AUDITING

UNIT – I

Auditing – Meaning and Objectives of audit – Difference between auditing and accountancy –
Kinds of audit – Advantages and limitations of audit – Audit programmes and working papers.

UNIT – II

Internal control – Meaning and object – Internal check – Meaning and object – Internal
control regarding cash purchase, sales, payment of wages.

UNIT – III

Vouching – Meaning – Objects – Features of good voucher – Procedure importance –

Vouching of cash transactions – Verification of assets of liabilities.

UNIT – IV

Auditor – Qualification, Appointment Disqualification, Removal ,Duties, power,

liabilities and Remuneration –Share capital and share transfer audit – Audit report contents and
types

UNIT – V

Specialized audits – Charitable Institutions, club, Cinema theatre, Education

Institutions, Hospital – Hotel – Electronic Data Processing Audit(EDP).

Text Book:

1. A Text book of Practical Auditing - B.N. Tandon, S. Chand Publishing Pvt Ltd, New
Delhi.
2. Auditing –R.G. Saxena, Himalaya publishing House Pvt Ltd., Mumbai.

Reference Book:

1. Practical Auditing – K. Sundar & K. Paari, Vijay Nicole Imprints Pvt Ltd, Chennai-9

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 2. Auditing - Dinkar Pagare – Sultan Chand & Sons, New Delhi.

AUDITING

SYNOPSIS:
* MEANING OF AUDITING.
* DEFINITION.
* OBJECTIVES OF AUDITING:
*MAIN OBJECTIVES.
*SUBISIDIARY OBJECTIVES.
*SPECIFIC OBJECTIVES.
* KINDS OF AUDIT.
* ADVANTAGES AND LIMITATIONS OF AUDIT.
* AUDIT PROGRAMMES AND WORKING PAPERS.
* CONCLUSION.

MEANING OF AUDITING:
The word “audit” is derived from the Latin word “audire” which means “to hear”.
Auditing is the verification of financial statement as is disclosed by the balance sheet and the
profit &loss a/c. It is an examination of accounts to ascertain whether the balance sheet and
profit &loss a/c give a true and fair view of financial position and profit &loss a/c of the
business.
Auditing is an examination of books of accounts, documents and vouchers of a business in
order to verify the financial position as disclosed by the balance sheet and profit and loss account
of the undertaking.

DEFINITION:
According to SPICER AND PEGLAR “auditing is such an examinations of books, accounts
and vouchers of a business as shall enable the auditor to satisfy himself whether the balance
sheet is properly drawn up so as to exhibit a true and correct view of the state of affairs of the
business, according to him and as shown by the books and if not in what aspect he is not satisfied
or the balance sheet is untrue or incorrect”.

According to INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA “Auditing is a

systematic and independent examination of data, statement, records, operations and performance
of an enterprise for a stated purpose. In any auditing situation the auditors understands and
recognize the proposition before him for examination, collect evidence, evaluates the same and
on this basis, formulate his judgment which is communicated through his audit report”.

According to L.R. DICKSEE “Auditing 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”.

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 According to A.W. HANSON “an audit is an examination of such records establishes their
reliability and reliability of statements drawn from them.”

OBJECTIVES OF AUDITING

INTRODUCTION:
The principle objectives of auditing are changing with the advancement of business
techniques. Earlier it was only to check the correctness of receipts and payments, which was
extended to detection of frauds and errors.

OBJECTIVES:
The objectives of audit can be categorized into:

1. Main objectives.
2. Subsidiary objective and
3. Specific objective.

OBJECTIVES OF AUDIT

MAIN
OBJECTIVE

SUBSIDARY SPECIFIC
OBJECTIVE OBJECTIVE

I) MAIN OBJECTIVES:
Verification of accounts and financial statements:

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 The main objectives of an audit is to verify and establish that a given data of balance sheet
presents true and fair view of financial position of the business and the profit &loss account
gives the true and fair view of profit or loss for the accounting period.
And also it is required under company’s act that whether the books of accounts are kept
according to the act and they show true and fair view of the state of affairs of the company. To
judge the according of the books of accounts the auditor must
· Access the system of internal control
· Verify the accuracy of posting, balancing etc.
· Confirm the validity of transaction with supporting documents.
· Ascertain whether distinction has been made between capital and revenue items.
· Confirm the existence of assets &liabilities.
· Confirm whether the books and records are maintained as per the statutory requirement.

II SUBISIDIARY OBJECTIVE:
A) DETECTION AND PREVENTION OF ERRORS
B) DETECTION AND PREVENTION OF FRAUDS

SUBSIDARY
OBJECTIVE

Dedection Dedection
and and
Prevention Prevention
of Errors of Fraud

Clerial Compensating Errors of Manipulaltion

errors Errors of or setting off duplication of accounts.
principle errors
Errors Embezzlement
of Errors of
commission of cash Misapprop
ommi riation of
ssion cash

A) DETECTION AND PREVENTION OF ERRORS:

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 Errors are generally the result of carelessness on the part of the person preparing the
accounts. Sometimes errors may be the result of fraudulent manipulate of accounts. Auditor
should be very careful because sometimes an accounting manipulation may appear to be an error.
The following are the various types of errors:

1. CLERICAL ERRORS:
A clerical error may be committed in the course of (a) recording transaction in the books of
original entry such as purchase Book or Sales Book (b) posting a transaction to the ledger.
These errors are committed in posting, totaling and balancing .such errors may again be sub –
divided into:
A) ERRORS OF OMISSION &
B) ERRORS OF COMMISSION.
A) ERRORS OF OMISSION
When a transaction is omitted fully or partially from the books of accounts. Such errors are
known as errors of omission. Usually it arises due to mistake of clerk.
Eg: omission of purchases from purchase book.
Eg: omission of sales from sales book.
Eg: omission the entry for charging department in the books.
Errors of omission may be intentional or otherwise. But in both the cases profit &loss of the year
is affected. Such errors can be detected only by careful scrutiny.
B) ERRORS OF COMMISSION
When a transaction has been recorded but has been wrongly entered in the books of original
entry or posted in the ledger, errors of commission is said to have been made.
E g: Purchase of goods for Rs 1250 recorded as for Rs 1520 in purchase book.
E g: Posting to wrong account. Sale made to x &co is posted to the debit of x account.
2. ERRORS OF PRINCIPLE
Such errors arise when the entries are not recorded according to the fundamental principles
of accountancy.
E g: Providing excess or inadequate depreciation.
Over or under valuation of stock. Such an error is not disclosed by the trial balance.
It can be detected only by a searching inquiry & independent checking. Such errors can be
detected by thorough checking of each & every transaction.
3. COMPENSATING OR OFF SETTING ERRORS
A compensating error is one which is counter balanced by any other error.
E g: A ‘s a/c was to be debited for Rs100 but was debited for Rs 10 while B/S account was to be
debited for Rs10 but was debited for Rs 100.
These errors may be located by checking the totals, posting. Such an error will not affect
Treasury bill .But of these errors may affect the profits of the year.
4. ERRORS OF DUPLICATION:
When a transaction is recorded twice and also posted twice in the ledger such type of errors
arise.
It is more difficult to locate such errors. Only through checking & comparing vouchers with
entries in the books of original entry will reveal such errors.

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B) DETECTION AND PREVENTION OF FRAUDS:
FRAUD

EMBEZZLEMENT MIS - APPROPRIATION MIS - APPROPRIATION

MANIPULATION OF CASH OF GOODS
OF ACCOUNTS

Fraud means false representation or entry made intentionally with a view to defraud
somebody. Fraud may be divided into 3 categories.
1. Embezzlement of cash
2. Misappropriation of goods
3. Fraudulent manipulation of accounts.
1. Embezzlement of cash:
With the increase in the size of business, the opportunities of committing fraud also increase
because the owner of business has no direct control over receipts and payment of cash /cash
may be misappropriated by
a) Omitting to enter any cash which has been received or
b) Entering less amount than what has been actually received or
c) Making fictitious entries on the payment side of the cash book or
d) Showing payment of wages to dummy workers
For detecting such, a detailed checking of all important books & documents is required.
2. Misappropriation of goods:
This type of fraud is more difficult to detect especially when the goods are less bulky and are of
higher value. Such fraud can be detected only if proper stock records are maintained.
Efficient system of record keeping, periodical checking, internal check and adequate external
security arrangements will be helpful to avoid misappropriation of goods .
3. Manipulation of accounts:
This type of fraud is more difficult to discover as it is usually committed by directors or
managers or other responsible officials with the object of:
a) Showing More Profits than what actually they are:
i) So that if they get commission on profits, they may get more commission or
ii) Their service may be retained by showing to the shareholders that because of their
efficiency they have shown more profits.
iii) If they hold share, they may sell them at high price by declaring higher dividends or
iv) To obtain further credit by showing the financial position of the business better than what
actually it is.
b) Showing Less Profit than what actually they are:
i) In order to purchase shares in the market at a lower price or
ii) To reduce or avoid the payment of income tax or
iii) To give a wrong impression about the success of the business to competitors.

III SPECIFIC OBJECTIVES:

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 The term “audit” should not be taken to imply financial audit alone. The audit can be
conducted in other like review of operations, performance, management policy, cost records &
so on .According there will be specific objective in respect of each type of such specific audits.
Eg: The cost audit is to check the cost records in order to make a report on the proper
ascertainment of cost of production of goods or services.
Conclusion:
From the above references, it can be made out that auditor is a watch – dog. Which means he
has to look after the interest of those who are the owners of the business. He should make every
effort to protect interest of his client by detecting errors & frauds.

BOOK KEEPING, ACCOUNTANCY AND AUDITING, INVESTIGATION:

In earlier days book-keeping, accountancy & auditing were considered as three aspects of the
term accountancy. But with the increase in trade commerce & industrial activities they have
become separate functions.
Book keeping is an art of recording the business transactions in the books of original entry & the
ledgers this work is done by junior clerks.
 Journalizing.
 Posting to the ledger.
 Totaling of various accounts in ledger.
 Balancing of ledger.
Accountancy means the compilation of accounts in such of affairs of the business. This work is
done by an accountant. Work of accountancy starts where Book keeping ends
 Balancing of ledger accounts.
 Rectification of errors.
 Preparing the trial balance.
 Preparing the trading, profit &loss account.
 Preparing balance sheet.
Auditing means the verification of books entries and accounts to find out their accuracy.
Checking and verification of work done by accountant.
Investigation implies an examination of the accounts of a business for some special purpose. It
is done by an investigator. Investigation is done
 To ascertain the true financial position of the company.
 Its profit earning capacity.
 To know the existence of fraud and the extent of mismanagement.

DIFFERENCE BETWEEN ACCOUNTANCY AND AUDITING

ACCOUNTANCY
“ACCOUNTANCY BEGINS WHERE BOOK KEEPING ENDS”.
Accountancy involves the preparation of final accounts to show the result of the business at the
end of the financial period. The man who is interested with this work is called accountant. His
work is not only to supervise the work of the book keepers but also to analyze, review and draw
conclusion from the final accounts.
AUDITING
“AUDITING BEGINS WHERE ACCOUNTANCY ENDS”.

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Auditing is a careful and critical examination of books of accounts to find out their accuracy
whether the profit and loss account and the balance sheet have been properly drawn up and
whether they exhibit a true and fair view of the state of affairs of business.

Basis of Accounting Auditing

distinction
1) Nature Accounting refers to preparation of Auditing refers to examination
accounts. and checking of financial records.
2) Objective The primary object of accounting is to
The primary object of auditing is
find out the trading results of business
to certify the correctness and
during a financial year and show the
justification of the financial
financial position of the concern on a
statements prepared by the
particular data. accountants.
3) Qualification The accountant need not be a chartered
The auditor must be a qualified
accountant. chartered accountant.
4) Appointment Accountant is employee of the business.
Auditor is independent outsider
appointed on contractual basis for
a year.
5) Status The accounting work is done by a The audit work is done by an
permanent employee of the concern. outsider.

6) Scope Its scope is restricted to preparation of It is determined by the agreement

financial statements and their between auditor and his client.
interpretation.
7) It starts where book-keeping ends. It starts where accountancy ends.
Commencement
8) Remuneration The accountant is paid monthly salary. The auditor gets a fixed amount as
per agreement with his client.

9) Knowledge The accountant may or may have any The auditor must have thorough
knowledge of auditing and its knowledge of accountancy.
techniques.
10) Time period Accounting work is undertaken Generally auditing is taken up at
throughout the year. the end of the year.
11) Regulations Accounting is governed by
any Auditing is governed by the code
applicable professional regulations. of conduct and standards laid
down by the ICAI.
12) Submission of The accountant is not required to submit The auditor is required to submit a
report a report on the financial statements report to his client on truth and
prepared by him. fairness of financial statements.
13) Compulsion Keeping of accounts is a must to know Audit is not compulsory except
the exact financial position and where this is required by the

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 profitability of the business at the end of statute.
the financial year.

ADVANTAGES AND DISADVANTAGES OF AN AUDIT

INTRODUCTION:
It has become a necessity for every commercial and non-commercial organization to get their
financial statements audited, so that it becomes helpful for them to plan for future and make
improvements in operations.
Sole trader is interested in knowing whether the business is conducted efficiently or not.
In case of partnership business, to maintain healthy relations among the partners, it is
important that true financial statement must be made known to every partner.
In case of joint stock companies shareholders would like to know whether the amount
invested by them is properly used or not.

ADVANTAGES OF AUDIT

1. For the
Owners of
the Business
and
Shareholer.

2. For the
5. For Others.
Management

4. For the
3. For the
Government
Creditor.
Bodies.

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1) For the owners of the business and shareholders:
 - Incase of sole traders, he can value his business on the basis of audited accounts for the
purpose of sale of business.
 - Incase of partnership firm, audited accounts will be useful in valuing goodwill, for
admission or retirement of a partner.
 - Shareholders can judge the performance of management from audited accounts.
 - Shareholders can value their shareholders on the basis of audited financial statements.
2) For the management:
 - It helps the management in detecting and preventing errors and frauds.
 - It keeps the accountant and staff vigilant while preparing books and records as they
know in advance that all the accounts are to be audited.
 - Claims due to fire, theft and accident can be estimated from audited accounts.
 - Management gets advice on financial affairs from the auditors who have expert’s
knowledge.
 - Because the audited accounts are uniformly prepared over the year, comparison of such
statement becomes easier.
 - Money can be borrowed from the financial institutions and banks, if the accounts of the
business are audited.
 - It helps in reviewing the system of internal control and check.
3) For the creditors:
 - Long term and short term creditors can depend on audited financial statements while
taking decision to grant credit to business house.

4) For the government bodies:

 - Taxation authorities depend on audited statements in assessing the income- tax, sales –
tax and wealth tax of the business houses.
 - Audited accounts can be produced in court to provide as an evidence.
 - Audited accounts are useful for the government while granting subsidies etc.
5) For others:
 - It can be used by insurance companies to settle the claims arising on accounts of loss by
fire.
 - Incase of amalgamation and absorption, the purchasing company can calculate purchase
consideration on the basis of audited accounts.
- It safeguards the interest of the workers because audited accounts are useful for setting
trade disputes for higher wages or bonus.
DISADVANTAGES OF AN AUDIT:
 - The audit may not give complete picture. If the accounts are prepared with bad intention
and for that fraud is committed, auditor may not be able to fully disclose them.
 - Sometimes the auditor has to depend on explanations, clarification and information
from staff and client. He may or may not get correct or complete information.
 - Under law, shareholders appoint an auditor, but in fact directors appoint him, under
such situation he may not be an independent auditor.
 - The auditor has to depend upon such reports which may not be always correct.

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  - The auditing may not serve its purpose unless the auditors are independent and bold.
 - Auditing is considered as a mechanical work.
 - Auditing is a post – mortem examination. There is no use of such examination when
events have already happened.
 - It is very difficult to verify items like stock in trade success of audit depends on the
sincerity with which auditor has performed his duties.
Conclusion:
Thus the importance of auditing can be judged from the fact that even those organizations not
covered by companies act 1956 get their financial statements audited.

TYPES OF AUDIT OR CLASSIFICTION OF AUDIT

INTRODUCTION:
Auditing is concerned with verification of accounting data and determining the reliability and
accuracy of accounting statements. The scope of audit has widened to different types of audit
such as management audit, operation audit, cost audit etc, with the recognition of audit as a
profession all the countries of the world have framed certain rules and regulations.

TYPES OF AUDIT

A) ON THE BASIS OF B) ON THE BASIS OF

ORGANISATIONAL CONDUCT OF
STRUCTURE AUDIT

A) ON THE BASIS OF ORGANISATONAL STRUCTURE:

1) Statutory audit:
Where audit in the case of an enterprise is made compulsory by law, it is called statutory
audit. statutory audit has been prescribed in the case of the following:

1) Companies governed by the companies Act, 1956.

2) Banking companies audit is governed by banking company’s regulation act 1949.
3) Insurance companies are governed by insurance act 1938.
4) Co-operative society’s act 1904 governs the audit of co-operative societies.
5) Public and charitable trusts are governed by the respective acts which governs them.
6) Electricity companies are governed by the provision of electricity act 1948 and
Indian electricity act1910.
2) Private audit:
When the audit is not statutory requirement, but it is conducted at the desire of owners, such
audit is private audit. Private audit is of the following types:
a) Audit of sole trader.
b) Audit of partnership.
c) Audit of individuals.
a) Audit of sole trader:

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 Incase of proprietary concerns, the owner himself takes the decision to get the accounts
audited. Sole trader will decide about the scope of audit and appointment of auditor.
b) Audit of partnership firm:
To avoid any misunderstanding and doubt, partnership firm recognize the advantages of audit
of financial statements. Auditors are appointed by the mutual consent of all the partners.
While conducting audit, the auditor must refer to the deed of partnership. He should obtain a
copy of such deed certified by one of the partners.
c) Audit of individual:
Many of the individuals derive income from property, shares, investment and other sources.
Auditor may be appointed to prepare the accounts and verify their accuracy. He can know the
true income from various sources and values of their properties.
d) Audit of institutions not covered by law:
Certain non-profit organizations e g: clubs, hospitals, libraries, charitable institutions etc get
their accounts audited. Auditors are appointed by the governing bodies.
3) Internal and External audit:
The audit is said to be external if the appointment of auditor is made by persons other than
whose performance is evaluated by auditor. An external auditor is appointed by the shareholders.
An audit is said to be internal when the auditor is appointed by persons who are responsible
for the performance of the entity. An internal auditor is appointed by the management by the
company.
4) Government audit:
Audit of Government offices and departments is covered under this heading.
1. Audit of government offices and departments are done by government auditors.
2. The president of India appoints the comptroller and Auditor General of India
(C & AG), who is the prime authority in the audit hierarchy of government accounts.
3. Each state has its auditor general.
4. To audit the accounts of municipalities, universities and other government institutions, local
auditors are appointed.
5. These auditors submit the report to C & AG who comments on it and place it before the
parliament.
6. It works strictly according to government rules and regulations.

B) ON THE BASIS OF CONDUCT OF AUDIT:

Based on the frequency with which audit is conducted, the audit is classified into following
types:
i) Continuous audit:
An audit which involves a detailed examination of the books of accounts at regular interval of
one month or three months such audit is called continuous audit.
The auditor visits his client at regular or irregular intervals during the financial year and
checks each and every transaction. At the end of the year he checks the profit and loss account
and balance sheet.
Business where continuous audit is applicable:
 Where it is desired to present the accounts just before the close to the financial year.
 Where the volume of transaction is very large.

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  Where the statement of accounts is required to be presented to the management every
month or quarter.
 Where no satisfactory system of internal check is in operation.
3) Partial audit:
When an auditor is asked to audit certain category of transactions made during a part of a
period it is known as partial audit. The auditor may be asked to audit the payment side of cash
book.

4) Balance sheet audit:

Balance sheet audit relates the verification of various items of balance sheet such as assets,
liabilities, reserves and surplus. The procedures under this audit is to follow a backward process.
First the item is located in balance sheet, then it is locates in the original record for the purpose
of verification.
5) Cost audit:
Cost audit is the complete checking and verification of cost accounts, to see whether the
concern is following cost accounting principles. The government may direct certain company to
maintain cost records and to get cost accounts audited.

