet everybody seeks a clean chit from
the auditor.
The company law board has been of the view that it is necessary to
ensure high standard of audit of companies because it is only by doing so
that a high standard of integrity in company affairs could be maintained. In
order to attain this in the cases of non-government companies.
Appointment of auditor of other companies:
Provisions of sec 619 shall also apply in the case a company in
which not less that 51%of the paid up share capital is held, whether singly
or jointly.
Share capital
Introduction:
Share capital may be defined as the capital raised by a company by
the capital raised by a company by the issue of share. The words “capital”
and “share capital” are synonymous in the care of a company. But it has
several different meaning eg:
a. Nominal, authorised or registered share capital: it means the
maximum capital which a company is authorised to issue by its
memorandum of association, unless it is increased in the manner
preserved.
b. Issued and subscribed share capital: it is that part of the nominal
capital which is actually issued by the company for public
subscription. A company is not obliged to issue all its nominal
capital at once. It may have unallotted residence to be allotted in the
near future as and when the company needs further capital.
Called up capital: it is that amount of then nominal value of share
subscribed for, which the company has asked its share holders to pay by
means of calls or otherwise.
Uncalled capital: this is the amount which remains unpaid on shares. The
company may, at any time, call upon the share holders to pay the uncalled
capital in accordance with the provisions of the articles when shows are
fully paid there is no uncalled capital.
Form of the audit report
International auditing guideline issued by international federation of
accountants first issued in 1983 and revised in 1989 provides guidance on
the forward content of the auditor’s report to be issued after the
examination of financial statements.
1. Title: an appropriate title such as auditor’s report, helps the reader to
identify the reports and to distinguish it from report issued by them.
2. Address: the report should be appropriately addressed. Like in the
case of statutory audit of a company, the report is addressed to the
share holders and in the case of special audit it is addressed to the
govt.
 3. Identification of financial statements: the financial statements can be
identified by including the name of the entity and the date and period
covered by the financial statements.
4. Address of the auditor: the report should give the address of the firm.
5. Dating of the report: inevitability, an auditor’s report is issued on a
date letter than the end of the period being reported on because it
takes time for the books to be closed. Financial statements to be
prepared and audit to be completed.
This required standard it is necessary for the auditors fully alert and to
satisfy themselves by examining such materials and documents as they
consider necessary, that the accounts which they cerify really reflect a
true and fair view of the state of affairs of the company concerned.
Contents of the audit report
Under section 227(2) every auditor is required to make report to the
share holder on the accounts examined by him and every balance sheet
and profit and loss around and on every documents declared by law to
be part of annexed to the balance sheet and profit or loss account
1. In the case of balance sheet, of the state of the company’s affairs is at
the end of its financial years and
2. In the case of profit and loss account, of the profit or loss for its
financial year.
Sub-section (3) of section 227,required that the auditor’s report shall also
state:
a. Whether he has obtained all the information and explanation which
to the best of his knowledge and belief were necessary for the
purpose of his audit.
b. Whether the report on the account of any branch office audited under
section 228 by a person other than the companies auditor has been
forwarded to him and how he has death with the same in preparing
the auditor report.
 c. Whether the companies balance sheet and professional loss account
deal with by the report are in agreement with the books of account
and salary.
Types of reports:
Clean or unqualified report:
When the auditor is satisfied as to fairness of the balance sheet and
profit and loss account he will give a clean report. The audit or makes the
various stator affirmation without reservation he is said to have given as
unqualified report on the financial state.
Qualified report:
If the auditor of his option that the balance sheet does not give a true
and fair view of the state of the company’s affairs or that the profit or loss
are does not give a true and fair fee.
Objectives:
1. Certified auditors are subject to the rules framed in this behalf by the
central government.
2. According to sec 224(5) act appointed of first auditor.
3. Auditor’s report is the format result of all the effort that goes into an
audit.

Most repeated question:

1. Explain the qualification and disqualification of an auditor.
2. Discuss the appointments of auditors in all areas.
3. Define audit report and explain its importance.
4. Briefly explain the types and contents of audit report.
Objective type questions:
1.The first auditor of a company shall be appointed by the _______
within one month of the date of registration of the company.
2. When the auditor is satisfied as to fairness of the balance sheet and
profit and loss account he will give a _________.
3.According to sec ________act appointed of first auditor.
4. Under section 227(2) every auditor is required to make report to the
_________on the accounts examined by him.
Assignment:
1. Discuss the audit process and methods.
2. Discuss the audit evidence and audit reports.
Book referenced:
Principles and practice of audit – Dinker Pagare.