6) Management audit:
In management audit an attempt is made to evaluate various management function and
processes. A detailed review of all the objectives, policies, procedures and functions of
management is made with a view to bring an overall improvement in managerial efficiency.
Management audit includes the following:
 Study of objectives of the organization.
 Target of each department to achieve the objectives.
 Reviewing the organizational structure.
 Comparing inputs and outputs for evaluating the performance and
 Making suggestions for improvement.
7) Operational audit:
Operational audit is review of operations. It involves intelligent examination of various
operations of functional areas of the business (ie) production, marketing, stores etc. observing
weakness, lapses, inefficiency in the operation and suggesting way to strengthen the system.
8) Interim audit:
When an audit is conducted between two annual audits such audit is known as interim audit.
It is conducted with a view to find out interim profits to enable company to declare interim
dividends.
9) Cash audit:
When an audit is conducted to check all the items of cash book, it is known as cash audit.
Auditor will check receipts and payments made by cash and bank with the vouchers and other
documents. It is useful when large amount to cash is received and paid.
Conclusion:
Thus by conducting various types of audit the management gets the advice of the auditor to
improve their performance.

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 AUDIT PROGRAMMES
SYNOPSIS:
INTRODUCTION
MEANING
DEFINITION
ADVANTAGES & DISADVANTAGES

INTRODUCTION:
Proper implementation of any plan depends upon a good programme. So the auditor should
chalk out a programme according to the requirement of each case as to what work is to be done
by senior or junior staff and the time by which the work is to be finished.

MEANING:
Audit program me is the auditor plan of action it is the description of the work to be done,
prepared by an auditor for the guidance & control of the assistants. it provides a guide in
arranging and distributing the work and in checking against the possibility of omissions.
An audit programme should be elastic &should be chalked out in such a way that if there is a
need for revision it may be carried out without any difficulty.

DEFINITION:
According to MEGIS, an audit programme is a detailed plan of the auditing work to be
performed, specifying the procedure to be followed in verification of each item in the financial
statements and giving the estimated time required.
Advantages:
1. Identification of the work to be done:
An audit programme spotlights the work to be done by the audit staff.
2. Ground work for audit operations:
It forms the basis for the audit operations in the current as well as future years. Even if
there is a change in the staff conducting the audit the new staff will have no difficulty in
knowing what is required to be done by them in any audit operation.
3. Efficient distribution of work:
It is prepared keeping in mind the level of competence & experience of each individual
member of the audit staff. Senior audit clerks are given complex assignment, juniors are
made responsible for routine work .This makes smooth and efficient execution of work.
4. Pinpointing of responsibility:
It lays down in clear terms. The work to be done, the allotted time for completion of the
work and the person to carry out.
5. Evidence against charge of negligence:
It serves as evidence against any charge of negligence on his part in the performance of
the audit.
6. Basis for subsequent revision:
It serves as the basis for revision in the audit operations in the light of any changes taking
place within the enterprises.
7. Ensures completeness:

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 It ensures all necessary work has been done and nothing has been omitted.
8. Progress of work:
The auditor is in a position to know about the progress of work done by his assistants.
9. Uniformity of work: A Uniformity of work can be attained as the same programme will
be followed at subsequent audits.
10. Guidance:
It is a kind of guidance to the audit clerk for the work he has to perform.
11. Reason for negligence:
In case any fraud or error has remained undetected, the responsibility for negligence
can be fixed on the clerk who had performed that work as his initials are put on the audit
programme.
12. Continuity:
Continuity is not lost even if the person on duty is changed.
13 .Final review:
It facilitates final review before the report is signed.

Disadvantages:
1. An efficient clerk loses his initiative because he adheres to the programme which has
been fixed for him. He may not make any suggestion.
2. Even if audit programme is well drawn up .it may not cover everything that might
come during the course of audit.
3. The audit programme may be followed mechanically year after though some changes
in the routine or internal check might have been introduced by the client.
4. Each business has a separate problem of its own & hence rigid programme cannot be
laid down for each type of business.
5. Drawing up of an audit programme may be unnecessary for a small concern.
6. The audit programme may be completed and certain items may not be checked.
Precautions:
These disadvantages can be overcome by
1. Impressing upon the audit clerk that the audit programme is only guidance & he should
use his initiative & intelligence during the courses of audit.
2. He should be encouraged to make suggestions.
3. The audit programme should be modified from time to time according to experience &
changes made in business.
4. While preparing the audit programme the audit assistants should be duly consulted.
5. Auditor should thoroughly review the internal control system prevailing in the concern.
Objects of audit programme :
a. To obtain informations regarding the accounting system, policies and control
techniques of client.
b. To ascertain the extent to which internal control techniques can be banked upon.
c. To lay down the nature, time and extent of audit techniques to be adopted.
d. To co-ordinate the total work.

Characteristics of good audit programme

i. Explicit and clarity of expression.
ii. Segmentation of work in the light of different aspects of accounting.

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iii. Logical flow of accounting documents
iv. Elasticity
v. Review of work
vi. According to scope of audit
vii. Based on evidences
viii. Record of movements

WORKING PAPAERS
MEANING:
The term audit working papers means the files of analysis, summarizes, comments and
correspondence built up by an auditor during the course of the field work of an audit
engagement.
It is the medium through which the auditor expresses his technical knowledge of accounting
principles & procedures as applied in the reports in the reports, statements & analysis of business
information.
These papers contain essential fact about account which is under audit.
DEFINITION:
Arnold W.JOHNSON defines that “audit working papers are the written, private materials
which an auditor prepare for each audit. They describe the accounting information which he
received from his client, the method of examination used, his conclusion and financial
statement.”
According to SAP-5” Documentation: issued by the Institute of charted accountant of
India, audit of working paper consist of:
a) Evidence obtained during the audit examination
b) Details of the methods & procedure followed by the objects of the audit.
Audit working papers
Audit working papers are personal written materials which an Auditor prepares with regard to all
audits and contains techniques adopted by the auditors, his decisions and conclusions and
relevant information regarding financial statements.
Some papers included in Audit Working Papers;-
1. The agreement regarding the appointment if the auditor or letter of appointment
2. Technical Features of the audited business.
3. Audit Programme
4. Certificates of officials in regard to such important matters as bad debts, valuation of stock,
unpaid
expenses, accrued income etc
5. Certificate issued by the banks in regard to the bank balance of the client certain date, safe
custody
of documents etc.
6. Correspondence between the auditor and the debtors, creditors, etc. the client.
7. Rough trial balance.
8. Important extracts from the minute books
9. Particulars of investment.
10. Draft final accounts.
11. A copy of the auditors book.

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OBJECTIVES /AIM OF WORKING PAPERS:
1. Support for auditor’s opinion: Working papers show in detail the work done by the
audit clerk to support the auditor’s report.
2. Basis for future work: Future in the same order on the basis of the previous working
papers.
3. Basis for review &revision internal control: The working papers enable the auditor to
point out the client the weaknesses of internal control system. He may therefore, be in a
position to advise his client as to how to avoid such pitfalls.
4. Basis for evaluation & training of audit staff: Working papers are the permanent record
& in case of any suit against him for negligence he can defend himself on the basis of the
working papers.
5. Use as permanent record: Working papers are the permanent record & in case of any
suit against him for negligence he can defend himself on the basis of the working papers.
6. Bridge between original transactions and financial statements: Working papers
provide an important link between original transactions and financial statements. Because
an auditor work mostly consists of tracing the business transactions, from the original
records to the financial statement & vice versa.
7. Quick preparation of report: Working papers enable the auditor to prepare the report to
be issued without much waste of time.
8. Moral check on assistants: Through Working papers auditor can know that his assistants
have followed his instructions.
9. Minimum dislocation: If changes &transfer of staff are very frequent and in such case
working papers exist the audit work can be assigned to others with minimum of
dislocation & without omission of any work.
10. Attention to outstanding items:
Items left outstanding during previous year may be paid particular attention in the future.

ESSENTIAL OF GOOD WORKING PAPERS:

1. Completeness:
Good working papers should contain all the necessary information so that it may be of
maximum use.
2. Organization & Arrangement:
Good working papers should be so arranged that one does not find any difficulty in locating
a particular matter. If not properly arranged it result is loss of time in finding a particular fact
while preparing the report.
3. Clearness:
The facts contained in working paper should be self explanatory:
4. The facts stated in working paper should be readily apparent to the reader.
5. Paper used stated in working paper should be of better quality & uniform size, so that it may
not be damaged by frequent handling.
6. Sufficient space should be left after each note so that any decision taken may be written in that
space.
7. After audit report has been prepared & delivered to the client. The working papers should be
filled & preserved for a period of 5 to 10 years.

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8. Person responsible in possession of working paper should be responsible for their safe
custody. They should not show to a third party except with the permission of client.

CLASSIFICATION OF WORKING PAPERS:

3. Audit
evidence
papers.

2. Audit
Administrat
ive papers.

1. Permanent
working papers.

1. Permanent files papers: It contains papers of continuing interest over many years audit of
the same client. The file can be used year. These include:
· MOA & AOA & other statutory documents.(e.g. partnership deed)
· Copies of other documents & minutes of meeting having continuing importance
· A short description of the type business carried on & places of business.
· List of accounts, records & responsible officials & plan of organization.
· Policy regarding valuation of stock ,change ,charge of department
· Client’s internal accounting audit instructions.
· Brief history of company, its products, markets.
· Copies of balance of earlier years.
2. Audit Administrative papers (current file): These papers are bound together with the
current years audit evidence papers. The following items may appear in the point of each year’s
current file.
· Appointment letter
· Memoranda of meetings with management.
· Memoranda of meetings with the audit committee of the client.
· Internal control questionnaire
· Management control questionnaire

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 · EDP control questionnaire.
· Internal control system & flow charts
· Audit programme.
· A working trial balance of general ledger accounts.
3. Audit evidence papers: The current year evidence working papers contain the record of the
procedures followed, tests performed, evidence obtained & the decisions made in the course of
audit. These papers themselves are communication of the quality of audit so audit. So it must be
clear, concise, complete, well-indexed & information.
Types of working papers:
 Audit programme.
 Audit note book
 Copies of documents which the auditor has taken
 The schedules of debtors &creditors, fixed assets, investments.
 Certificate of stock in trade & its valuation.
 Contract letters from the client
 Particulars of department, investment.
 Copies of resolution passed in meeting of shareholders & directors etc.
MERITS (OR) PURPOSE OF WORKING PAPER.
The following are some of the merits of the working paper.
1. They represent the volume of work performed by the auditor and his staff which held in
preparing a reports.
2. They show the extend of follow the accounting principle and accounting standard.
3. They are useful as evidence against the charge of negligence.
4. They act as guide for subsequent examination.
5. They assist the auditors in co-coordinating and organizing the work of audit clerk.
6. They assist in planning and performance of audit work.
7. They enable the auditor to know the weakness of the internal check system.

Audit Note Book;-

An important component of Audit-Working papers is audit note- book basically
maintained by the audit clerk in which he notes down the important points and enquires which he
has to refer to officials clients or to discuss with his senior or the auditor himself.
Contents of audit note book:
1. Technical details about the business.
2. Queries for which explanations and information have to be demanded.
3. Missing vouchers and invoices whose duplicates have to be obtained.
4. Fraud and errors found in the books during the course of audit.
5. Details to be included in audit report.
6. Notes regarding system of maintaining accounts.
7. Information to be needed in future.
8. Names of officials who certify bad debts, depreciation, etc.
9. Record of all important correspondence.
10. Total of important ledger accounts.
11. Progress of audit work.
12. Record of suggestions made by the audit staff.
Advantages:-

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1. Defense in court of law.
2. Yard-stick of the efficiency and diligence and skill of the auditor,
3. Guide for future.
4. Future references,
5. Permanent certificate of audit.

UNIT- II
INTERNAL CONTROL
SYNOPSIS:
* INTRODUCTION
* INTERNAL CONTROL – MEANING
* DEFINITION
* OBJECTIVES OF INTERNAL CONTROL
* ELEMENTS/CHARACTERISTICS OF INTERNAL CONTROL
* SCOPE OF INTERNAL CONTROL
* CONCLUSION

INTRODUCTION:
As the size of the operation of the business firm increase and nature of activities became
complex, it is difficult for the manager to control the firm by his direct and close supervision.
The management in such a circumstance is interested to introduce a system of internal control.

MEANING:
Internal control is a wider term. It includes all type of control namely financial control,
managerial control and organizational control. As a matter of fact it covers even the internal
check and internal audit. It helps the organization to meet its goal more effectively.
Internal control involves a number of checks and control exercised in a business to ensure
its efficient and economic working. It has become one of the basic and essential factors for
efficient and effective management.

DEFINIITON:
According to SPICER & PEGLAR, “internal control is best regarded as indication as
the whole system of control, financial and otherwise established by the management in the
conduct of a business, including internal check, internal audit and other forms of control”.

OBJECTIVES OF INTERNAL CONTROL (OR) WHY TO HAVE INTERNAL

CONTROL:
Before introducing a proper system of internal control, businessman must know the
objectives or purpose for which it is to be introduced. The objectives of internal control can be
studied in two phases.
OBJECTIVE OF INTERNAL CONTROL

MANAGEMENT VIEW AUDITORS VIEW

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I. FROM MANAGEMENT POINT VIEW:
The benefits which the internal control system offers are
a) PROVIDING RELIABLE DATA:
Business decision required accurate information to run the business activities efficiently. For
example management required reliable information for fixation of selling price etc.
b) SAFEGUARDING ASSETS & RECORDS:
The physical assets of a company are stolen, misused or accidentally destroyed, if not
properly protected by adequate controls. The safe guarding of certain assets and records has
become increasingly important since the introduction of computer system. For example large
amount of information stored on computer media such as magnetic tape can be destroyed
permanently if care is not taken to protect them.
c) TO PROMOTE OPERATIONAL EFFICIENCY:
The controls within an organization are meant to prevent unnecessary duplication of efforts,
protect against waste in all aspects of the business and discourage other types of inefficient use
of resource.
d) TO ENCOURAGE ADHERENCE TO PRESCRIBED POLICIES:
The system of internal control is meant to provide reasonable assurance that procedures and
rules of the various institutes are followed by company personnel.
II. FROM AUDITORS POINTS OF VIEW
The study and evaluation of the management system of internal control is important to
auditors. The auditor must have a thorough understanding of the system. Simply by asking
certain questions, reviewing of organizational chart and studying a few procedure manuals to
obtain an understanding of the system is not sufficient.

ELEMENTS (OR) CHARACTERISTICS (OR) PRINCIPLES OF INTERNAL

CONTROL
An effective or a good system of internal control should have the following characteristic
which can be abbreviated as CROSSASIA for memory.
1) COMPETENT AND TRUST WORTHY PERSONNEL
Personnel are the most important elements of any system of internal control. If employee are
competent and trust worthy some of the other characteristic can be absent and reliable financial
statement can be still result.
2) RECORDS FINANCIAL AND OTHER ORGANISATIONAL PLAN
Documents perform the functions of transmitting information throughout the organizations
and between different organizations. The document must be adequate to provide reasonable
assurance that all assets are properly controlled and all transactions correctly recorded.
3) SEGREGATION OF DUTIES
For the prevention of both intentional and unintentional errors, following types of segregation
of duties should be taken care of, Segregation of operational responsibility from record keeping
responsibility. Separation of the custody of assets from accounting.
4) SUPERVISION
Directors should review the company’s financial statements and positions at regular and
frequent intervals. Comparison with result for previous period indicates problems that call for
further examination. From time to time, special reviews of particular items such as stock,
operation of wage department should be undertaken.

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5) AUTHORISATION
If control is to be satisfactory every transaction must be properly authorized. Authorization
can be of two namely,
o General
o Specific
Examples of general authorization are the issue of fixed price list for the sale of product, credit
limit for customers, reorder level for making purchases etc. Examples of specific authorization is
a sale transaction by the sales manager for used cars of a company.
6) INTERNAL AUDIT
Internal audit is a part of the whole system of internal control. It is the examination of
accounts of a business concern by its employee specially appointed for the purpose.
7) ARITHMETIC & ACCOUNTING CONTROLS
Chart of accounts in balance sheet and income statement is an important control because it
provides information to management and other financial statements users. Chart of accounts or
financial statement should be prepared in accordance with the generally accepted principles.

INTERNAL CHECK

INDRODUCTION:
Internal check is a valuable part of internal control. The entire system of accounting needs to
be organized in such a manner that it may ensure some sort of check without incurring additional
financial burden.

MEANING
Internal checks are also called inner check or inter check system. It is a system of accounts
keeping. It is an arrangement of duties of members of the staff in such a manner that the work
performed by one person is automatically and independently checked by another. For example,
in cash sales the sales man will not be allowed either to deliver the goods to the customers or
receive money from him. The cashier will receive the cash, the gate keeper will deliver the goods
and the accountant will make entry in the cash book.

DEFINITION
According to SPECIER AND PEGLAR,”A system of internal check is an arrangement of
duties whereby no person is allowed to carry through and record every aspect of a transaction, so
that without collusion between two or more persons, fraud is prevented and at the same time the
possibilities of error are reduced to a minimum”.
According to F.R.M. DE PAULA, “Internal check means practically a continuous internal
audit carried on by the staff itself, by means of which the work of each individual is
independently checked by other members of the staff”.
INTERNAL CHECK
Internal check means that check imposed in such a way on a day to day transaction that work of
one person is checked by another person automatically in this way the chances of frauds and
errors minimizes.
Objects of Internal Check:
1. Prevention of Fraud
2. Prevention of Error

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3. Swift discovery of fraud and error
4. Fixing the responsibility
5. Correct accounting of business transactions
6. Fast preparation of Final Accounts
7. Facility of Audit work.
8. To exercise moral pressure over staff.
9. To ensure that the accounting system produce reliable and adequate information
10. To provide protection to the resourced of the business against fraud, carelessness and
inefficiency.
11. To allocate duties and responsibilities of each clerk in such a way that he may be held
responsible for particular fraud or errors.
12. To minimize the chance of errors, fraud or irregularities in the business.
13. To increase the efficiency of clerk because the allocation of duties is base on the
principles of division of labour.

Essential features of Ideal Internal Check System:

1. Regarding Employees
i. Qualification and Training
ii. Honesty and Integrity
iii. Security
iv. Monitoring
v. Fixing Responsibilities
vi. Allocation of Work
vii. Authorization
viii. Compulsory Leave
2. Regarding
Accounting
i. Sound System of Accounting
ii. Procedure Manual
iii. Forms
3. Other Features
i. Utilization of Machinery
ii. Control over mailing
iii. Flexibility.

CHARACTERISTICS (OR) PRINCIPLES OF A GOOD SYSTEM OF INTERNAL

CHECK
1) FIXED RESPONSIBILITY
Responsibility of each individual must be properly defined and fixed. There should be a
schedule of duties of every employee in the entire department.
2) COMPLETION
The work should be divided in such a way that no single person is allowed to complete the
work solely by himself from the beginning to the end.
3) AUTOMATIC CHECK
A good system of internal check must provide for an automatic checking of the work of one
clerk by the other.
4) ROTATION OF EMPLOYEES
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 Where the employees are in large number, the auditor should suggest the rotation of the
various employees so that they should not develop same work within the staff of the concerned
department.
5) USE OF MECHANISED METHODS
As far as possible and keeping in view the requirement of the undertaking, the
mechanized systems of accounting should be adopted so that the erases or over writing can be
avoided.
6) REVIEW
The system of internal check should be reviewed from time to time to introduce
improvement.
7) RELIANCE
No clerk of the business should be relied upon too much.
8) SUPERVISION
A strict supervision should be exercised to ensure that the prescribed internal check and
procedures are fully operative.
9) FORMAL SANCTION
No deviation should be allowed from the established procedure till it is formally sanctioned
by the top official.

INTRENAL CHECK FOR CASH RECEIPT AND CASH PAYMENT

There is a great scope for misappropriation of cash if there is no well organized system of
internal check. The following system of internal check may be adopted for receipt of cash.
RECEIPT SIDE
Every receipt of cash should be entered in a rough cash book or diary in the presence of a
responsible person.
 All cheque received should be immediately cashed
 All cash receipt should be acknowledged by the issuing printed receipt which should
have counterfoil or carbon copies.
 The receipt should be signed by a responsible officer of the concern. The cashier also
should counter sign them.
 The receipt should be serially numbered
 Unused receipt should be kept under lock and key
 Spoiled receipts should be cancelled and should be presented along with counterfoils. If
some alteration is made in the receipt already written it should be properly initialized
 No blank counterfoils should be accepted
 All receipt of cash should be banked daily
 The cashier should not have access to the ledger
 Bank reconciliation statement (BRS) should be prepared periodically by a person other
than cashier.
PAYMENT SIDE
 All payment as far as possible except the petty expenses should be made by crossed
cheque.
 Before issuing cheque to trade creditors his ledger account must be checked with the
statement received from him.

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  Vouchers should be obtained for all payment
 All the vouchers are to be numbered consecutively and properly filed.
 The number of cash voucher should be entered in the cash book against the respective
entry.
 All cheque should be signed only by authorized persons. The same person should also
initial the counter foils of the cheque book.
 Unused cheque book should be kept under lock and key.
 Petty cash should be organized under “Imprest system”
 Internal control over the preparation of wage sheet and payment of wages should be
exercised.
 “Bank Reconciliation Statement” should be prepared frequently by a person other than
the cashier and it should be compared with the cash book.
 The person in charge of making payment should have no connection with the receipt of
cash.

INTERNAL CHECK REGARDING PURCHASES

Purchases are a very important part of the activity of a business. Thus it is necessary to
have a proper system of internal check regarding purchase. The following steps are suggested to
secure an effective control over credit purchase.
PROCEDURE OF PURCHASE CYCLE:
1. REQUISITION
The procedure for issuing purchases requiting should be specified. The head of the dept which
needs of goods should fill in a requisition slip duly signed and then should send it to the purchase
department. The details about quantity, quality and the time by which the goods must be supplied
be clearly mentioned in the requisition slip.
2. ENQUIRY
Purchase department makes a enquiry about the terms and conditions of purchase from
different suppliers. For this purpose tender are generally invited but who shall open and accept
the tender should be clearly specified. As a rule the lowest tender should be accepted and
accordingly a decision should be taken.
3. PURCHASE ORDER
The purchase department places orders which should be recorded in the “purchase order
book”. For this purpose four copies of purchase order should be prepared.
- One copy will be sent to vendor,
- Second to the store department,
- Third to the accounts department and
- Fourth one will be retained by the purchase department itself. A responsible officer should sign
the purchase order.
4. RECEIPT OF GOODS
On receipt of goods the purchase department should properly inspect them and after an entry
in the “goods inward book”. The same should be sent to the store.
5. MAKING THE PAYMENT
The purchase department should thoroughly check the invoice and send the same to the
accounting department for payment. The accounts department compares the invoices with the
purchase order and should also verify the calculation. A good system of internal check with
regards to purchase will prevent the following types of irregularities, error and frauds.

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a) FICTITIOUS
It may be recorded in the purchase book and payment with drawn may be misappropriated.
b) DOUBLE PAYMENT
Some invoices may be recorded twice and double payment made may be misappropriated.
c) ARTIFICIAL INFLATION IN PROFITS
Goods purchased may not be entered in that period so as to inflate profiles.
d) ARTIFICIAL REDUCTION IN PROFITS
Goods not received in one period may be entered as purchases so as to show profits less than
the actual.

INTERNAL CHECK REGARDING TO SALES

Sales are the most important sources of revenue in a business. In most of the business concern
it is only sources of revenue. Therefore the system of internal check regarding sales should be
extremely efficient otherwise the following type of frauds may be committed.
 Sales may be omitted from recording in the sales book
 Fictitious sales may be recorded in the sales book.
 Goods actually sold may be treated as sent on approval basis or by value payable by post.
 Sales of fixed assets may be treated as sale of goods.
 Sales of the next year may be recorded as the sales of the current years.
Thus to avoid such type of frauds the whole system of credit sales should be kept under proper
control and supervision.
INTERNAL CHECK SYSTEM TO SALES
 All order received should be entered in the “order received book”
 Only authorized person should accept the order
 Only senior official should have authority to grant credit facility.
 The person having authority to examine and record the dispatch of goods should not be
from among those who are in charge of stock maintenance or invoice duties.
 There should be a well established procedure for regular comparison of records of goods
dispatched with original order, dispatch memo and invoice.
 Invoice should be prepared in triplicate.
 Two copies of invoice should be sent to the customers concerned who should be asked to
return a copy there off with his signature as a proof of receipt of goods mentioned there
in. From the third copy of the invoice particular of the sales should be recorded in the
“goods outward book”.
 A proper procedure to follow the goods sent on approval, sales or return, free of charge
etc.
 Goods returned by customer should be entered in a separate register. For example “goods
inward book” and the reason for the return.
 Authority to deals with customer’s enquiries, overdue accounts and writing of bad debts
should rest with a senior person.
INTERNAL CHECK REGARDING TO WAGES
INTRODUCTION:
The system of internal check for wages should be devised in a careful and planned way
especially the manufacturing concern. In big manufacturing concern huge amount will have to be
disbursed to number of workers periodically as wages. There are greater possibilities of frauds in

26
such concern. Efforts therefore should be made to prevent them with the help of some suitable
arrangement of internal check.
It should be actively enforced and supervised by some responsible officers. The objects
are,
 To avoid inclusion of dummy or ghost workers in the wage list
 To avoid incorrect time and piece work record
 To avoid fraudulent manipulation of wage sheet and misappropriation of money etc
SYSTEM OF INTERNAL CHECK.
 To minimize such risk of fraud the following system of internal check may be adopted.
 Wage department should be headed by a responsible official other than the cashier.
 The time of arrival and the time of leaving of every worker must be recorded by the gate
keeper
 All apportionment, removal and fixation or alteration of wage rate should be in writing
and authorized by a responsible officials.
 In respect of time workers the time records maintained by the gate keeper and the
foremen must be compared and checked to deduct dummy or ghost worker if any
 Each worker should be given a card bearing his name and numbers. The worker should
write the time of his arrival and leaving from the factory, the job number and the
department in which he works and the terms of employment. The foreman in charge
should initial the entries on the card. These cards will be collected from the workers and
sent to the wage office at the end of each week
 Overtime must be recorded separately and passed and approved by the foreman and
work manager.
 The workers should not be allowed to leave the factory without written permission before
the scheduled time.
 Wage sheet should be prepared for piece worker separately by person not connected with
the recording of attendance and work of the employees. Each person who took part in the
preparation of wage sheet should initial it for the work performed.
 A cheque should be drawn for the exact amount payable.
 Wages should be paid by a person not connected with the preparation of wage sheet. But
in the presence of foreman and work manager.
 Wages should be paid only the workers who are present and not to their nominees.
 A statement of “unpaid wages” should be prepared and which should be signed by the
cashier and concerned foreman.
 Advances should be discouraged. If unavoidable advances should be given through the
petty cashier. Later on they should collect from the wages of the respective.
 If casual workers are also employed in the factory a separate record should be maintained
about them. Such records should e examined periodically by responsible officers.
 There should be specific instruction with regards to the procedure will be followed for
dealing with unclaimed wages. These should include of preparation list of unclaimed
amount and immediate deposit of the sum in the bank in a separate accounts
 Senior officer should do surprise checking of wage sheet and wage payment to ensure
that,

 Fake dummy names are not shown in the wage sheet.

 Wage rate are not over stated or deduction are not under stated.

27
  False over time payment are not recorded.

INTERNAL CHECK WITH REGARD TO STORES (STOCK)

The stores department has the charge of preserving and issuing stores to different
departments. Proper control of stores is very much essential to prevent pilferage, theft and
misuse. Therefore, the internal check system in relation to stores must give careful attention.
The following general rules may be followed to ensure effective check over stores:
1) Location of the store:
Store should be located at convenient place. It should have proper storage facilities so that
goods may not be misplaced, misused or wasted.
2) Receipt of stores:
On receiving stores, the stores department will prepare a ‘Goods received Note’ in triplicate.
- One copy will be sent to the purchase department,
- Second copy will be sent to the accounts department,
- Third will be retained by the stores department itself.
The stores should be properly checked after their receipt.

3) Preservation of stores:
- Responsibilities as to safeguarding and maintenance of stores should be clearly determined.
- Persons engaged in maintenance of inventory records should have nothing to do with stores.
- There should be separate place for each category of stores.
- For proper store control, a system of code number should be established for each item and the
place where it is kept.
- The system of bin cards should be used to show the receipts, issues and balance of stores.
- Stock taking should be carried out at regular intervals by a responsible person who is not
involved in purchase, issue or maintenance of stores.
- Goods kept at outside warehouses should be properly controlled and inspected.

4) Issue of stores:
- The stores should be issued only on the requisition or demand note duly sanctioned by a
responsible person.
- Each requisition should contain the name or code number of the department and description of
stores required and these should be checked with the list of stores commonly used by the
department.
- Only authorized person should be allowed to remove articles from the stores according to the
requisition.
- The stores officer should be seated near the gate so that all issues may be made under his
supervision.
- The gate – keeper should be instructed not to allow any material out of the factory without
necessary permit from the store keeper.

5) Recording:
After the issue of material from the stores, the stores issue requisition should be sent to the
accounts sections for proper records there.

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UNIT – III

VOUCHING
SYNOPSIS:
 MEANING OF VOUCHING
 OBJECT OF VOUCHING
 PROCEDURE OF VOUCHING
 IMPORTANCE OF VOUCHING
 KINDS OF VOUCHERS
 VERIFICATION AND VALUATION OF ASSETS
 VERIFICATION OF LIABILITIES

MEANING OF VOUCHING
Vouching is an important aspect of auditing. Audit without vouching shall be incomplete.
It enables testing the truth of items appearing in the books of original entry.
Vouching does not mean only comparing the cash receipt with the counterfoils of the
receipt book or the bank pay in slip, but it includes proper examination with reference. Thus the
act of establishing the accuracy and authenticity of entries in the accounts book is called
“vouching”.
So vouching means testing the truth of the entries appearing in the books of accounts
with the support of any documentary evidence. The documentary evidence is commonly known
as vouchers, invoice, receipts, and minutes, bought note, wage book etc are example of voucher.
DEFINITION
According to Ronald A. Irish, “vouching is a technical term which refers to the inspection by
the auditor or documentary evidence supporting a transaction”.
VOUCHING
Vouching is the examination of 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 authorized and are correctly recorded in books.

OBJECT OF VOUCHING
The main objectives of vouching are as follows.
1) All the transaction which is connected with the business has been recorded in the books
of accounts properly.
2) To verify that all transactions recorded in the books of accounts are supported by
documentary evidence.
3) The vouchers which support the entries are legally valid from the view point that they are
authentic and properly dated.
4) To verify that no fraud or errors has been committed while recording the transaction in
books of accounts.
5) The vouchers have been processed carefully through various states of internal check
system.
6) Every transaction recorded has been adequately authenticated by a responsible person.

29
 7) While recording the transaction whether distinction has been made between capital and
revenue items.
8) Whether accuracy has been observed while totaling, carrying forward and recording an
amount in the accounts.

VOUCHERS
MEANING OF VOUCHER
A voucher may be defined as any documents which evidences a transaction or an entry in a
book of accounts. It may be in the form of a money receipts, invoice , cash memo, bank pay in
slip, agreement of contract, a resolution passed at a meeting of the board of directors of
shareholder , the minutes of a meeting, correspondence with parties and so on.
PROCEDURE OF VOUCHING
The auditor must be taken the following procedure while vouching the transaction.
1) While vouching a transaction auditor must verify the authenticity of transaction, accuracy
of amount recorded and proper classification of accounts.
2) Auditor should see that all the vouchers are numbered serially and dated.
3) The voucher which has been checked by the auditor should be stamped or tick marked
with a special sign, so that it may not be used again for a fictitious transaction.
4) The amount in the receipt must be shown in words and figures. If the two differ then it
should be investigated.
5) If the voucher is in the personal name of the partner, manager, director or any other
person, it should be seen that proper treatment for such transaction has been provided in
the books.
6) If any voucher is doubtful the auditor should proceed cautiously and use special tick for
such voucher.
7) It should be seen that every voucher is certified by the responsible of the business.
8) For missing voucher the auditor should ask for explanation from the concerned official. If
no satisfactory reply is received then it should be further investigated.
9) While vouching the auditor should not take any help from client staff.
10) While vouching the auditor should keep in mind that distinction is made between capital
and revenue items.
11) For certain transaction auditor may refer the resolution passed at the meeting of share
holders or directors
12) When purchases are made on cash basis, auditor should see that such transaction are not
recorded twice, once in the cash book and then in the purchase book.
13) As far as possible vouching of books of accounts of a particular period must be
completed him one continuous sitting.
14) Auditor should use specific tickets for vouching cash payment, receipts, purchase, sales
etc.

IMPORTANCE OF VOUCHING
“VOUCHING IS THE BACKBONE OF AUDITING”
Vouching is considered to be the essence of auditing or backbone of auditing due to the
following reasons.
1. PRIMARY STEP IN AUDITING

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 Vouching is the preliminary step in the audit of accounts. If an auditor completes this
work carefully, he can proceed further in his task easily.
2. ACCURACY OF BOOKS OF ACCOUNTS
The main aim of audit is to check the books of accounts to ascertain their accuracy.
This object of audit is fulfilled by vouching since it establishes the accuracy and authenticity of
transaction.
3. BASIS FOR THE VERIFICATION OF ASSETS AND LIABILITIES
Vouching is the basis of verification of assets and liabilities which is the next step in
auditing. The auditor has to certify the correctness of assets and liabilities appearing in the
balance sheet for which vouching is helpful to him. Let us take an example of cash at bank stated
in a balance sheet. If it is to be certified as correct the auditor has to vouch the pass book
counterfoils of the paying in slips, banker’s advice note, counterfoils of cheque book and other
correspondence with the bank. He should further compare these items with the cash book and
check the bank reconciliation statement.

4. DETECTION OF ERRORS AND FRAUDS

During the course of vouching the auditor is able to detect errors and frauds which is the
subsidiary object to audit. This possibility of detection automatically prevents the commission of
errors and frauds.
5. CERTIFICATION OF STATE OF AFFAIRS OF A BUSIENSS
The auditor has to certify that the profit and loss account and the balance sheet exhibit a
true and correct view of the state of affairs of a business. In order to certify like this or otherwise
the vouching is of much use of an auditor since it reveals the correctness of accounts and forms
the basis of verification.

FEATURES OF GOOD VOUCHER (OR) REQUISITIES OF A VOUCHER

1. ADEQUATE
Adequacy is not to be confused with the number of vouchers which the auditor is able to
collect in support of a transaction or an entry. The important thing is the relevance and authentic
of a voucher.
2. REALICBILITY
Reliability of a voucher is to be determined with reference to the manner of preparation
and maintenance of the voucher, for example whether the voucher is addressed to the firm at its
normal business address, and whether it is properly dated, authorized and filed.
3. COMPETENCY
Competency of a voucher will largely depend on the place of its origin. Vouchers
originating outside, such as written confirmations obtained from debtors or creditors, may be
safely treated as competent evidence. But vouchers originating outside but held by the client e.g.
purchase invoices or bank statement cannot be so treated because these can be easily forged or
altered. Vouchers processed through an effective internal control system can also be relied upon.

VERIFICATON
MEANING:

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 Verification means the procedure normally carried out at the year end, to confirm the
ownership valuation and existence of items at the balance sheet date. It also involves confirming
that presentation in the financial statements is in accordance with legislations.
The auditor must verify that the various items appearing in the balance sheet are in the
possession of the concern. In simple words verification means ‘proving the truth’.
DEFINITION:
According to Spicer and Pegler, “verification of assets implies an enquiry into the value,
ownership and title, existence and possession and the presence of any charge on the assets”.
Verification of assets involves the following points:
1. Comparing the ledger accounts with the balance sheet
2. Verifying the existence of the assets on the date of balance sheet.
3. Satisfying that they are free from any charge or mortgage
4. Verifying their proper value.
5. Assets were acquired for the business.

VALUATION
MEANING:
Valuation means to set the exact value of an asset on the basis of its utility. Valuation is
very important because the accuracy of balance sheet depends much upon how correctly the
value of various assets and liabilities has been made .both over valuation & under valuation
exhibit wrong picture of the financial affairs of the company.
The valuation of assets should be done by the responsible of the concern and the auditor
has to see whether they have been properly valued or not. For this purpose auditor can obtain
the certificates of values and other competent persons.

Valuation involves the following points:

Auditor has to check that items appearing in the balance sheet are valued according to
the generally accepted principles of accounting, prevailing practices etc.
He should take into account the following.
a) Obsolescence of assets due to change in economic condition or increased competition.
b) Technological changes.
c) Government regulation as regards use of property.
d) Replacement or relocation of assets.
e) Decline in the usefulness of any asset due to inadequate maintenance and Losses from
business operations.
f) All liabilities of the clients business are disclosed in the financial statements.
g) Proper classification of assets& liabilities are made.

While valuation of assets the auditor must keep in mind

 Chances of asset becoming obsolete
 Original cost of the asset
 Expected working life of the asset
 Scrap value of the asset
 Fixed assets should be valued at cost less depreciation
 Current assets should be valued at cost or market price whichever is less.

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 VERIFICATION AND VALUATION OF DIFFERENT ASSETS

1. INTANGIBLE ASSETS:
These are the assets which cannot be seen or touched
a) GOODWILL: Goodwill is the value of reputation of the firm. It does not diminish in value
with use. The value varies with the earning capacity of business.
Verification: verified from the agreement with the vendor showing the price paid for it.
Valuation: goodwill should be valued at cost less amount written off .

b) PATENTS: A Patent is an official document, which secures to an investor exclusive right

for years to make, use or sell his invention.
Verification: Verified with the help of the certificates which have granted such patent rights.
The auditor should also ensure that the patents are registered in the name of the client.

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Valuation: Patents must the valued at cost less depreciation. It should be written off in a period
of sixteen years after which the right automatically lapses unless the term extended.

c) TRADE MARK: It is a distinctive mark attached to goods offered for sale in the market in
order to distinguish the same from that of competitor.
Verification:
 It can be verified by examining the assignment deed duly endorsed by the office of the
registrar of trade mark.
 If it is purchased from others, expenditure incurred in this connection. Eg: registration
fees payment made to designer etc should be verified.
Valuation:
 It is valued at cost less depreciation.
 The causes of depreciation may be due to
- Lapse of time
- Obsolescence and
- Article going out of fashion.

d) COPYRIGHT: It is a sole right to produce or reproduce a book or an article. The life of

copyright is the lifetime of the author and fifty years after his death.

Verification:
 It should be verified with reference to the original agreements and correspondence and
other supporting evidence.
 If it is purchased, the price paid should be verified from the written agreement.
Valuation:
 Valued at cost less depreciation. Value is not stable because it loses value by passage of
time.
 If the sale of publication is low or nil, then it should be written off.

2. FIXED ASSETS:
Fixed assets are those which are acquired for permanent use and not for resale in the
normal course of business.

a) LAND AND BUILDING: Almost all the business undertaking own land and building. For
verification and valuation purposes, auditor should distinguish between the freehold and
leasehold property.

i) Freehold land & building – verification:

Verification of freehold land includes a care inspection of the title deed, conveyance or
purchase deed.
 To establish its genuineness a certificate from the client’s legal advisor may be obtained.
 If ownership documents are with legal advisor or banker, a certificate from the concerned
person should be examined.
 If there has been purchase of freehold land during the year, the purchase contract along with
relevant vouchers such as assessment notices, tax bills etc should be examined.

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  In case of sale of freehold land during the year, the sale deed along with all related vouchers
and correspondence should be verified.
 Freehold land should be note separately in balance sheet & not bracketed with any other
asset.
 He can verify the existence of the property by referring to the amount of taxes paid or by
actually inspecting the property

Valuation:
 Being a non –depreciable asset, it should be shown at cost, which includes purchase price,
unpaid taxes, broker’s commission, registration fees, legal charges & other expenses.
 If any payment made to municipality for lying of water mains, these also to be included.
 Land should be for the purpose of balance sheet valued at cost less depreciation.
Appreciation in value should not be considered.
ii) Leasehold land: When the land and building is acquired by a business concern for a fixed
duration on lease, the property is said to be leasehold.
Verification:
 Inspection of lease agreement.
 Auditor should see that lease agreement is registered with the registrar and the same is
certified by client legal adviser.
 The amount of lease along with all incidental expenses should be appropriately
capitalized by debiting to building account.
 Where the lease is in favour of other person than the client, a letter confirming the
arrangement should be obtained from the nominee.
Valuation:
 It should be valued at cost less depreciation which should be at a rate that is sufficient to
write off completely during the period of lease.

A) PLANT AND MACHINERY:

Verification:
 Auditor should verify schedule of plant and machinery certified by some responsible
officer.
 It should be verified with reference to original invoices, correspondence etc.
 Expenses incurred on erection of machinery, repairs, freight etc should be charged to
revenue account.
 Check whether plant and machinery is properly depreciated.
 If machinery sold, it should be seen that necessary entries have been passed and profit and
loss arising out of sale is duly recorded.
 If it is acquired through hire purchase, then method of payment, date when the title pass etc
to be verified.
 With regard to imported machinery, agreement with the foreign supplier to note the terms
& conditions on which machinery has been supplied.
 Import license covering imported plant copy of invoice, documents relating to customs
duty permission of RBI authorizing the remittance should be examined.
Valuation:
 Plant & machinery are generally valued at the original cost less depreciation at a
reasonable rate, to an accepted method which to be disclosed in the accounts.