UNIT-5
Investigation – objectives of investigation – audit of computerised
accounts – electronic auditing – investigation under the provisions of
companles act.
Introduction:
It is a special kind of examination of records and accountsdone by an
investigator with a predetermined purpose. Professional accountants a
often required to investigation differs from the normal and it. In most of
the uses the investigation is done to ascertain the true financial position of
the company, its profit earn the existence of fraud and the extent of
mismanagement.
“investigation involves inquiry into facts behind the books and
accounts into the technical , financial and economic position of the
business or organisation.
Definition:
“The term investigation implies an examination the accounts of a
business for some special purpose.
Essentials for investigation:
1. It is essential for an investigator to make himself familiar with all
the important details, documents, contacts , book of accounts with
legal documents about a business before the commenment of his
work.
2. From time to time the investigator shown assistance of technical
experts during the course of enquiry.
3. The investigator in no way be influence by the director, manager
and the senior officer of the business.
Characteristics of investigation:
1. It is a critical examination and it is based on suspicion on the state of
affairs to be investigated.
2. It may even extend to the examing of individual like directors,
auditors and other officers of the company.
3. It does not confine itself only with the financial aspects but the
technical, political, economical and management aspects are also
counted for.
4. The investigation is normally conducted with certain specific objects.
 5. The investigator submit his reports of investigation only to his client
who appoints him.
6. It suggests the outline for the future course activation on a particular
function.
7. In the investigation report, the factual information is given in an
analytical and descriptive manner.
Objects of investigation:-
1. Investigation on behalf of a person who is interested to join a
partnership firm as a particle.
2. Investigation on behalf of a person or company which wants to
purchase a running business.
3. Investigation on behalf of a person who wants to lend money to
business and is interested to known its financial years.
4. Investigation in care the properties of the business, suspects a
fraud.
5. An investigation when a person seeks different avenues of
investment.
6. An investigation under the Indian companies ACT IC the
statutory investigation.
Investigation under the provisions of company:
The companies act, 2013 contains striven provisions to contain
corporate frauds. A new investing procedure has been provided under
section 210 to 229, as against sections (235 to 251) of the companies ACT
1956.
The companies ACT 1956 provides for investigation of the affairs of
companies under section 235 – 250 A of the act. None damage would be
done by frequent instruction into the affairs of companion with little or
low application of sanction.
Where the investigation into the affairs of a company has been
assigned by the central government to serious fraud investigation office, it
shall conduct the investigation in office, it shall conduct the investigation
in the manner and follow the procedure provided and submit its report to
the central government within such period as may be specified in the
order.
The director, serious fraud investigation office shall cause the affairs
of the company to be investigated by an investigating officer who shall
have the power to the inspection under section 217.
The central government if so directs, the serious fraud investigation
office shall submit on intension report to the central government.
Electronic auditing:
Auditing is used to circumvent any question of integrity. An
electronic data processing audit is at evaluation of the accuracy
and proper function of an organisation’s data processing
organisation mainly audit the accounting department.
E-audit is a online compliance and risk management software
solution for compliance manages to build and report all, the
checks you have or might want.
It’s quick to set up and easy to use. The flexibility inherent to
the design means it works seamlessly with your organisation
risk and compliance systems.
From simple tick lists to complex audit you can build, schedule
and assign by name, title, site, area, etc. and report findings and
designate tasks with data instantly viewable and dashboards
E-audits could transform the way you work giving better
performance, reduced cost and management the information to
get the best from teams and resources.
Organisations have the challenge of dating with employee’s honesty
and trust worthiness. Auditing is circumevent any question of
integrity. An electronic data process audit is an evaluation of the
accuracy and proper function of an organisation data processing.
Organisation mainly audit the accounting department. Other areas
like project management, quality management and energy
conservation are also auditor. Auditing ensures compliance and
check on frauds of the company’s resources.
 Objectives:
1. Investigation implies an examination of the accounts of a business
for some special purpose.
2. An electronic data processing audit is an evaluation of the
accuracy and proper function of an organisation’s data processing.
3. E-audit could transform the way you work giving better
performance reduced cost and management.
Repeated questions
1.Define investigation and explain its essential.
2.Explain the characteristics of investigation.
3.Explain the objectives of investigation.
4.Briefly explain the E-Auditing.
Objectives type question
1. _____________ involves inquiry into facts behind the books and
accounts into the technical , financial and economic position of the
business or organisation.
2. __________implies an examination of the accounts of a business for
some special purpose.
3. __________could transform the way you work giving better
performance, reduced cost and management
4. An __________processing audit is an evaluation of the accuracy and
proper function of an organisation’s data processing.
5. The term _______ implies an examination the accounts of a business
for some special purpose.
Assignments
1. How the audit is of computerised accounts.
2. Auditing accounting procedures.
Reference
1. Principles and practices of auditing – Dinkar Pagare.
2. Principles of auditing – P. Kumar B. Sachdeva J Singh.