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  Market or realizable value of Plant & machinery, which is subject to fluctuations, is
generally not considered for valuation purpose.

B) FURNITURE & FIXTURES: Furniture is a movable asset and can be easily removed from
one place to another. A fixture is an asset so affixed to land or building as to become a part
thereof e.g.: science laboratories in a college.
Verification:
 Auditor should verify this item with the help of invoices.
 Any expenses incurred in the purchase of this asset should be debited to furniture account.
 Any additions or sales made during the year should be carefully verified.
 Repairs to furniture should be debited to profit & loss account.

Valuation:
 Assets are valued at cost less depreciation at a reasonable rate.
 He should enquire into the method of charging depreciation because depreciation depends
upon the use of assets. For e.g. furniture used in hotel require depreciation than used in
office.
D) MOTOR VEHICLE: It may consist of trucks, wagons, small buses used to pick up and
delivery of goods and for transporting the employees.
Verification:
 Auditor may call for a schedule of vehicle and compare it with the motor vehicle register.
 He should examine the registration book for each vehicle.
 He should check the insurance premium receipt to ensure that the vehicles are fully insured
against accidents, theft etc.
 He should check speedometers are in working condition.
Valuation:
 Valued at cost less depreciation.
 Motor vehicle to be written off over the mileage they are expected to run.

3. FLOATING ASSETS:
a) CASH - IN - HAND:
 The auditor should verify the cash – in –hand by counting it on the date of balance sheet.
 He should verify in the presence of a cashier so that he may not be blamed for the shortage
of cash’
 He should count the cash, stamps; IOU’s in hand and see that IOU’s are genuine.
 To avoid fraud, he should take all vouchers and books into his possession till the entire
cash balance is verified.
 If not possible to pay a visit, he may ask the client to deposit the whole amount of cash in
the bank on closing day and can easily verify it. But IOU’s cannot be deposited.
 If physical counting is not possible, he should obtain a certificate signed by the person-in-
charge that he has physically verified the counting of cash balance.
 As regards cash in hand at different branches the auditor should get certificates from the
branch auditors &mention in his report that he has relied upon the certificates.
 The auditor should pay a surprise visit otherwise the cashier borrow necessary amount to
make up the shortage.
 Cash in transit should be verified with documentary evidence and correspondence.

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b) CASH- AT- BANK:
 He should compare the balance in pass book with the balance in cash book and difference
between the two should be reconciled by BRS.
 It is possible that fictitious pass book may be presented to the auditor. So he should obtain
a letter of confirmation from the bank.
 He should obtain separate certificates for fixed deposit account current account ,saving
account see that the” cheques outstanding” & cheques not yet collected are genuine.
c) BILLS RECEIVABLE: Bills receivable is a document of indebtedness.
 The auditor should examine the bills receivable book &prepare a schedule of all those bills
receivable which have not matured before the date of the preparation of the balance sheet.
 Sometimes the bills might have matured and honoured subsequent to the date of balance
sheet but prior to the date of audit. The auditor in such a case should vouch the cash
received as shown in cash book.
 For bills discounted but remain outstanding at the time of audit, the auditor should see that
a note for the contingent liability is mentioned at the foot of balance sheet.
 If bills deposited with the bank for safe custody, it should be verified on the basis of
certificates obtained from the banks.
 Bills receivable dishonored before the date of balance sheet and not renewed should not be
shown as bills receivable, but should be included in sundry debtors.
 He must also make due inquiries regarding the bills that are out for collection. He will
prepare the list of bills classifying them into
- Bills discounted
- Not discounted
- Sent for collection.
d) STOCK – IN –TRADE: The correctness of the profit and loss account of a concern depends
upon the correctness of the value of stock of goods in hand and at the close of the period.
Verification:
 Auditor has to verify the existence of the stock in hand and it is valued according to certain
accepted principles.
 He should secure a copy of the client’s physical inventory verification in advance of the
actual verification.
 He should obtain physical layouts of all plants, giving names and all departments where
inventory is held and also the names of person incharge.
 Proper and adequate records of inventories have been maintained should be checked.
 He should see that personnel employed for verification are competent have enough time to
devote to the work and are not concerned with custody or record of inventories.
 He should apply test check of atleast 5%of the items to ascertain whether stock records
correctly represent the stock –in-hand.
 He should see that inventory lying with third parties is included in the inventory sheet.
 He should visit where major items of inventory are located.
 He should see that stock sheets are signed by a responsible official.
valuation:
 Stock -in-trade being a floating asset should be valued at cost or market price whichever is
less.
 He should check that the inventories are correctly valued on the basis stated & also it is
followed from year to year.

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  Raw material & semi finished goods are valued at cost.
 Value of work in progress is fixed after adding cost of raw material.
 Labour & proportionate cost charges.
 Finished stock always valued at cost /market price whichever is less.
 He should see that proper provision is made for depreciation of the damaged, obsolete, out-
of-fashion stock etc in order to find the exact value of stock.
e) SUNDRY DEBTORS: According to the company’s act 1956, sundry debtors should be
shown as under.
 Debts considered good & in respect of which the company is fully secured.
 Debts considered good for which the company holds no security other than debtor’s
personal security.
 Debts considered doubtful or bad and
 Less provision.
Verification:
Accuracy: The auditor should obtain a schedule of debtors certified by responsible officer.
Accuracy can be verified by reference to the schedule of debtors and relevant ledger accounts.
Validity: Confirmation requires direct communication with the debtors. The auditor should
carefully determine the method, time of requesting such confirmation and the no of debtors to
be requested after taking into consideration.
 Degree of internal control
 Probability of response from the debtors and
 Materiality of accounts.
Collectability: Satisfactory confirmation of a debt is not an evidence of its collectability. The
auditor should examine the adequacy of reserve for bad and doubtful debts and bring
inadequacy of reserve to the knowledge of the owner of the business.
Valuation:
Disclosure in financial statements:
Book debts are to be shown in the financial statements at their estimated realizable value ie
from total book debts; provision for doubtful debts should be deducted.
f) INVESTMENTS:
Investments include government securities, share, debentures etc.
Verification:
List of investment:
 The auditor should ask for a schedule of investments held by the client.
 He should make a complete examination of the names, cost, and market value on the date,
book value, rate of interest etc.
Existence: The auditor should check all the securities and tally them with the schedules.
Verification:
 The auditor should inspect the broker’s contract note, the bill and receipt to see that the
investments are held in the name of the client.
 The auditor should also see that the client has the power to invest the money in shares,
debentures etc of other company’s
Ownership: The securities themselves may be consulted or brokers note etc may be examined
for checking the cost .i.e.
- Purchase of investment:-bought note.
- Sale of investment:-sold note & cash book.

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Underwriting contract: In case the investments have been acquired as a result of underwriting
contracts, their cost should be the amount subscribed less underwriting commission received.
Interest or dividend: Interest or dividend accrued on investment should be verified by the
auditor.
Income: The auditor should verify all the income from investments are collected and recorded.
Register of investment: In case of a company, the requirements of sec 49 &372 with regard to
maintenance of investment register should be duly complied with.
Valuation:
 There is no depreciation in case of investment except investment in shares of mines &
plantation companies.
 The valuation of investment in balance sheet depend upon the purpose for which they are
held if they are held by trust company, such investments are treated as fixed assets and
value depends on AOA & MOA of the trust company.
 If they are held by finance company the basis of their valuation should be “cost price or
market price” whichever is less.
 For underwriters the cost price will be face value less commission.

4. FICTITIOUS ASSETS:
a) PRELIMINARY EXPENSES: It is the amount spent on the creation and location of the
company. This asset should be written off as early as possible. The auditor should verify that
the balance of preliminary expenses not been written off is shown in balance sheet under the
heading “Miscellaneous expenditure”.
b) DISCOUNT ON ISSUE OF SHARE AND DEBENTURES: Being a fictitious asset it
should be written off as early as possible. The auditor should verify that the balance of
“Discount on issue of share\debenture” Which has not been written off is shown in the balance
sheet.
VERIFICATION OF LIABILITIES

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 VERIFICATION BILLS LOANS
OF
PAYABLE AND
LIABILITIES
ADVANCES

TRADE OUTSTANDING
CAPITAL CRETITORS LIABILITIES
FOR
EXPENSES

RESERVES
AND DEBENTURES
FUNDS CONTINGENT
LIABILITY

Verification of labilities is aied at ascertining that all the business liabilities are properly
disclosed, valued, classified and presented in the balance sheet. If liabilities are not verified and
valued, the balance sheet will not reveal a true picture of the concern.

1. CAPITAL: Capital is not the liability of a company but still the auditor is required to verify it
to certify the correctness of balance sheet.
Verification:
 He should examine the MOA & AOA to know the maximum capital the company is
authorized to raise.
 He should check the cash book, director’s minute book to find out the number of shares,
various classes of shares, amount received & amount due from shareholders.
 If some shares have been allotted to vendors, he should examine the contract between the
vendors & the company.
 He should check that the share capital is the same as in the previous year unless there is
some alteration or addition by fresh issue.
 See that authorized capital has been shown separately in the balance sheet.
 Particulars in respect of each class of issued, subscribed capital have been shown
separately.
 Verify amount called up in respect of each class of shares.
 Total amounts of calls unpaid should be ascertained.
 If one class of shares issued by the company, the auditor should check that it has been
specified as equity capital in balance sheet.
In regard to capital of sole trader or a firm, the auditor should examine the partnership deed or
agreement, cash book & bank pass book in the year of establishment.

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2. RESERVES AND FRAUDS: It is that part of the profit which is set aside for future use i.e.
to meet any known or unknown contingency, liability etc.
Verification:
 The auditor should examine the minutes of the meeting of the board & see whether the
decision to create a reserve has been decided.
 If sinking fund is rated for redemption of debentures, the auditor should refer to debentures
trust deed to see that adequate provision is made every year.
 The auditor should see that those capital profits which have been transferred to capital
reserve account are really surplus of capital over the assets and liabilities.
 Capital reserve is utilized according to the articles and law because it cannot legally
distribute among shareholders.

3. DEBENTURES: Debenture is acknowledgement of a debt given under the seal of the

company which specifies the repayment of principle, payment of interest at a ficed percentage
untile the sum is repaid.
Verification:
 The auditor should refer to the memorandum and articles of association to find out whether
the company has got power to issue debentures.
 Debenture trust deed should be inspected. Since debentures are supposed to be redeemed,
the auditor should see the arrangements for their redemption.
 Debentures may be issued at pay, premium or discount.
a) If issued at par, but redeemable at premium, such a loss should be changed to profit and
loss account.
b) If issued at premium, it should not be utilized for distribution of dividends, unless specified
in articles.
c) If issued at discount, the debentures must be shown in balance sheet at face value and
discount should be written off as soon as possible.
 If insurance policy taken for redemption, auditor should verify that such a policy is duly
assigned to debenture holders.
 If debenture redemption fund created, the auditor should examine the articles of
association.

4. TRADE CREDITORS: These are persons for whom payment is to be made for the goods
supplied by them on credit basis.
Verification:
 The auditor should ask for a schedule of creditors. The schedule should be checked with
the balances of ledger accounts and statements of accounts received from creditors.
 Purchase ledger should be checked with the books of original entry, invoices, credit notes
etc.
 He should see that all purchases during the year have been accounted. Special care should
be exercised with regard to the purchases made at the close of the year.
 Where goods purchased on hire - purchase he should see that the conditions of agreement
are compiled with.
 If any debt is found unpaid for a long time, an enquiry should be made because instead of
paying creditors, the amount might have been misappropriated.

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5. BILLS PAYABLE: These are acknowledgements of debts payable.
Verification:
 The auditor should verify the item from bills payable book and bills payable account. If
there is any deviation it should be rectified.
 With the permission of his client, the auditor should obtain confirmatory statements from
the drawers directly.
 The bills paid after the balance sheet date should be verified with the entries passed in the
cash book.
 He should ensure that the bills which have been paid are not recorded as outstanding.

6. LOANS AND ADVANCES:

 Reference may be made to the agreement and correspondence for getting the loan.
 If interest on loan has been paid, he should see that it is shown as a liability.
 If loan has been secured by mortgaging any property, it should be indicated in the balance
sheet.
 He should get a confirmation letter from the advanced the loan regarding the amount of
loan interest due and security offered.
 In case of company he should verify memorandum of association and articles of association
as whether the company is empowered to borrow.
 He should also see that mortgage has been registered with the registrar of companies.
 Security for loan can be following types
- Investment i.e. stock and shares.
- Mortgage on property
- Insurance policies
- Guarantee by the third party
- Security of goods/
Investment: Auditor should examine them and their valuation should be checked.
Mortgage on property: He should inspect title deeds if property is deposited with the lender
and if mortgage exercised through conveyance in the name of lender, mortgage deed should be
inspected.
Insurance policy: Auditor should see that loans are granted within the surrender value of the
policy and he should examine the certificate issued by the insurance company.
Guarantee: The value of security depends on the status of the guarantor. He should ascertain
whether his position continues to be as such throughout the term for which the loan is granted.
Security of goods: Loans may be granted against security of goods which may be kept in the
godown. So the auditor should examine the godown keeper’s receipt.
Loan to employees: Sometimes loans may be granted by employers to employees against P.F.
accounts as security. In such case
 The auditor should examine the terms and conditions of loan given in loan agreement.
 Condition in respect of the repayment of loan and interest payable should be verified.
 He should ensure that the installments of loan are deducted from the employee’s salary.
 Get the confirmation from the employees in regard to their indebtedness at the end of each
year.

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7. OUTSTANDING LIABILITIES FOR EXPENSES: Auditor should obtain a certificate
from a responsible officer of the company stating that all outstanding liabilities for expenses
incurred have been brought into account.

8. CONTINGENT LIABILITIES: It is a liability which may or may not arise.

 The auditor should verify the contingent very carefully.
 He should examine the director’s minute book, correspondence made with the legal
advisers and information obtained from the officials.
 The auditor should insist the client to make provision because sometime contingent liability
turns into actual liability resulting in loss to the client.
 Obtain certificate from responsible official that expected contingent liabilities have been
brought into the books of accounts.

VOUCHING OF CASH TRANSACTION

SYNOPSIS:
* Introduction.
* Objectives.
* Vouching of cash receipts (receipt side).
* Vouching of cash payments (payments side).
* Conclusion.
INTRODUCTION
Vouching of cash transaction is a very important part of the auditor’s duty as there are
greater chances of fraud and misappropriation. The auditor should carefully examine the system
of internal check. He should enquire about the right and duties of the cashier, who should not
have any access to the ledger, books of original entries etc; otherwise there are greater chance of
fraud and misappropriation.
OBJECTIVES OF VOUCHING:
Following are the objectives of vouching
1. To verify that all transactions recorded in the books of accounts are supported by
documentary evidence.
2. To see that no fraud or error has been committed while recording the transaction.
3. No transaction has been recorded which does not relate to business.
4. Every transaction recorded has been duly signed by a responsible person.
5. To see that transaction has been recorded on and under the proper date.
6. While recording the transaction whether the distinction has been made between capital
revenue items.
7. Whether accuracy has been observed while totaling, carrying forward and recording an
amount in the account.
VOUCHING OF RECEIPT SIDE (OR) DEBIT SIDE OF CASH BOOK
While vouching the debit or receipt side of the cash book, the auditor must remain alert to
the following errors.
 Receipts may not be entered in the cash book, particularly receipts of a casual and non-
recurring nature such as proceeds from sale of assets, recovery of bad debts already written
off, or repayment of over payment to suppliers.
 Receipts may be understood by preparing the duplicate receipts for sums less than the
original.

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  On the counter foils of bank paying in slips, false particulars of cash deposited in bank may
be mentioned.
 Discount allowed may be overstated and the excess amount may be misappropriated from
cash received.
 A recoverable debt may be shown as bad, and cash received from the party may be
misappropriated.
 Cash sale may be treated as credit sales chargeable to fictitious debtors and the cash
received may be misappropriated.
VOUCHING PROCEDURE
The vouching procedure in regard to some of the important items appearing on the debit
side of the cash book is given below.
1. OPENING BALANCE
Closing balance of last year becomes the opening cash balance of the current year. Opening
balance can be verified from the last years audited balance sheet. In cash book has bank column
also it should be ensured that opening balance are not entered in the wrong column.
2. CASH SALES
There are more chances of misappropriation of cash sales. The concerned sales man may
make the sales and may not make entry for cash received. In big concern the sales man is not
allowed to receive cash from customers, even goods are also delivered by some other person. He
is simply to prepare four copies of memo of goods sold of which two copies are handed over to
customer and sales man will send one copy along with goods to the delivery clerk. In the
meantime customer will make payment to the cashier, who will stamp a copy of memo.
Customer can get the goods from delivery clerk over the copy of memo. At the end of the day
salesman, cashier and delivery clerk will prepare summaries all of which must tally.
In vouching cash sales, cash register shall be fully checked with carbon copies of cash memo.
Then the auditor should verify the daily deposit of cash in the bank. Date of cash memo and date
on which the receipts are recorded in cash book must be same.
3. CASH RECEIVED FROM DEBTORS
Apart from the cash sales the goods are mostly sold on credit, the parties to whom the goods are
sold on credit are called debtors. In course of time cash is received from debtors, the vouchers in
this case will be the counterfoil or the carbon copies of the receipt issued against the payment
received from the debtor. The auditor should vouch the debtors considering the following
important point.
 CASH DISCOUNT
The auditor should give stress upon the discount policy of the business. Cash discount
should be verified and it should be according to the agreed terms or usual trade customs.
 STATEMENT OF ACCOUUNTS SENT TO DEBTORS
In the process of internal check and vouching of cash statement an important point to note
is that the person who receives cash from the customers should not be connected with
sending the statement of accounts to the debtors. The auditor should also see that these
statements are regularly sent and debtors are asked to confirm the balance as shown by the
statement of accounts.
 UNUSED RECEIPT BOOK UNDER SAFE CUSTODY
Due care should be taken in respect of unused receipt books. These should be kept under
the lock and key safely in possession of the responsible officers.

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  BAD DEBTS
The auditor should pay special attention to the amount written off as bad debts. He should
find out as to who is authorized to write off bad debt. Cash received may be misappropriated by
writing off the debts wholly or partly.
 DIRECT CONFIRMATION STATEMENT SENT BY AUDITOR
The auditor with the consent of the client can send the confirmation letter so as to confirm
that the balance shown in the books are correct.
4. LOANS
All the business concern has to borrow money from banks or other financial institutions.
Auditor should enquire whether the client is empowered to borrow. Restrictions are imposed by
company act 1956 or limited companies whether the company has with all the legal provision
relating to loans. While vouching the loans received, the terms and conditions contained in the
agreement should be verified. If the loan is secured what security has been offered, whether the
fact has been disclosed in the balance sheet.
5. BILLS RECEIVABLE
Bills receivable book may be verified because the various details regarding bills matured
and discounted are available in it. Auditor should check the amount received with the bank
statement. Some bills might have been becomes due but no amount is received. A verification of
the bills discounted should be made whether the entry for discount had been made.
6. RENT RECIVABLE
The following points regarding rent receivable are examined by the auditor.
- Terms and conditions of agreement and lease deed.
- Rent received should be compared with the list of properties maintained. In case of rent
collected by agent, then it should be compare with the accounts submitted by agents.
- Check the counter foils of receipts issued to tenants.
- In case of heavy arrears of rent outstanding, auditor should confirm the arrears from
tenant with the consent of client.
7. COMMISSION RECEIVED
The auditor should keep in mind the following points while vouching commission received.
- Study the agreement for receiving commission
- Verify the commission received with counterfoil of receipt
- Check the calculation of commission according to the terms of agreement
- List of names of the parties should be verified from whom the commission is receivable.
8. INCOME FROM INTEREST & DIVIDEND
While vouching dividend auditors should check dividend warrant counterfoils and covering
letter received along with the cheque. If the dividend received through bank amount should be
verified with the bank statement.
Interest received on the securities can be couched from covering letters and scheduled of
securities. Interest on fixed deposits can be verified from the bank pass book. If the interest
received on the loan granted to a party it can be checked from the agreement made and
counterfoil of receipt received.
9. INSURANCE CLAIMS
Insurance claims can be vouched with the copy of insurance claim lodged, correspondence
with the insurance company counterfoil of the receipt issued. It should be verified that insurance
claim recovered has been recorded in the proper account
10. ROYALTY RECEIVED

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 Royalty received can be examined from the following.
- Terms and conditions of royalty payment.
- Correspondence with the lessee
- Calculation of royalty
- Counterfoil of receipt issued

VOUCHING OF PAYMENT SIDE (OR) CREDIT SIDE OF CASH BOOK

INTRODUCTION
Before vouching the credit side of cash books the internal control system for payment
should be evaluated. While vouching various payments, auditors should see that,
- Payment is made to right person
- Payment is for the purpose of business
- Amount recorded in the cash book is the amount appearing in the voucher.
- Payment is duly sanctioned by the authorized officer
- Provision of company’s Act has been complied with while recording the payment
- Rough cash book should be compared with cash book to locate the fictitious payment.

VOUCHING OF THE MORE IMPORTANT ITEMS APPEARING ON THE PAYMENT

SIDE SHOULD BE DONE AS FOLLOWS:
1) OPENING BALANCE
Cash book may have credit balance in the bank column. This balance can be verified from the
previous year balance sheet.
2) CASH PURCHASE
In emergency cash purchase of goods may be made. Purchase of stores and stationery are
made usually on cash basis. An adequate internal control system will be helpful in controlling
manipulation of cash purchase. It should be seen that goods purchased are actually received by
the store keeper. Cash memo can be compared with “GOODS INWARD BOOK” to verify the
goods received.
3) PAYMENT TO CREDITORS
Payment to creditors should be examined with the receipt issued by the creditors. Receipt
should indicate the purpose for which the payment has been made. If the payment is made in full
and final settlement of accounts. The balance should be accounted for as discount received.
Where the payment is made in excess of bill, either the excess payment is in advance or the
payment is made by mistake, which should be recovered back from the creditor.
4) BILLS PAYABLE
Bills payable on the date of maturity and is return by the payee after receiving payment.
Those bills should be cancelled after being paid. Bills payable paid can be vouched with bill. If
the payment is made by bank, bank statement or pass book can be examined to verify the
payment of bill.
5) WAGES
Payment of wages involves large amount. There are many chances of fraud and
misappropriation in wage payment. The auditor should study the system of internal control in
operations. Fraud and misappropriation in wage payment can arise in the following ways.
Inclusions of dummy workers in the workers register.
- Payment of wages at higher rate than allowed.
- Including the records the name of those workers who have left the organization

46
 - Payment of wages for the time or the work for which workers was not present at the work
place.
- Payment of wages should be distributed department wise and senior officer of the
concerned dept should be present on the day of wage payment. As for as possible wage
sheets should be prepared department wise.
6) PAYMENT OF SALARIES
To vouch payments on account of salary to staff the auditor should begin by a review of the
last years audit working papers and see whether the salaries register show any increase or
decrease in the number of salaried persons or nay variation in the amount payable and ascertain
the reasons for the same. In casa of the variation are due to annual increments granted to
employee’s authorization for the same in the form of a resolution of the board or other competent
authority should be examined.
Salary register should be carefully scrutinized to see that the total of salaries for each month
corresponds with the amount of cheque or cash drawn for the purpose as recorded in the cash or
bank pass book. Deduction in respect of provident fund, income tax etc should be checked.
7) LOAN
Auditor should see that the loan voucher should be supported by the receipt given by the party.
Further details regarding terms and conditions of loan can be verified from the loan agreement. It
should see that installments of loan along with interest are received in time. Mortgage deed and
other document should also be examined.

8) PURCHASE OF INVESTMENT
The auditor should compare the investment purchased with “BROKER BOUGHT NOTE”. If
possible physical verification of investment should be made. Investment must be in the name of
the company.
9) PLANT & MACHINERY
The auditor can vouch the purchase of machinery with invoice received from the suppliers.
The expenses incurred on the purchase and installation of machinery is to be capitalized by
debiting the concerned assets account. In case of imported machine the import duty and clearing
charges should also be debited to the assets account.
10) PURCHASE OF LAND & BUILDING
Land may be purchased or acquired on long term lease. Buildings may also be constructed.
To vouch payments made on this account the auditor should first ascertain that there is proper
authority for the expenditure. This may be in the form of resolution of board in the case of a
company. If the expenditure on purchase exceeds the amount authorized, the reason and approval
for the excess should be examined.
11) DIRECTOR’S FEES
Directors received fees for attending board of directors meeting. Provision for the payment of
fees to directors is made in Articles of Association. Director’s attendance register will provide
the name of directors, who attend the meeting. Directors signature on receiving fees is obtained
on the receipt book and the signature of directors attend the meeting.
12) RENT PAID
Auditor should verify the payment of rent from the agreement. The rent voucher should be
supported rent receipt from the landlord. It should be seen that payment of rent is sanctioned by
responsible officers.

47
13) INSURANCE PREMIUM
The auditor should examine the following for the vouching of insurance premium.
- Insurance policy or the cover note issued by the insurance company.
- Insurance policies in case of policies are more than one.
- Insurance premium receipt.
14) TRAVELLING EXPENSES
The staff of the company is paid traveling expenses according to the rules and regulations. It
will be framed by the board of directors, partners etc. in the absence of such rules, vouching
should be on the basis of the expenditure incurred.
15) INCOME TAX
The payment of income tax can be verified from the demand notice and receipt challan. The
auditor should see the proper entries are made in the accounts keeping in view advance tax,
previous year tax and current year tax payment. If any penalty is also paid, separate entry shall
be made in the concerned account.
16) PETTY CASH BOOK
Petty cash book is an important book. It records petty cash payment. It is usually maintained
on the basis of “IMPREST SYSTEM”. In many cases the petty cash payment is considered as
unimportant. But in fact there are lot of opportunity for committing fraud and misappropriation.
Before commencing the vouching of petty cash book the auditor should check the system of
internal check in regard to the petty cash transaction and adopt the following force of action.
The amount received by the petty cashier should be checked with the payment entered in the
cash book.
- The totals, balance and costing of petty cash book should be checked.
- Payment made towards postage and stationery should be checked with the entries in the
“postage register” and “stationery register” respectively.
- The auditor should see that the petty cash book is periodically checked and initialed by
some responsible person to ensure that the petty cash payment.
- He should verify the closing balance of petty cash on the balance sheet date.

DIFFERENCE BETWEEN VOUCHING, VERIFIACATION AND VALUATION

BASIS VOUCHING VERIFICATION VALUATION

1) Meaning It is the process of Proves the existence, Certifies the correct

comparing the entries ownership and title to value of the assets and
in the books of the assets liabilities at the date
accounts with the of balance sheet.
bonafide vouchers.

2) Subject matter It is made of the It is made of the It is made of the

entries recorded in the assets and liabilities assets and liabilities
books of original appearing in the appearing in the
entries and their balance sheet at the balance sheet at the
posting in the ledger. end of the year. end of the year.

3) By whom It is done by the It is done by the Done by the owner of

48
 senior audit clerk. auditor himself or his expert valuers or by
associates. the staff.

4) When It is done after the It is done at the end of It is done at the end of
entry of the the financial year the financial year
transaction in the when the final when the final
accounts books. accounts are to be accounts are to be
prepared. prepared.

5) Evidence Bonafide voucher are It is made on the basis The auditor has to
sufficient evidence for of evidence such as depend upon the
vouching. the title deeds, certificate of the
receipts of payments owners.
made etc.

UNIT – IV

AUDITOR
SYNOPSIS:
 INTRODUCTION
 APPOINTMENT OF COMPANY AUDITORS
 QUALIFICATION & DISQUALIFICATION OF AUDITORS
 REMOVAL OF THE AUDITORS
 DUTIES & RIGHTS OF AUDITORS
 LIABILITY & QUALITIES OF AUDITORS

INTRODUCTION:
Appointment of an auditor depends upon the form of organization. If the form of
organization is such, where the audit is not statutory requirement, the right and duties of an
auditor will depend upon the terms and conditions laid down in the letter of appointment.
Auditor of a soletrader:
- A sole proprietary concern is not required, under any statute to get its accounts audited. But it is
quite usual for many sole proprietors to get their accounts audited, particularly when they are
maintained by someone else.
- In the case of soletrader, the auditor generally acts as accountant who also prepares accounts
besides checking their accuracy.

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- As he is appointed by an individual, he must get clear instructions from his client in writing as
to what he is expected to do. His work and its scope will depend upon the agreement with his
client.
- The auditor has the right to check and examine the books of accounts, call for necessary
information and to receive remuneration.
- Similarly, he has the duty to carryout audit with care and diligence to bring errors to the notice
of his client and advise him to improve and keep up the accounts in future.
Auditor of a partnership firm:
- Partnership deed provide for an audit of accounts of the firm by an independent auditor,
although Indian partnership act 1932, does not provide for any compulsory audit.
- The rights and duties are defined by the agreement between partners and can be subjected to
modifications and limitations.
- The auditor has to get in writing the nature and scope of his work, which is to be carried out to
avoid any dispute in future.
The following are the advantages of appointing auditor in partnership firm.
1. It helps in settling accounts between the partners themselves and to avoid possibility of
disputes in future.
2. It facilitates the settlement of accounts on the retirement, death of admission of a partner.
3. It facilitates rising of loans from financial institutions.
4. Sleeping partners can get a reliable report on the accounts of the firm.
5. It enables the partners to assess the firm’s tax liability.
Auditor of a limited company:
The statute governing company provides for compulsory audit of the company accounts.
Section 224 to 233 of Indian company act 1956 contains the specific provision regarding audit.

APPOINTMENT OF COMPANY AUDITORS

Audit is voluntary to sole trading concerns and partnership firms. But it is legally
compulsory to all joint stock companies. Every company must appoint a qualified auditor to
audit the accounts. Auditors are appointed and not elected. Sec 224 of the Companies Act 1956
contain provision relating to the appointment of a company auditor.

APPOINTMENT
OF AUDITOR

FIRST AUDITOR OF APPOINTMENT APPOINTMENT

SUBSEQUENT BRANCH
GOVERNMENT BY SPECIAL UNDER CAUSAL
AUDITOR AUDITOR CONPANY RESOLUTION AUDITOR
VACANCY

1) First auditor:
 Sec 224 (5) provide for the appointment of first auditor by the board of directors within one
month of the date of registration of the company.
 The auditor or auditors so appointed shall hold office until the conclusion of the first annual
general meeting.

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  The company may however at a general meeting, remove any auditors and appoint in their
place any other person.
 Appointment of the first auditor should be by a valid resolution at the board meeting.
 Merely naming them in the article will not be recognized as appointment under the act.
 The first auditor is also not required to inform the registrar about his acceptance or refusal of
the said appointment.
2) Subsequent auditors:
 Subsequent auditor or auditors of a company are appointed every year by the share holder in
annual general meeting by passing an ordinary resolution.
 According to Sec 224(1) “ every company shall at each annual general meeting, appoint an
auditor or auditors to hold office from the conclusion of that meeting until the conclusion of
the next annual general meeting, and shall within 7 days of the appointment give intimation
to every auditor so appointed”.
3) Appointment by central government:
 According to Sec 224 (3) where at an annual general meeting no auditors are appointed or re-
appointed, the central government may appoint a person to fill the vacancy.
 In such case the company is required within 7 days of its failure to appoint or reappoint an
auditor to whom the central government’s power to appoint an auditor in such an event has
been delegated under sec 637.
4) Appointment in case of casual vacancy:
 According to sec 224(6), board of directors may fill any casual vacancy in the office of an
auditor before the annual general meeting of the share holders.
 However casual vacancy called by the resignation of an auditor shall be filled only by the
company in general meeting.
 The auditor appointed to fill a casual vacancy shall hold office till the next annual general
meeting.
5) Appointment by special resolution (sec 224 (a)):
 Sec 224-A of the amendment act 1974 specified the cases in which the appointment by the
auditor which require a special resolution.
 In case of company which is not less than 25% of subscribed share capital is held by
- A public financial institution or Government Company or any state government
- Any financial or other institutions established by any financial of state act in which the state
government holds not less than 51% of the subscribed share or capital or
- A nationalized bank or an insurance company carrying on general insurance business
- The appointment or reappointment shall be made by a special resolution.
- If the company fails to pass a special resolution, the central government will be empowered to
make an appointment.
6) Auditor of government companies:
 Special provision has been made by sec 619 of the company’s act 1956, regarding the auditor
of a government company. The auditor of such a company shall be appointed or reappointed
by central government on the advice of the comptroller and audit general of India.
7) Restriction on the number of auditor ship:
 Companies act 1974 has introduced certain radical changes with regard to the appointment of
the company auditor. Two new sub-sections have been added to sec 224.
 Subsection 1B empowers the central government to specify the number of companies in
which a person can be appointed as an auditor.

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  An auditor cannot hold the audit of more than 20 companies, out of which not more than 10
companies where, paid up share capital Rs.25 lakhs or more.
8) Branch auditor (sec 228):
 Audit of accounts of branches of the company may be audited by the company statutory
auditor.
 If the company decide to have the branch accounts audited by another person, in such a case
the appointment must be made by shareholders in general meeting.
 Board of directors can appoint branch auditor if the company authorized Board of directors to
appoint by a resolution passed in general meeting. But he must consult the company statutory
auditor while appointing branch auditor.
9) Appointment of new auditor in the place of retiring auditor:
If an auditor is to be removed at the expiry of his term, an ordinary resolution will be
sufficient. However the provisions of sec 225 must be complied with. These provisions require
that
i) A special notice of such an intention must be given, that a retiring auditor shall not be re-
appointed.
ii) On receipt of notice of such a resolution, the company must send a copy thereof to the
retiring auditor.
iii) A copy of his representation is not sent to the members, the auditor may insist that the
representation shall be read out in the meeting.
v) The auditor has the right to attend the general meeting where his removal is to be discussed.
vi) The newly appointed auditor should communicate with the retiring auditor in writing before
accepting appointment as a part of his professional conduct.

QUALIFICATION & DISQUALIFICATION OF AN AUDITOR

Audit is optional to sole trading concerns and partnership firms. But it is compulsory to
joint stock companies. The accounts of sole trader and partnership firm can be audited even by
unqualified auditors. But according to the joint stock companies can be audited only by qualified
auditors. Sec 226 of the company’s act 1956 contains provisions relating to the qualification and
disqualification of a company auditor.
QUALIFICATION
PROFESSIONAL QUALIFICATIONS:
 Wide and thought knowledge in the taxation commercial law, principles of auditing and
companies act etc.,
 Considerable knowledge in economic also
PERSONAL QUALIFICATION:
 He must be honest & tactful
 He must be vigilant
 He must be systematic/methodical
 He must be courage & integrity
 He must be sincere in profession
 He must have sound common sense
 He must have the ability to draft the effective audit report
DISQUALIFICATION

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 Sec 226 (3) provide the disqualification. According to it following are disqualified to be
appointed as auditor of a company.
 A body corporate
 An officer or employee of the company
 A partner or employee of an officer or employee of the company
 A person indebted to the company for an amount exceeding Rs 10000
 A surety or guarantee of a debt exceeding Rs.10000 taken by a third person from the
company
 A director or member of a private company or a partner of a firm, which is the managing
agent or secretaries and treasurers of the company.
 An un-discharged insolvent or insanity persons.

REMOVAL OF THE AUDITORS

Provision regarding removal of the auditor

According to sec 224(7) of the Indian companies Act an auditor may be removed from
office before the expiry of his term. The law permits the removal of an auditor under certain
circumstances. The directors of a company however have no power under any conditions to
remove an auditor from office.
 No new auditor can be appointed in place of an existing auditor unless the latter has been
given a due notice according to the companies act.
 The companies act does not lay down the consequences if due notice is not given to the
retiring auditor. However, according to law if due notice has not been given, the resolution
regarding the removal of the auditor cannot be put before the general meeting.
 If still the auditor has to be removed, again a general meeting must be held and the auditor
removed.
 If any shareholder wishes to nominate another person in place of the existing auditor, he must
give a special notice (14 days) to the company which in turn send a copy there of to the
retiring auditor.
 Such an auditor will have the right to send a representation to the company which in turn
shall be sending to the shareholders. The main idea is to prevent the directors to remove an
auditor without knowledge of the shareholders.
 The first auditor appointed by the directors can be removed before the expiry of his term
provided atleast a 14 days notice before the holding of the meeting had given to him.
 For removal of subsequent auditors, besides passing an ordinary resolution, prior permission
of the central government must be obtained.

Procedure for removal

Sec 225 lays down the procedure that is to be followed for removal of an auditor.
 If any shareholder wishes to nominate another person in place of the existing auditor he must
give a special notice of 14 days to the company.
 The company must send a copy of such notice to the retiring auditor.
 The retiring auditor has got a right to make written representation to the company.
 He got a right to ask the company to circulate his written representation among its members.
 The auditor is also entitled to attend the meeting where his removal is being discussed.
 He also has a right to speak at such meeting.

53
REMUNERATION OF THE AUDITORS

Sec 224(8) of the companies act deals with the remuneration of the auditor of a company.
The remuneration of the auditor of a company shall be fixed by the appointing authority.
According to the provision of sec 224(8) the remuneration may be fixed as under.
a) If the auditor has been appointed by the Board of directors, it is the Board which fixes his
remuneration.
b) If the auditor had been appointed by the central government, the central government fixes his
remuneration.
c) If the auditor has been appointed by the shareholders at the general meeting, it is the company
which determined his remuneration. It is not necessary that the remuneration be fixed at the same
meeting at which his appointment has been made.
d) The retiring auditor who is automatically re-appointed at the annual meeting is entitled to get
the same remuneration as he was getting previously.
e) If an auditor is asked to do any other work over and above his normal work, he is entitled to
get extra remuneration.
Any sum paid by the company in respect of the auditors expenses shall be deemed to be
included in the expression “Remuneration”.

RIGHTS OF COMPANY AUDITOR

54
 RIGHTS OF COMPANY AUDITOR

RIGHT OF ACCESS OF THE BOOKS OF ACCOUNTS

RIGHTS TO OBTAIN INFORMATION AND EXPLANATION

RIGHTS TO VISIT BRANCHES

RIGHT TO RECEIVE NOTICES

RIGHT TO ATTEND THE MEETING OF SHARE HOLDERS

RIGHT TO MAKE A STATEMENT

RIGHT TO CORRECT ANY WRONG STATEMENT

RIGHTS TO REFUSE TO START THE AUDIT WORK

RIGHT TO TAKE LEGAL & TECHNICAL ADVICE

RIGHT TO RECEIVE THE REMUNERATION

POWERS (OR) RIGHTS OF AUDITOR

Right of access of the books of accounts (Sec 227(1)):
Auditor has a right to access at all time to the books and vouchers of the company, whether
kept at the head office or elsewhere. He is free to go surprise visit and check books. The term
‘Book’ not only include financial record but also all the statistical and costing books. Similarly
vouchers include all type of documentary evidence recorded in the books of accounts.
Rights to obtain information and explanation (Sec 227(1)):
Auditors have the right to ask the directors and officers of the company to give any
information and explanation which are necessary for the preparation of his duties satisfactorily.
Rights to visit branches:
Auditors have a right to visit the branches and audit the account maintained by them.
However if qualified auditor are appointed to audit the account of the branches he cannot
exercise the right.
Right to receive notices etc (Sec 231):
Under sec 231 an auditor is entitled to receive and other communication relating to any
general meeting of the company in the same way as a member of the company is entitled to
receive them. He is also authorized to attend any general meeting.

Right to attend the meeting of share holders (Sec 232):

55
 The auditor has the right to attend every general meeting of the share holders. He also has the
right to speak at such meeting where the accounts are being discussed. However he has no right
to attend the meeting of directors.

Right to make a statement:

The auditor has the right to make any statement at a meeting where his certified account
discussed if he so desires. He is not found to make any statement or answer question unless he is
asked to do so by the chairman of the meeting. He should answer only those questions which
affect the accounts.

Right to correct any wrong statement:

The auditor has a right to correct the wrong statements made by the directors relating to
accounts.

Rights to refuse to start the audit work:

The auditor has a right to refuse to start the audit work until the management balance the
book.

Right to take legal & technical advice:

Auditor has the right to take legal expert or technical advice any matter relating to the
business in order to perform his work satisfactory. But he must give his opinion in the report and
not that of experts, lawyer etc.

Right to receive the remuneration:

Auditor has a right to get remuneration on the completion of the agreed audit work.

DUTIES OF AN AUDITOR

56
 The duties of an auditor of a company are as follows:

STATUTORY
DUTIES

DUTIES UNDER
PROFESSION SECTION
DUTIES 227(1A)

DUTIES UNDER
DUTY TO SECTION
KNOW THE
227(4 A)
DUTIES
DUTIES OF
AN
AUDITOR

RELATING TO DUTIES UNDER

MANDATORY SECTION
ACCOUNTING COMPANY’S
STANDARDS ACT

CONTRACTUA L
DUTY OF CARE
DUTIES

1) STATUROY DUTIES:
It is the duty of the auditor to make a report to the members of the company on the accounts
examined by him and on every balance sheet, every profit and loss account. Besides the report
should state
a) Whether, in his opinion, the accounts give the information as per the requirement of the act.
b) Whether balance sheet and profit and loss account gives true picture and drawn according to
the requirements of the companies act.
c) Whether he has obtained all the information and explanation required by him for the purpose
of his audit.
d) Whether, in his opinion, proper books of accounts as required by law have been kept by the
company.
2) DUTIES UNDER SECTION 227(1A):

57
 An auditor is required to enquire:
a) Whether loans and advances made by the company on the basis of security have been properly
secured and whether the terms on which they have been made are not prejudicial to the interest
of the company.
b) Whether the transactions of the company which are represented merely by book entries are not
prejudicial to the interest of the company.
c) Whether the assets of the company as consist of shares, debentures and other securities have
been sold at a price less than that at which they were purchased by the company.
d) Whether loans and advances made by the company have been shown as deposits.
e) Whether personal expenses have been charged to revenue account.
f) Whether it is stated in the books and papers of the company that any shares have been allotted
for cash has actually been received and if no cash has actually been so received, whether the
position as stated in the accounts book and balance sheet is correct and not misleading.
Where any of the above matters is answered in negative, the auditors report must state the
reason for the answer.

3) DUTIES UNDER SECTION 227(4 A):

This section empowers the central government to direct by a general or specific order that in
the case of specific companies, the auditors report shall include a statement on such matters as
may be specified into its orders. This order applies to the following types of companies:
 Manufacturing, mining or processing.
 Supplying and rendering services.
 Trading and
 The business of financing, investment, chit fund or mutual benefit societies (excluding
banks).
It is the duty of an auditor to give detailed comment on the matters mentioned in the order in
respect of such companies.

4) OTHER DUTIES UNDER THE COMPANIES ACT:

The auditor has following other duties under the companies act.
a) It is the statutory duty of an auditor or a partner of the firm of accountants practicing in India
to sign audit report (Sec 229).
b) Part II and III of schedule III of companies act; an auditor has the duty to report on certain
matters included in the prospectus of the company (Sec 56(1))
c) Sec 165 (4) of the companies act require an auditor to report an certain matters relating to
accounts and allotment of shares required to be included in the statutory report.
d) If a company goes into voluntary winding up, the directors are required to file a declaration of
solvency.
5) CONTRACTUAL DUTIES:
A Professional accountant many be hired by a company for purpose other than the statutory
audit. In all such cases the duty of the auditor will depend upon the terms and condition of his
appointment.
6) DUTY OF CARE:
An auditor of a company must be honest and must exercise reasonable skill and care;
otherwise he may be sued for damages.

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7) DUTIES OF AUDITOR IN RELATION TO MANDATORY ACCOUNTING
STANDARDS:
According to the decision of the council of the Institute of Charted Accountant of India,
certain accounting standards are to be implemented in the presentation of financial statements
covered by their audit reports.
In the event of any deviation from the standards, it will be their duty to make adequate
disclosures in their reports so that the users of such statements may be aware of such deviations.
8) DUTY TO KNOW THE DUTIES:
The auditors are duty bound to become aware of their duties under the company’s act. They
should understand the articles of association of the company. Sometimes these may contain
additional duties. Their ignorance will not be an excuse to avoid the liability on account of
negligence.
9) PROFESSIONAL DUTIES:
When a person is appointed as auditor of a company he should correspond with the previous
auditor before accepting the assignment.

LIABILITY OF AUDITORS
Introduction:
Liabilities of an auditor arise if he fails to detect any error. The liability will depend upon the
nature of his work and contact. If his appointment, duty and liabilities are not covered by any
statute, his liabilities will depend upon the agreement of his appointment with his client. He must
obtain clear instructions from the client and carry out his work diligently.
Liability of an auditor:
The liabilities of an auditor from the legal point of view may be classified as under:

LIABLITY OF
AUDITIOR

WHEN WHEN
APPOINTED BY A APPOINTED BY A
PRIVATE JOINT STOCK
CONCERN COMPANY

LIABILITY
LIABILITY
LIABILITY FOR UNDER THE
UNDER OTHER
NEGLIGENCE STATUTE
STATUTE
(MISFEASANCE)

I) LIABILITY OF AN AUDITOR WHEN HE IS APPOINTED BY A PRIVATE

CONCERN:
If an auditor is appointed by a private concern, his duties and liabilities are not defined by any
act. His duties, powers and responsibilities depend upon the agreement between him and his
client. The auditor should get in writing the scope of his duties so that he may not be held
responsible for the work which he is not required to do.

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 If according to the instructions, the auditor does not examine any books which he is not
required to examine and consequently his client suffers any loss, the auditor is not liable.
If no agreement was entered into he must show as much diligence and skill to perform his
duties. Otherwise he will be responsible for the damage or loss suffered by his client. The
essential elements to constitute such a liability are
- he must be negligent
- as a result of negligence, a loss is caused and
- The loss is suffered by the person who employed him.

II) LIABILITY OF AN AUDITOR UNDER COMPANIES ACT:

If an auditor is appointed by a company, then it is the company’s act which defines his duties
and liabilities. The liability may arise from any one or more of the following causes.
1) Liability for negligence under the law of agency.
2) Liability under the statute (misfeasance).
a) The company’ 1956- either civil or criminal.
b) The Indian penal code.
1) Liability for negligence under the law of agency:
The auditor may be sued in a civil court for damages arising out of negligence in the
performance of his duties.
If on account of negligence in the performance of his duties, the company suffers a loss, the
auditor is held responsible for damages.
An auditor is not liable though the company has suffered a loss and proved that it was not
negligent on the part of an auditor. On the other hand even if it is proved that the auditor was
negligent in performance of his duty, he cannot be liable for loss, if the company has not suffered
any loss.
Thus, damages which are the direct result of negligence are only recoverable. Remote
damages are not recoverable.
2) Liability under the statute (misfeasance):
a) Under companies act – civil liability:
Misfeasance means breach of duty imposed by law sec 227 (3) of the companies act specifies
the duty of an auditor. Accordingly he should state in his report
i) Whether he has obtained all the information and explanation required from the purpose of
audit.
ii) Whether in his opinion the balance sheet and profit or loss account exhibit true picture.
If he dose not comply with these requirements, he is liable to be fined upto one thousand
rupees.
According to sec 229, the report has to be signed only by the person who is appointed as
auditor or by a person of the firm if the appointment is in the name of the firm. Such a partner
who signs the report must inform the register of companies within a reasonable time. Failure to
comply of this section may make an auditor liable to a fine upto Rs 1000.
Sec 543 of the companies act lays down that in the event of winding up of a company, if it
appears that any promoter, director or officer (auditor) of the company has retained any
belonging to the company, the court may compel such persons to repay with interest at certain
rate.

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 It dividends paid on net profits on the faith of the accounts audited by him and which did not
show a true and fair picture and were incorrect and misleading he will be liable to refund such an
amount.
It must be pointed that if a company has suffered any loss, it is only the company which can
sue the auditor for damages and an industrial shareholder has no right to do so.

b) Under companies act – criminal liability:

Criminal liability of an auditor arises when an auditor willfully makes a false statement either
in balance sheet or any other document.
According to sec 628 of the companies act, if any return report, certificate, balance sheet etc
required by the act, any person makes a statement
i) Which is false in any material particular, knowing it to be false or
ii) Which omits any material particular, knowing it to be material is punishable with
imprisonment for a term which may extend to 2 years and shall be liable to fine.
According to sec 539 if with intent to defraud any person, any auditor of a company which is
being wound up
i) Destroy or alters any books, paper or securities or
ii) Makes any false entry in the books of account of document belonging to the company. He
shall be punishable with imprisonment for a term which may extend to 7 years and shall also be
liable to fine.
In order to hold an auditor criminally liable the following must be proved:
i) That the statement made was false in material facts
ii) That the auditor willfully made such a false statement and
iii) That the statement complained has been made in any return, report, balance sheet, certificate
etc.
According to sec 633 the court has power to relive an auditor either partly or wholly provide
it is satisfied that the auditor acted honestly and reasonably.
However, the court has no power to relive the auditor incase of any civil liability in a criminal
case against the auditor.

c) Under the Indian penal code:

Sec 197 of the Indian penal code provides that whoever issues or signs any certificate
required by law knowing that such certificate is false in any material point, shall be punishable in
the same manner as he gave false evidence.

III) LIABILITY UNDER OTHER STATUTE:

i) Liability of an auditor to third parties:
An auditor is not appointed by the third party and hence he cannot be held liable.
ii) Liability of an honorary auditor:
The liability of an honorary auditor is equal to that of a paid auditor. Once he takes up an
assignment he assumes the responsibility for its proper execution.
iii) Under Income tax act:
Under rule 12a of the Income tax rule, an auditor can face imprisonment upto 2 years for
furnishing false information.
According to sec 278 if a charted accountant is guilty of misconduct he can be disqualified
from practicing.

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QUALITIES OF AN AUDITOR
An auditor is required to perform a wide variety of functions and to be able to do so, he
must possess several qualities, some tangible, others not so tangible. Some of these qualities may
be acquired through formal educational and training, while for the others he will have to depend
on his experience in the school of life.

The various qualities required of him are as follows:

A. PROFESSIONAL EXPERTISE
 Knowledge of accounting
 Knowledge of cost accounting
 Knowledge of accounts of business under audit
 Knowledge of business laws
 Knowledge of production system
 Knowledge of economics
 Knowledge of mathematics and statistics
 Knowledge of general management
 Knowledge of financial management
 Knowledge of marketing management
 B. GENERAL QUALITIES
 Honesty and integrity
 Tactfulness
 vigilance
 judgment
 responsibility
 diligence
 communication
 common sense

SHARE CAPITAL
Share capital may be defined as the capital raised by a company by the issue of shares.
The term “ share capital ’’ is used in several senses. Thus, it may mean nominal, issued and
subscribed, uncalled and paid-up capital.
NOMINAL, AUTHORISED OR REGISTERED SHARE CAPITAL
It means the maximum capital which a company is authorized to issue by its
Memorandum of Association, unless it is increased in the manner as prescribed.
ISSUED AND SUBSCRIBED SHARE CAPITAL
It represents the nominal value of the shares of the company actually allotted and
included both shares issued for cash, and share issued for considertation other than cash.
UNCALLED CAPITAL
It is that portion of the nominal value of shares actually issued, which has not yet been
called up.

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PAID UP CAPITAL
It means that amount of money that has been paid or deemed to have been paid on share
actually allotted . After the commencement of the companies(Amendment) Act 2000, a private
company must have a minimum paid-up capital of Rs. 1,00,000 and a public company, Rs.
5,00,000. Any deficiency in this must be made good within two years of amending Act.

Audit of Share-Issue-
1. Checking the right to issue.
2. Checking the Procedure of issue.
3. Checking Books of original entry.
4. Checking Ledger Posting.
5. Presentation in Balance Sheet.
6. Audit of Calls in Advance.
7. Audit of Calls in Arrears.
8. Underwriting Commission and Brokerage.
9. Audit of Issues at premium
10. Audit of Issues at Discount.
AUDIT OF SHARE TRANSFER
Ordinarily, a detailed examination of transactions involving transfer of shares is beyond
the scope of an audit. Yet auditors are often asked to audit the transfer of shares so as to detect
and prevent clerical mistake in the registration of transfers.
TRANSFER NOT TO THE REGISTERED EXCEPT ON PRODUCTION OF
INSTRUMENT OF TRANSFER SEC.108 (1)
A company will not register a transfer of its or debentures unless a proper instrument of
transfer, duly stamped and executed by, or on behalf of, both the transferor and the transferee,
and specifying the name, address and occupation of the transferee has been delivered of the
company. Such instrument should be accompanied by the certificate relating to the share or
debenture, and if no such certificate is in existence then by the letter of allotment of shares or
debentures.
LOSS OF INSTRUMENT OF TRANSFER
If on the basis of an application made to the company by the transferee, bearing the
stamp required for an instrument of transfer signed by or behalf of the transferor, it is proved to
the satisfaction of the board of directors that the instrument to transfer signed by or on behalf on
the transferor and the transferee has been lost, the Board may register the transfer on such terms
as to indemnity, as it may deem fit.
PRESCRIBED FORM SEC .108 (1-A)
Every instrument of transfer will be in the prescribed form and bear the end endorsement
of the specified authority with date, and such endorsement should be obtained before the
instrument of transfer signed by or on behalf of transferor. The instrument bearing the
endorsement and otherwise complete, should be submitted to the company for registration within
the period specified.

Audit of Share Transfer -

1. Under the Companies’ Act.
2. Under agreement:
(i) Checking the Articles.

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(ii) Checking the Transfer Registrar.
(iii) Checking the Transfer Deed.
(iv) Checking the intimation to Transferee.
(v) Action by Directors’ Meeting
(vi) Checking the Share Certificates.
(vii) Checking the Register of Membership.

Audit Report
Reporting Requirements:
The auditor of the company appointed u/s 224 of the Companies Act, 1956 is required to report
u/s 227(2) & 227 (3) and 227(4A) which may be classified into two categories:
1. Statement of opinion:
a) Opinion on true & fair view:
Section 227(2): Whether in his opinion and to the best of his information and according to the
explanations given to him, the accounts give the information required by the Act in t he
prescribed manner and also given a true and fair view of the company’s affairs in its balance
sheet and correct picture of the profit or loss during the relevant financial year.
b) Opinion on principal assertion:
Section 227 (3) (b): Whether, in his opinion, proper books of accounts as required by law have
been kept by the company so far as it 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.
2. Statement of facts:
Report on principal assertions.
Section 227 (3) (a): Whether he has obtained all the information and explanations, which to the
best of his knowledge and belief were necessary for the purpose of his audit.
Section 227(3) (bb): Whether the report on the account of any branch office audited under
section 228 by a person other than the company’s auditor, has been forwarded to him as required
by section 228 (3) (c) and how he has dealt with the same in preparing the auditor report.
Section 227(3)(c): Whether the company’s balance sheet and profit and loss account dealt with
by the report are in agreement with the books of account and returns.
Section 227(3)(d): Whether the profit and loss account and balance sheet comply with
accounting standards referred to in section 211(3 c)
Section 227(3) (3): Auditor’s report shall state his observations or comments, which have any
adverse effect on functioning of the company in thick type or in italics.
Section 227(3) (f): Whether any directors are disqualified from being appointed as director under
section 274(1) (g)

Types of Audit Report:

An audit-report can be of two types:
1. Clean or Unqualified Report -
If the auditor is fully satisfied on the facts to be incorporated in his report, he shall submit a clean
or unqualified report on the Final Accounts. Such a report shall be given on the accounts
regarding which the auditor does not find any irregularity or fallacy and about which there is no

64
complaint and the auditor has no suspicion about their being true and fair. A report being clean
means the auditor has performed the following acts:
(a) Adequate examination of books.
(b) Follow-up of generally accepted principles of auditing.
(c) Adoption of necessary procedures as demanded by particular circumstances.
(d) Use of reasonable skill and care.
2. Qualified Report -
If the auditor is not satisfied regarding the facts to be mentioned in his report, he must mention
his dissatisfaction in his report. Such a report is called Qualified Report. By and large, the
following reasons may be ascribed to a Qualified Report:
(a) The auditor could not adopt the necessary audit procedures in the examination of the accounts
for want of necessary evidence in the form of vouchers of documents.
(b) The generally accepted principles of auditing have been violated.
(c) The auditor may not have received adequate information and explanations sought by him,
e.g., the accounting system may be incomplete.
(d) There may be some inconsistency in the principles of accounting adopted by the company
from year to year, e.g., the closing stock may not have been valued on the lines of last year and
the change may not be acceptable to the auditor.
(e) Any other reason for which the auditor may be dissatisfied.

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 UNIT- V

SPECIALIZED AUDITS
SYNOPSIS:
* CHARITABLE INSTITUTION
* CLUB
* CINEMA THEATRE
* EDUCATIONAL INSTITUTIONS
* HOSPITALS
* HOTELS

1. CHARITABLE INSTITUTION
Charitable institutions are usually registered as societies under Societies Registration Act,
1960. Charities may be public charity or private charity. The Trustee of the charity is responsible
for maintaining proper books of accounts.

AUDITIORS DUTY
1) The auditor must examine the constitution, rules and regulations of the charitable
institutions.
2) He must check the income from donations and subscriptions with the list of donors and
counter foils of receipts issued.
3) He must see that the funds created for specific purpose are not utilized for other purpose.
4) He must check the income from investments with register of investments.
5) He must check rents received from the property of charitable institution.
6) He must check all important payments with the minute book of the trustee or the
Managing committee to ascertain whether the payments are duly authorized.
7) He must vouch investment purchased with bought notes. He must verify the physical
existence of investment by personal inspection. If investments are pledged with the bank
he must get a certificate from the bank.
8) He must verify the cash and bank balance.
9) He must verify all other assets and liabilities very carefully.
10) He must see that the annual accounts are prepared as per rules.

2. CLUB
Generally a club is set up as a company ltd by guarantee in which case the provision of
the companies act relating to the Companies Act relating to the maintenance and audit of
company are applicable to club. A club may also be registered under the Societies Registration
Act 1960.
The auditor should take the following steps while auditing the accounts of a club and he
should evaluate the system of internal check and control and select the audit procedure
accordingly.

AUDIT OF INCOME:
1) Auditor should vouch the entrance fees with the application received from members,
counterfoils of receipts issued to them and the minutes of the managing committee
approving the membership.

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 2) Subscription from members should be vouched with the counterfoils of receipts issued
to them and the register of members.
3) He should test check the receipts for a selected period with the entries passed in the
Register of Members.
4) He should see the arrears of subscriptions pertaining to the previous year are duly
brought forward.
5) He should verify whether necessary steps have been taken for the recovery of arrears of
subscription and whether the amount deemed as irrecoverable has been duly written off.
6) He should see whether there is an adequate internal check as regards charging the
members for foodstuff, wines, cigars etc supplied to them and their guests.

AUDIT OF EXPENDITURE
1) He should examine the procedure relating to purchases, custody and issue of foodstuff, sports
goods, crockery etc and see that all purchases and issues are properly authorized and
recorded in the respective stock register.
2) He should test check vouchers for a selected period.
3) In case wine and liquors served in the club are not the property of the club but of outside
dealers, he should see that records as to the receipts, consumption and unsold stock are
properly maintained.
4) In case of club owns or hires any machine for amusement for its subscribers it should be seen
that there is a proper check over the removal of coins from them.
5) Salary and yearly increments to staff should be verified by reference to service contracts,
salary register and minutes of the meeting of the managing committee
6) He should as far as physically check the stock of furniture, sports goods, china glass,
foodstuff, wine etc with the respective stock register or inventory sheets prepared at the end
of the year.
7) He should ascertain the rate of depreciation being applied to furniture, fixtures, fitting, linen,
china glass etc and satisfy himself that it is adequate.

3. CINEMA THEATRE
The auditor should conduct the audit of a cinema along the following lines.

PRELIMINARY STEP
 - He should examine the letter of his appointment to see the scope of his responsibilities.
 - He should carefully go through the documents relating such as partnership deed,
memorandum of association and articles of association.
 - He should ascertain if there is an effective system of internal check and control.

AUDIT OF INCOME
1) He should ascertain whether the entrance to the cinema hall during the shows is only
against printed tickets which are serially numbered and uniformly found into books.
2) He should verify the entries made in cash book in respect of total of the daily returns of
sale of tickets and cash collected for the same.
3) All the capital expenditure must be dealt correctly in the accounts

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 4) He should see that all the receipts from advertisement on the screen and slides are
accounted in the books and verify the amount received with contacts and other
documentary evidence.
5) He should see that the amount of entertainments tax collected is duly reconciled with the
total number of tickets sold for each class.
6) He should see that there is s proper record of the issue of free passes and that there are
duly authorized by a responsible officials.
7) Receipts from restaurants or bars run by the cinema management should be vouched with
the daily summary of takings.

AUDIT OF EXPENDITURE
1) Auditor should satisfy himself that a proper distinction is maintained between capital and
revenue items of expenditure.
2) Salaries to staff should be vouched with the individual agreements, money receipts,
counter foils of cheque etc.
3) Payment to advertisers should be vouched with the contracts with advertisers and bills
and statements submitted by them.
4) Expenditure on repairs and maintenance of a routine nature should be checked with the
bills and money receipts.
5) Payments on accounting of renting of films which is generally based on percentage of the
taking should be vouched with the agreements with distributor bills submitted by them.
6) In case of advance payment to distributor, the auditor should enquire whether the same
are good and recoverable.

OTHERS
- Adequate depreciation should be provided on furniture and equipment
- Unused tickets must be kept under lock and key.
- Stock of various items such as maintenance of materials, stationery etc should be verified.

EDUCATIONAL INSTITUTIONS [SCHOOLS & COLLEGES & UNIVERSITIES]

The auditor should conduct the audit of an educational institution whether a school or
colleges or university along the following lines.

PRELIMINARY
- He should see that the letter of his appointment as auditor in the order.
- He should examine the charter, trust deed or regulations in the case of school or college and
note all the provisions.
- In case of a university he should go through the act of legislature.
- He should see, study and evaluate the internal check and control.

AUDIT OF INCOME:
A) FEES
 Fees constitute an important source of income of an educational institution. The auditor
should check the students fees register for each month or term with the respective class
register showing names of the student on roll.

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  He should vouch the fees received with the counterfoils of money receipts issued to
students as also with the entries in the cash book and the fees register.
 He should check the fees collection for the month or term with the aggregate total in the
fees register.
 In the case of free student ships or other concessions as to fees the auditor should
examine the authorization by a responsible officer.
 He should check late payment of fees along with fines if any with the entries of arrears in
the fees register and authorization for the payment by a responsible official.
 He should see that the receipts of capital nature such as admission fees, building fund
contribution etc are credited to separate account.
 He should ascertain if all the arrears of fees including hostel dues are recovered before
the students are closed.
B) GRANTS-IN-AID AND MISCELLANEOUS INCOME
 He should vouch the income by way of grants-in-aid from the government or local body
on the basis of the memorandum of association or other correspondence with regard
thereto.
 He should examine the original documents or to endowments and legacies and vouch the
income there from by reference to the relevant vouchers and investments.
 Income from donations and subscription should be checked with the counterfoils of
money receipts, cash book and list of donors/ subscribes published with the annual report.
 He should vouch income by way of rent from landed property with reference to the rent
rolls and see that rent in advance or rent in arrears is disclosed in the annual statements.
 He should ascertain whether items of capital and revenue expenditure are properly
distinguished in accordance with sound accounting practice.
 When expenditure on any item exceeds the budgeted sum, he should ascertain that the
managing committee has duly authorized the same or that it is within its knowledge.
 He should test check the efficiency of the procedure to purchase, custody and issue of
materials. Example :- provision, foodstuff etc
 He should see whether purchase invoice are duly passed for payment
 Stock of furniture, stationery, foodstuff and other equipment should be physically
verified.

5. HOSPITALS
While auditing the accounts of a hospital, the auditor should pay attention to the
following.

PRELIMINIARY
 He should examine the letter of his appointment and ascertain whether it has enlarged in any
way the scope of his responsibilities.
 He should carefully go through the charter or trust deed under which the hospital has been set
up.
 He should check the system of internal check and control system.

AUDIT OF INCOME
 He should vouch entries in the patients bill register with copies of bills issued.

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 In case of income by way of interest / dividend he should vouch it with shares and securities
as recorded in the Investment Register and dividend and interest warrant.
 The dividend / interest have accrued but not yet received he should verify the appropriate
entries have been passed in the book.
 The rental income from landed property settled on the hospital as shown in the property
register he should vouch the rent rolls and counterfoils of rent receipt.
 In case of arrears or advance payment of rent, he should confirm whether appropriate entries
have been made.
 In case of donations received for a specific purpose. He should ensure that these amounts are
properly utilized for that specific purpose or not.
 Actual collection of subscription should be checked with subscribers register.
 Grants in aid received from the government or a local body should be verified by reference to
the correspondence and entries in the cash book.
AUDIT OF EXPENDITURE
 He should ascertain whether a clear distinction has been made between capital and revenue
items of expenditure.
 He should see that the system of internal check as to purchase and issue of stores, medicines,
linen, clothing and other apparatus does not suffer from any defects.
 All purchases should be properly classified and recorded in the stock register.
 He should see that all appointment of the staff and payment of salaries and also annual
increments are authorized by the trustee or the managing committee.

6. HOTEL
The auditor should conduct the audit of a hotel along the following lines.
PRELIMINARY
 He should go through the documents as regards establishment of the hotel business i.e
partnership deed, memorandum of association and articles of association.
 He should examine the system of internal check and control particularly as regard ordering,
receiving and payment for provision, wines, sprits, crockery, linen etc.
AUDIT OF INCOME
1) He should vouch the receipts from the sale of food stuffs, wine, cold drinks etc from the
copies of cash memos and summary of daily taking prepared by the cashier.
2) Receipts on accounts of boarding and lodging should be checked with the individual
accounts of customers as also number of days the room were occupied.
3) Receipts on account of holding of conference, marriage, reception etc should be checked
with the agreements.
4) In case of receipts from advertising the vouching should be by reference to contracts and
correspondence with the advertisers and money receipts issued to them.
AUDIT OF EXPENDITURE
1) He should be ensured that a proper distinction is made between items of revenue and
capital expenditure.
2) He should see that purchase of provisions, wines; cigarettes etc are against duly
authorized requisition.
3) He should verify whether all purchase is duly recorded in the respective stock register.
4) Salaries and wages paid to staff should be vouched with the copies of letter of
appointment, salaries and wage register.

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 5) It should be seen that annual increments and bonus payments are duly authorized.
MISCELLANEOUS
1) He should ascertain the rate of depreciation being applied to furniture, fitting, fixtures,
bedding, plates, cutlery etc.
2) He should ensure that adequate on hire purchase basis he should ensure that interest
account is duly debited or not.
3) He should physically verify the several assets of the hotel with the respective ledger
accounts, stock register etc.
ELECTRONIC DATA PROCESSING(EDP)
An electronic data processing audit is an evaluation of the accuracy and proper function
of an organization's data processing. Other areas like project management, quality management
and energy conservation are also audited. Auditing ensures compliance and checks on fraud of
the company's resources.

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QUESTION BANK
UNIT - 1
2 MARKS

1. Give the meaning for auditing.

2. Define auditing.
3. What is an error of principle?
4. What is an error of duplication?
5. What is audit programme?
6. Define audit programme.
7. Write the meaning of audit note – book.
8. What are working papers?
9. Define working papers.
10. What is statutory audit?
11. What is continuous audit?
12. What is interim audit?
13. What is partial audit?
14. What is cash audit?

5 MARKS

1. Explain the detection and prevention of frauds.

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 2. What is detection and prevention of errors?
3. What is embezzlement of cash?
4. What is misappropriation of goods?
5. Explain the advantages and disadvantages of continuous audit
6. Explain the merits and demerits of audit programme.
7. Point out the objectives of working papers.
8. Write the contents of audit not book?
9. Give the essentials of good working papers.
10. What are the merits of working paper?

10 MARKS

1. Explain the objectives of audit.

2. Distinction between accountancy and auditing.
3. Explain the difference between auditing and investigation.
4. Describe the classification of audit.
5. Difference between continuous audit and periodical audit.
6. Enumerate the advantages and disadvantages of audit.
7. Explain the classification of working papers.

UNIT – II
2 MARKS

1. What is internal control?

2. Define internal control.
3. What is internal check?
4. Define internal check.

5 MARKS
1. Explain the objectives of internal control.
2. Explain the characteristics of internal control.
3. What is the scope or area of internal control?
4. List out the limitation of internal control.
5. What is the objective of internal check?
6. What is internal check regarding to sales?

10 MARKS
1. Explain the principles or characteristics of a good system of internal check.
2. What are the advantages and disadvantages of internal check system?
3. Describe the internal check for cash receipt and cash payment.
4. Explain the procedure of purchase cycle.
5. Explain briefly about the internal check regarding to wages.

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6. Describe the internal check with regard to stores (stock).

UNIT – III
2 MARKS
1. What is vouching?
2. Define vouching.
3. What is the meaning of voucher?
4. What are the kinds of voucher?
5. What is verification?
6. Define verification.
7. What is valuation?
8. What is an intangible asset?
9. What are fictitious assets?

5 MARKS
1. What is the objective of vouching?
2. Explain the procedure of vouching.
3. Write the importance of auditing.
4. Explain the features of good voucher.
5. Explain the points which involved in valuation.
6. What are the methods of valuation?
7. What is stock in trade and its valuation?
8. Difference between verification and vouching.

10 MARKS
1. Explain the verification and valuation of different assets.
2. Describe the verification of liabilities.

UNIT – IV

2 MARKS
1. Who is a sole trader?
2. Who is a Branch auditor?
3. What is removal of auditor?
4. What is subsequent auditor?
5. What is remuneration of auditor?
6. what do you mean by share capital?
5 MARKS
1. What are the qualification and disqualification of an auditor?
2. What is the provision regarding removal of the auditor?
3. What is liability under other statute?
4. What are the qualities of an auditor?

10 MARKS

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1. Explain the appointment of company auditors.
2. Briefly explain the rights of a company auditor.
3. Describe the duties of an auditor?
4. Explain the liability of an auditor under companies act.
5. Explain the Audit Report.
6. Briefly explain the types of audit report.

UNIT – V
2 MARKS
1. What is charitable institution?
2. What is club?
3. What is educational institution?
4. Tell about EDP.

5 MARKS
1. What is club and explain its audit?
2. Explain the preliminary step of cinema theatre and its audit of income and expenditure.
3. Describe the educational institutions?

10 MARKS
1. Explain in detail about hospital.
2. Describe briefly about Hotel.
3. Explain the Electronic Data Processing

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 2 MARKS WITH ANSWERS

UNIT - I
1. Give the meaning for auditing.
The word “audit” is derived from the Latin word “audire” which means “to hear”.
Auditing is an examination of books of accounts, documents and vouchers of a business in order to
verify the financial position as disclosed by the balance sheet and profit and loss account of the
undertaking.
2. Define auditing.
According to SPICER AND PEGLAR “auditing is such an examinations of books, accounts
and vouchers of a business as shall enable the auditor to satisfy himself whether the balance
sheet is properly drawn up so as to exhibit a true and correct view of the state of affairs of the
business, according to him and as shown by the books and if not in what aspect he is not satisfied
or the balance sheet is untrue or incorrect”.
3. What is an error of principle?
Such errors arise when the entries are not recorded according to the fundamental principles of
accountancy.
E g: Providing excess or inadequate depreciation.
Over or under valuation of stock. Such an error is not disclosed by the trial balance.
It can be detected only by a searching inquiry & independent checking. Such errors can be
detected by thorough checking of each & every transaction.
4. What is an error of duplication?
When a transaction is recorded twice and also posted twice in the ledger such type of errors
arise.
It is more difficult to locate such errors. Only through checking & comparing vouchers with
entries in the books of original entry will reveal such errors.
5. What is audit programme?
An audit programme should be elastic &should be chalked out in such a way that if there is a
need for revision it may be carried out without any difficulty.
6. Define audit programme.
According to MEGIS, an audit programme is a detailed plan of the auditing work to be
performed, specifying the procedure to be followed in verification of each item in the financial
statements and giving the estimated time required.
7. Write the meaning of audit note – book.
An audit note book is a book maintained by the audit clerk .during the course of audit, the
clerk comes across several difficulties or audit, the clerk comes across several difficulties or new
points which he has to discuss with his senior auditor .he makes he has to discuss with his senior

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auditor, the clerk comes across several difficulties or new points which he has to discuss with
senior auditor, he makes several inquiries which he thinks, have not been answered satisfactorily.
He note down these in the book which is named as audit not book or audit memoranda.
8. What are working papers?
The term audit working papers means the files of analysis, summarizes, comments and
correspondence built up by an auditor during the course of the field work of an audit
engagement.
It is the medium through which the auditor expresses his technical knowledge of accounting
principles & procedures as applied in the reports in the reports, statements & analysis of business
information.
These papers contain essential fact about account which is under audit.

9. Define working papers.

Arnold W.JOHNSON defines that “audit working papers are the written, private materials
which an auditor prepare for each audit. They describe the accounting information which he
received from his client, the method of examination used, his conclusion and financial
statement.”
According to SAP-5”Documentation: issued by the Institute of charted accountant of
India, audit of working paper consist of:
a) Evidence obtained during the audit examination
b) Details of the methods & procedure followed by the objects of the audit.
10. What is statutory audit?
Statutory audit is compulsory audit and is to be carried out each year by an auditor called
statutory auditor. The appointment of auditors, contents of audit report, manner of audit etc are
provided in the concerned statute.
The accounts of joint stock companies, banking companies, insurance companies, co-
operative societies, trust institutions are subject to compulsory audit.
11. What is continuous audit?
An audit which involves a detailed examination of the books of accounts at regular interval of
one month or three months such audit is called continuous audit.
The auditor visits his client at regular or irregular intervals during the financial year and
checks each and every transaction. At the end of the year he checks the profit and loss account
and balance sheet.
12. What is interim audit?
When an audit is conducted between two annual audits such audit is known as interim audit.
It is conducted with a view to find out interim profits to enable company to declare interim
dividends.
13. What is partial audit?
When an auditor is asked to audit certain category of transactions made during a part of a
period it is known as partial audit. The auditor may be asked to audit the payment side of cash
book.
14. What is cash audit?
When an audit is conducted to check all the items of cash book, it is known as cash audit.
Auditor will check receipts and payments made by cash and bank with the vouchers and other
documents. It is useful when large amount to cash is received and paid.

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 UNIT – II
1. What is internal control?
Internal control is a wider term. It includes all type of control namely financial control,
managerial control and organizational control. As a matter of fact it covers even the internal
check and internal audit. It helps the organization to meet its goal more effectively.
Internal control involves a number of checks and control exercised in a business to ensure its
efficient and economic working. It has become one of the basic and essential factors for efficient
and effective management.
2. Define internal control.
According to SPICER & PEGLAR, “internal control is best regarded as indication as the
whole system of control, financial and otherwise established by the management in the conduct
of a business, including internal check, internal audit and other forms of control”.
3. What is internal check?
Internal checks are also called inner check or inter check system. It is a system of accounts
keeping. It is an arrangement of duties of members of the staff in such a manner that the work
performed by one person is automatically and independently checked by another. For example,
in cash sales the sales man will not be allowed either to deliver the goods to the customers or
receive money from him. The cashier will receive the cash, the gate keeper will deliver the goods
and the accountant will make entry in the cash book.
4. Define internal check.
According to SPECIER AND PEGLAR,”A system of internal check is an arrangement of
duties whereby no person is allowed to carry through and record every aspect of a transaction, so
that without collusion between two or more persons, fraud is prevented and at the same time the
possibilities of error are reduced to a minimum”.
According to F.R.M. DE PAULA, “Internal check means practically a continuous internal
audit carried on by the staff itself, by means of which the work of each individual is
independently checked by other members of the staff”.

UNIT – III
1. What is vouching?
Vouching is an important aspect of auditing. Audit without vouching shall be incomplete. It
enables testing the truth of items appearing in the books of original entry.
Vouching does not mean only comparing the cash receipt with the counterfoils of the
receipt book or the bank pay in slip, but it includes proper examination with reference. Thus the
act of establishing the accuracy and authenticity of entries in the accounts book is called
“vouching”.
So vouching means testing the truth of the entries appearing in the books of accounts
with the support of any documentary evidence. The documentary evidence is commonly known
as vouchers, invoice, receipts, and minutes, bought note, wage book etc are example of voucher.
2. Define vouching.
According to Ronald A. Irish, “vouching is a technical term which refers to the inspection by
the auditor or documentary evidence supporting a transaction”.
3. What is the meaning of voucher?

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 A voucher may be defined as any documents which evidences a transaction or an entry in a
book of accounts. It may be in the form of a money receipts, invoice , cash memo, bank pay in
slip, agreement of contract, a resolution passed at a meeting of the board of directors of
shareholder , the minutes of a meeting, correspondence with parties and so on.
4. What are the kinds of voucher?
A voucher may be
1. Primary
2. Collateral.
Primary vouchers are an original evidence of a transaction or entry.
Collateral vouchers may be in the form of copies of sales invoice, receipt issued to debtors or
resolution passed at the meeting of board or shareholders.
5. What is verification?
Verification means the procedure normally carried out at the year end, to confirm the
ownership valuation and existence of items at the balance sheet date .it also involves confirming
that presentation in the financial statements is in accordance with legislations.
The auditor must verify that the various items appearing in the balance sheet are in the
possession of the concern. In simple words verification means ‘proving the truth’.
6. Define verification.
According to Spicer and Pegler, “verification of assets implies an enquiry into the value,
ownership and title, existence and possession and the presence of any charge on the assets”.
7. What is valuation?
Valuation means to set the exact value of an asset on the basis of its utility. Valuation is
very important because the accuracy of balance sheet depends much upon how correctly the
value of various assets and liabilities has been made .both over valuation & under valuation
exhibit wrong picture of the financial affairs of the company.
8. What is an intangible asset?
Goodwill, patents, trade mark, copyright etc.
9. What are fictitious assets?
Preliminary expenses, discount on issue of share and debentures.

UNIT – IV
1. Who is an auditor for sole trader?
In the case of soletrader, the auditor generally acts as accountant who also prepares accounts
besides checking their accuracy.
2. Who is a Branch auditor?
 Audit of accounts of branches of the company may be audited by the company statutory
auditor.
 If the company decide to have the branch accounts audited by another person, in such a case
the appointment must be made by shareholders in general meeting.
 Board of directors can appoint branch auditor if the company authorized Board of directors to
appoint by a resolution passed in general meeting. But he must consult the company statutory
auditor while appointing branch auditor.
3. What is removal of auditor?
According to sec 224(7) of the Indian companies Act an auditor may be removed from office
before the expiry of his term. The law permits the removal of an auditor under certain
circumstances. The directors of a company however have no power under any conditions to
remove an auditor from office.
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4. What is subsequent auditor?
 Subsequent auditor or auditors of a company are appointed every year by the share holder in
annual general meeting by passing an ordinary resolution.
 According to Sec 224(1) “ every company shall at each annual general meeting, appoint an
auditor or auditors to hold office from the conclusion of that meeting until the conclusion of
the next annual general meeting, and shall within 7 days of the appointment give intimation
to every auditor so appointed”.
5. What is remuneration of auditor?
Sec 224(8) of the companies act deals with the remuneration of the auditor of a company. The
remuneration of the auditor of a company shall be fixed by the appointing authority. According
to the provision of sec 224(8) the remuneration may be fixed as under.
a) If the auditor has been appointed by the Board of directors, it is the Board which fixes his
remuneration.
b) If the auditor had been appointed by the central government, the central government fixes his
remuneration.
c) If the auditor has been appointed by the shareholders at the general meeting, it is the company
which determined his remuneration. It is not necessary that the remuneration be fixed at the same
meeting at which his appointment has been made.
d) The retiring auditor who is automatically re-appointed at the annual meeting is entitled to get
the same remuneration as he was getting previously.
e) If an auditor is asked to do any other work over and above his normal work, he is entitled to
get extra remuneration.
Any sum paid by the company in respect of the auditors expenses shall be deemed to be
included in the expression” remuneration”.

UNIT – V
1. What is charitable institution?
Charitable institutions are usually registered as societies under Societies Registration Act,
1960. Charities may be public charity or private charity. The Trustee of the charity is responsible
for maintaining proper books of accounts.
2. What is club?
Generally a club is set up as a company ltd by guarantee in which case the provision of the
companies act relating to the Companies Act relating to the maintenance and audit of company
are applicable to club. A club may also be registered under the Societies Registration Act 1960.
The auditor should take the following steps while auditing the accounts of a club and he
should evaluate the system of internal check and control and select the audit procedure
accordingly.
3. What is educational institution?
The auditor should conduct the audit of an educational institution whether a school or
colleges or university along the following lines.

EXTRA NOTES
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UNIT- I

DIFFERENCE BETWEEN AUDITING AND INVESTIGATION

Basis of Auditing Investigation
distinction
1) scope The main purpose of auditing is to see Investigations have certain specified
whether the balance sheet show the objects like future earning capacity,
true and fair view of statement of extent of suspected fraud, matters
affairs of the business and the profit concerning purchase of business.
and loss account show true operating
results during the year.
2) Period covered Audit of accounts is usually for a Investigation covers several years
financial year. say 2, 3 or 5 years to find out
average earning capacity, financial
position etc.
3) Statutory Audit of accounts is statutory Investigation of accounts may or
requirement requirement as per company’s act may not be statutory requirement
1956. under company’s act 1956.
4) Initiated by Audit is always conducted on behalf Investigation may be carried out on
outsiders or of proprietors only. behalf of outsiders who either want
proprietors to purchase the business or to
became partner to advance loans etc.
5) Investigation of Investigated accounts are not audited. Audited accounts are further
audited accounts investigated for some special
purpose.
6) Evidence In case of auditing, the auditor is Investigator looks for substantive
concerned only with prima facie evidence.
evidence.
7) Qualification Audit of companies can only be Investigator may not be necessarily
conducted by a chartered accountant. a chartered accountant.

TYPES OF AUDIT OR CLASSIFICTION OF AUDIT

INTRODUCTION:
Auditing is concerned with verification of accounting data and determining the reliability and
accuracy of accounting statements. The scope of audit has widened to different types of audit
such as management audit, operation audit, cost audit etc, with the recognition of audit as a
profession all the countries of the world have framed certain rules and regulations.

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 TYPES OF AUDIT

A) ON THE BASIS OF B) ON THE BASIS OF

ORGANISATIONAL CONDUCT OF
STRUCTURE AUDIT

A) ON THE BASIS OF ORGANISATONAL STRUCTURE:

1) Statutory audit:
Statutory audit is compulsory audit and is to be carried out each year by an auditor called
statutory auditor. The appointment of auditors, contents of audit report, manner of audit etc are
provided in the concerned statute.
The accounts of joint stock companies, banking companies, insurance companies, co-
operative societies, trust institutions are subject to compulsory audit.
The following are the statutes covering the audits of various concerns.
7) Companies act 1956 covers all the companies incorporated under it.
8) Banking companies audit is governed by banking company’s regulation act 1949.
9) Insurance companies are governed by insurance act 1938.
10) Co-operative society’s act 1904 governs the audit of co-operative societies.
11) Public and charitable trusts are governed by the respective acts which governs them.
12) Electricity companies are governed by the provision of electricity act 1948 and
Indian electricity act1910.
Advantages of statutory audit:
 - It provides shareholders and other persons true and fair view of financial position of
the business.
 - Share holders can protect themselves from any frauds committed by directors,
promoters or managers.
 - Whether the provisions of companies act are followed by the management while
preparing and presenting accounts.
 It is a model check on the duties of the management.
2) Private audit:
When the audit is not statutory requirement, but it is conducted at the desire of owners, such
audit is private audit. Private audit is of the following types:
d) Audit of sole trader.
e) Audit of partnership.
f) Audit of individuals.
a) Audit of sole trader:
Incase of proprietary concerns, the owner himself takes the decision to get the accounts
audited. Sole trader will decide about the scope of audit and appointment of auditor.
Advantages:
o He is assured of his accounts being properly prepared.
o He can come to know any fraud by his employees and agents.
o Audited accounts are considered reliable by I.T. authorities.
o Classification of records makes it comparable with past figures.

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b) Audit of partnership firm:
To avoid any misunderstanding and doubt, partnership firm recognize the advantages of audit
of financial statements. Auditors are appointed by the mutual consent of all the partners.
While conducting audit, the auditor must refer to the deed of partnership. He should obtain a
copy of such deed certified by one of the partners.
Advantages:
o If the accounts of the firm are audited it facilitates settlement of accounts and valuation of
goodwill on retirement, death or admission of a partner.
o Audit avoids any financial dispute among the partners.
o The firm can avail the benefit of audit for purpose of taxation or improvement in operations.
o Negotiation for advances and loans from various sources become easy.
c) Audit of individual:
Many of the individuals derive income from property, shares, investment and other sources.
Auditor may be appointed to prepare the accounts and verify their accuracy. He can know the
true income from various sources and values of their properties.
Advantages:
o Audited accounts are taken as correct by I.T. authorities.
o It keeps moral check on the accountant and agent.
o Individual can know the true income from various sources.
d) Audit of institutions not covered by law:
Certain non-profit organizations e g: clubs, hospitals, libraries, charitable institutions etc get
their accounts audited. Auditors are appointed by the governing bodies.
Advantages:
o Financial statements of such institutions are audited to located any error or fraud by the
staff.
o Audited accounts are helpful in getting grants and other aids from the government bodies.
3) Internal and External audit:
The audit is said to be external if the appointment of auditor is made by persons other than
whose performance is evaluated by auditor. An external auditor is appointed by the shareholders.
An audit is said to be internal when the auditor is appointed by persons who are responsible
for the performance of the entity. An internal auditor is appointed by the management by the
company.
4) Government audit:
1. Audit of government offices and departments are done by government auditors.
2. The president of India appoints the comptroller and Auditor General of India
(C & AG), who is the prime authority in the audit hierarchy of government accounts.
3. Each state has its auditor general.
4. To audit the accounts of municipalities, universities and other government institutions, local
auditors are appointed.
5. These auditors submit the report to C & AG who comments on it and place it before the
parliament.
6. It works strictly according to government rules and regulations.
Objectives:
 To ensure that every payment is made as per rules and regulations
 Payments have been sanctioned by the proper authority.
 To see that the expenditure is incurred by the right person.
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 To verify the allowances granted by employees as per sanction and rules.
 To ensure that payments is made by the office to the right person.
 To check the existence of stock and stores and their proper valuation.
 Whether money due from others has been regularly recovered.
 To make suggestion to the proper authority for improvements in rules and regulations for
greater efficiency.

B) ON THE BASIS OF CONDUCT OF AUDIT:

Based on the frequency with which audit is conducted, the audit is classified into following
types:
i) Continuous audit:
An audit which involves a detailed examination of the books of accounts at regular interval of
one month or three months such audit is called continuous audit.
The auditor visits his client at regular or irregular intervals during the financial year and
checks each and every transaction. At the end of the year he checks the profit and loss account
and balance sheet.
Business where continuous audit is applicable:
 Where it is desired to present the accounts just before the close to the financial year.
 Where the volume of transaction is very large.
 Where the statement of accounts is required to be presented to the management every
month or quarter.
 Where no satisfactory system of internal check is in operation.
Advantages of continuous audit:
i) Easy and quick discovery of errors:
Errors and frauds can be discovered easily and quickly as the auditor checks the accounts at
regular intervals.
ii) Knowledge of technical details:
Since the auditor remains more in touch with business, he is in a position to know the
technical detail of it and hence he can give his client valuable suggestions.
iii) Quick presentation of accounts:
Most of the checking has been already performed; the final accounts can be presented to the
shareholders at the annual general meeting.
iv) Keeps the clients staff regular:
As the auditor visits the clients at regular intervals, the clerk will be regular in keeping the
accounts up-to-date.
v) Moral check on the client’s staff:
Continuous audit provides moral check against frauds.
vi) Efficient audit:
The auditor having more time at his disposal can check the accounts with greater attention
and in detail and his work will be more efficient.
vii) Preparation of interim accounts:
Where the directors of the company wish to declare an interim dividend, continuous audit
will help in the preparation of interim accounts without much delay.
viii) Audit staff can be kept busy:

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 The audit staff may be sent to other clients after having finished the work for one client.
Thus whole of the staff can be kept busy throughout the year.

Disadvantages of continuous audit:

 Alteration of figures:
Figures in the books of account which have already been checked by the auditor at his
previous visit, may be altered by a dishonest clerk.
 Dislocation of clients work:
The frequent visit by the auditor may dislocate the work of his client.
 Expensive:
It is an expensive system of audit and may not suit the budget of small organization.
 Losing link in audit work:
As the work is not completed continuously, the auditor may lose continuity and certain
inquiries may be left unanswered.
 Monotony:
The work of auditor may become mechanical.
 Unhealthy relationship:
Frequently visits by auditor may provide scope for unhealthy relationship between him and
clerks.
ii) Annual or periodical audit:
Periodical audit is one which is taken up at the close of the financial period when all the
accounts have been balanced and trading, profit and loss account and balance sheet have been
prepared. The audit is completed in one continuous session.
In this audit the auditor visits his client only once a year and goes on checking the
accounts until the audit work for the whole period is completed.
Advantages:
o There is less danger of alteration of figures after they have been checked.
o Office work is not unnecessarily disturbed because auditor visits only once a year.
o Auditor’s staff has a complete grip over the audit as the work is completed continuously.
o It is less expensive system and suitable for small business houses.
o Periodical audit can be finished quickly within reasonable time.
o Work allocation according to time schedule is easy.
Disadvantages:
 The audited accounts may not be available immediately after the close of the year. It may
cause delay in the declaration of dividends and holding annual general meeting.
 Auditor may not be able to check and verify all the transactions. There is a chance that
some of the errors may be left undetected.
 In big concerns report may get delayed. This forces the postponement of annual general
meeting.
 There is more dependence on the co-operation of management, which is not desirable
thing.
3) Partial audit:
When an auditor is asked to audit certain category of transactions made during a part of a
period it is known as partial audit. The auditor may be asked to audit the payment side of cash
book.
4) Balance sheet audit:

85
 Balance sheet audit relates the verification of various items of balance sheet such as assets,
liabilities, reserves and surplus. The procedures under this audit is to follow a backward process.
First the item is located in balance sheet, then it is locates in the original record for the purpose
of verification.
5) Cost audit:
Cost audit is the complete checking and verification of cost accounts, to see whether the
concern is following cost accounting principles. The government may direct certain company to
maintain cost records and to get cost accounts audited.

6) Management audit:
In management audit an attempt is made to evaluate various management function and
processes. A detailed review of all the objectives, policies, procedures and functions of
management is made with a view to bring an overall improvement in managerial efficiency.
Advantages of management audit:
o It helps the management in preparation of plans, objectives and policies and their
efficient achievement.
o It helps the management in taking critical decisions for maximization of profits.
o It helps the management in training of personnel and making policies.
o It helps in evaluating the performance of management.
Management audit includes the following:
 Study of objectives of the organization.
 Target of each department to achieve the objectives.
 Reviewing the organizational structure.
 Comparing inputs and outputs for evaluating the performance and
 Making suggestions for improvement.
7) Operational audit:
Operational audit is review of operations. It involves intelligent examination of various
operations of functional areas of the business (ie) production, marketing, stores etc. observing
weakness, lapses, inefficiency in the operation and suggesting way to strengthen the system.
8) Interim audit:
When an audit is conducted between two annual audits such audit is known as interim audit.
It is conducted with a view to find out interim profits to enable company to declare interim
dividends.
9) Cash audit:
When an audit is conducted to check all the items of cash book, it is known as cash audit.
Auditor will check receipts and payments made by cash and bank with the vouchers and other
documents. It is useful when large amount to cash is received and paid.
Conclusion:
Thus by conducting various types of audit the management gets the advice of the auditor to
improve their performance.

DIFFERENCE BETWEEN CONTINOUS AUDIT AND PERIODICAL AUDIT

Basis of distinction Continuous audit Periodical audit
1) Time period Continuous audit is done Periodical audit is done at the
throughout the year. end of the year.

86
2) Visit by auditor. The auditor visits the client’s
office frequently.
3) Nature of business concern It is quite suitable of big
concern.
4) Checking of transaction Detailed checking of the
transaction is possible.
5) Expensive It is very expensive.
6) Interim accounts It helps in preparation of
interim accounts.
7) Detection of errors and It reduces the opportunities for
fraud fraud.
8) Nature of work Work becomes mechanical
and boring.
9) Relationship with staff of There is a possibility for
the client developing unhealthy
relationship between the audit
staff and the client staff.
10) Quick submission of Financial accounts can be
accounts submitted immediately after
the close of the financial year.
11) Declaration of dividends It facilitates early declaration
of dividend.
12) Moral check There will be moral check on
the staff of the client.
The auditor visits the client
office at the end of the year.
It is suitable for small
concerns.
Detained checking is not
possible.
It is not expensive.
It does not help in preparation
of interim accounts.
It does not reduce the
opportunities of fraud.
Work does not become
mechanical.
There is no possibility for
developing unhealthy
relationship between audit
staff and client’s staff.
It dose not facilitate early
declaration of dividend.
It does not facilitate early
declaration of dividend.
There will not be any moral
check on the client.

AUDIT NOTE –BOOK

MEANING:
An audit note book is a book maintained by the audit clerk .during the course of audit, the
clerk comes across several difficulties or audit, the clerk comes across several difficulties or new
points which he has to discuss with his senior auditor .he makes he has to discuss with his senior
auditor, the clerk comes across several difficulties or new points which he has to discuss with
senior auditor, he makes several inquiries which he thinks, have not been answered satisfactorily.
He note down these in the book which is named as audit not book or audit memoranda.
Contents of audit note book:
1. List of books of accounts maintained by the client.
2. Names of principal officers, their powers, duties &responsibilities.
3. Technical details about a business.
4. Points for which explanation and information have to be demanded.
5. Missing vouchers and invoices whose duplicates have to obtain.
6. Frauds &errors found in the books during the courses of audit.
7. Totals of important ledger accounts.
8. Accounting method followed in the business.
9. Details which are to be included in the audit report.
10. Any matter which requires discussion with the senior.
11. Date of commencement & completion of audit.
12. Provisions in the AOA &MOA affecting the accounts &audit.

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 13. Notes & queries which might be required at subsequent audit.

Advantages and objectives of audit note:

1. Audit note book is of much help to the auditor for making the audit report.
2. Auditor is enabled to record important points which arise during the course of his audit.
3. He can produce this book as documentary evidence in case a suit is filed against him for
negligence.
4. In case the assistant in charge is changed, no difficulty is faced in continuing the incomplete
work.
5. It helps in making an assessment of the knowledge, efficiency and work of the audit clerks &
also the interest and pains taken by the audit staff.
6. It ensures that the audit programme has been sincerely followed. Deviations can be noticed.
7. The responsibility for errors undetected can be fixed on clerk concerned.
8. Important matters relating to the audit work may be easily recalled.

Disadvantages:
1. It develops a fault finding attitude in the minds of the audit staff.
2. Very often, it creates misunderstanding between the client’s staff and audit staff.
3. If an audit note is prepared negligently, it can be used as an evidence of negligence in court of
law against the auditor.
4. It places too much reliance on the staff of the client for its preparation.

UNIT-II

SCOPE OR AREA OF INTERNAL CONTROL

A) GENERAL FINANCIAL CONTROL
It is concerned with an efficient system of accounting, adequate supervision, recording and
duplicating system etc.
B) CASH CONTROL
It includes proper control for receipts, payment and balance held. Due safe guard must be
exercised to avoid misappropriation of cash.
C) CONTROL OVER TRADING TRANSACTION
This area deals with an efficient system of control over both purchase and sales transaction.
Proper procedures should be laid down for handling and accounting of goods purchased and also
for recording and handling of goods sold
D) CONTROL OVER EXPLOYEES REMUNERATION
This area concerned itself with the preparation and maintenance of records for remuneration
to employees, method of payment etc. proper control must be exercised over this aspect so as to
avoid misappropriation of cash payment to be made to the employees.
E) CAPITAL EXPENDITURE CONTROL
The expenditure on capital assets must be kept under proper control.
F) OTHERS
These includes,
 Maintenance of staff relationship
 Stock maintenance

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  Control over investment.
Conclusion:
Thus, the internal control system is equally important to the management and the auditor
concerned. It covers the control of the whole management system.

LIMITATION OF INTERNAL CONTROL:

 Operation of internal control system involves expenditure of time and money.
 It is concerned more with transactions of a routine nature.
 The possibility for human error may weaken the internal control system.
 Possible collusion between persons operating the internal control and employees of the client
enterprise may render the controls ineffective.
 The possibility that a person responsible for exercising control could abuse his authority.
 The possibility that changes in conditions may render the procedures ineffective.
 Manipulation by the management may defeat the objective of internal control.

ADVANTAGES & DISADVANTAGES OF INTERNAL CHECK SYSTEM

ADVANTAGES
Some of the widely accepted advantages of an efficient system of internal check are as follows.

ADVANTAGES OF INTERNAL CHECK SYSTEM

FOR BUSINESS FOR AUDITOR FOR OWNER

I) FOR THE BUSINESS

A) PROPER DIVISION OF WORK
Internal check system gives a proper and rational distribution of work among the members of
staff of the enterprises keeping in view their individual qualification, experience and area of
specialization.
B) DETECTION OF ERRORS & FRAUDS
Since no individual workers is allowed to handle a job completely from the beginning to the
end, and the work of each clerk is automatically checked by the others. This helps in the early
detection and discovery of errors and frauds and the possibilities of commission of errors and
frauds can be minimized.
C) INCREASED EFFICIENCY COUPLED WITH ECONOMY
A good system of internal check increases the efficiency of work among the staff and leads to
overall economy.
D) MORAL CHECK
Knowledge of subsequent checking of each employees work by others, acts as a great check
to commission of errors and frauds.

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II) FOR THE AUDITOR
A) QUICK PREPARATION OF FINAL ACCOUNTS
The profit and loss account and balance sheet are prepared without any loss to time.
B) CONVENIENCE
Where an organization is operating a system of internal check the statutory auditors may
conveniently avoid detailed checking of the transactions.

III) FOR THE OWNERS

A) INCREASE IN PROFIT
Overall efficiency and economy in operation result is more profit. Thus ensuring large
dividend for the owners or shareholders.
B) ACCURACY OF THE ACCOUNTS CAN BE RELIED UPON
If there is a good system of internal check the owner of the concern may rely upon the
accuracy of the accounts.

DISADVANTAGES
Dependence on each other proves fatal in the quick disposal of the work. If one person is
absent, the day-to-day work will be seriously affected.
Following are the disadvantages of a system of internal check:
A) COSTLY FOR SMALL BUSINESS
A system of internal check is costly for small business houses; it is only applicable for large
scale business.
B) QUALITY IS SACRIFIED FOR PROMPTNESS
In an internal check system quality of work declines because the clerk of the business
attached greater importance to become quick and do not care if in the process their work gets
standardized.
C) DISORDER IN THE WORKING OF A BUSINESS
In the absence of a properly organized system of internal check, there will be confusion and
disorder in the working of a business.
D) RISKY FOR AN AUDITOR
If the auditor does not apply tests and procedures of his own and if he relies on the output of
the system his work cannot be free from irregularities if the system itself proves to be defective.

To provide a safeguard against all these disadvantages:

It is very much desirable that system of internal check should be adopted very carefully and
continuously. Precautions, tactfulness and the skill of the auditor can overcome all these
disadvantages and it can be turned into an effective and useful method of checking the
accounting records.

UNIT-III
KINDS OF VOUCHERS
A voucher may be
1. Primary
2. Collateral.
Primary vouchers are an original evidence of a transaction or entry.

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Collateral vouchers may be in the form of copies of sales invoice, receipt issued to debtors or
resolution passed at the meeting of board or shareholders.
METHOD OF VALUATION:
1) COST PRICE:
The price which is paid for acquisition of an asset is known as its cost price. But expenses
incurred in the purchase of an asset and its installation is included in its cost price.

2) MARKET VALUE:
A value which an asset can fetch in the market when sold is known as market value.
3) REPLACEMENT VALUE:
It is a price at which a particular asset can be replaced. The expenses such as commission,
freight etc is also included in such a value.
4) BOOK VALUE:
A value at which an asset appears in the books of accounts is known as its book value.
5) GOING CONCERN VALUE AND CONVENTIONAL 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 these assets are acquired for
use in the business and not for resale.

6) REALISABLE VALUE:
A value which will be realized in the market and received from the sale of an asset is known
as it realizable value.
7) SCRAP VALUE:
A value which may be obtained from the asset if it is sold as scrap.

.
DISTINCTION BETWEEN VERIFICATION AND VOUCHING

Vouching is to examine the correctness and authenticity of the transactions recorded in

book of prime entry.
Verification is to confirm the value of assets and liabilities as shown in the balance sheet.
BASIS DIFFERENCE VOUCHING VERIFICATION

1) Nature of work It examines the entries relating It examines the assets and
to transactions recorded in the liabilities appearing in the
accounts books. balance sheet.

2) Time It is done throughout the year. It is done at the end of the year
when balance sheet is
prepared.

3) Basis Based only on documentary It is based on personal as well

examination. as documentary examination.

4) Valuation It does not include valuation. It includes valuation.

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5) Personal It is done by juniors like audit It is done by audit staff.
clerks.

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