STUDY MATERIAL

FOUNDATION PROGRAMME

FUNDAMENTALS OF
ACCOUNTING AND
AUDITING

PAPER 4

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 FOUNDATION PROGRAMME – IMPORTANT NOTE

The study material has been written in lucid and simple language and conscious efforts have been made to
explain the fundamental concepts and principles of accounting and auditing. This study material is divided into
two main parts –

Part-A Fundamentals of Accounting, and

Part-B Fundamentals of Auditing

The institute has decided that the first examination for Foundation Programme under new syllabus will be held
from December 2012 session in the Optical Mark Recognition (OMR) format, whereby students are required to
answer multiple choice questions on OMR sheet by darkening the appropriate choice by HB pencil. One mark
will be awarded for each correct answer. There is NO NEGATIVE mark for incorrect answers.

The specimen OMR sheet is appended at the end of the study material. There are two self test question papers
in the study to acquaint students with the pattern of examination. These are for practice purpose only, not to be
sent to the institute.

For supplementing the information contained in the study material, students may refer to the economic and
financial dailies, commercial, legal and management journals, Economic Survey (latest), CS Foundation Course
Bulletin, Suggested Readings and References mentioned in the study material and relevant websites.

The objective of the study material is to provide students with the learning material according to the syllabus of
the subject of the Foundation Programme. In the event of any doubt, students may write to the Directorate of
Academics and Professional Development in the Institute for clarification at faa@icsi.edu

Although due care has been taken in preparing and publishing this study material, yet the possibility of errors,
omissions and/or discrepancies cannot be ruled out. This publication is released with an understanding that the
Institute shall not be responsible for any errors, omissions and/or discrepancies or any action taken on the basis
of contents of the study material.

Should there be any discrepancy, error or omission noted in the study material, the Institute shall be obliged if
the same are brought to its notice for issue of corrigendum in the CS Foundation Course Bulletin.

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 SYLLABUS

PAPER 4: FUNDAMENTALS OF ACCOUNTING AND AUDITING

Level of Knowledge: Basic Knowledge

Objective: To familiarize and develop an understanding of the basic aspects of accounting, auditing concepts
and their principles.

PART A: FUNDAMENTALS OF ACCOUNTING (70 MARKS)

1. Theoretical Framework
– Meaning and Scope of Accounting; Accounting Concepts; Accounting Principles, Conventions and
Standards – Concepts, Objectives, Benefits; Accounting Policies; Accounting as a Measurement
Discipline – Valuation Principles, Accounting Estimates
2. Accounting Process
– Documents & Books of Accounts: Invoice, Vouchers, Debit & Credit Notes, Day books, Journals,
Ledgers and Trial Balance
– Capital and Revenue: Expenditures and Receipts; Contingent Assets and Contingent Liabilities
– Rectification of Errors
3. Bank Reconciliation Statement
– Meaning; Causes of difference between Bank Book Balance and Balance as per Bank Pass Book /
Bank Statement; Need of Bank Reconciliation Statement; Procedure for Preparation of Bank
Reconciliation Statement
4. Depreciation Accounting
– Methods, Computation and Accounting Treatment of Depreciation; Change in Depreciation Methods
5. Preparation of Final Accounts for Sole Proprietors
– Preparation of Profit & Loss Account, Balance Sheet
6. Partnership Accounts
– Goodwill
– Nature of and Factors Affecting Goodwill
– Methods of Valuation: Average Profit, Super Profit and Capitalization Methods
– Treatment of Goodwill
– Final Accounts of Partnership Firms
– Admission of a Partner
– Retirement/Death of a Partner
– Dissolution of a Partnership Firm
7. Introduction to Company Accounts

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 – Issue of Shares and Debentures; Forfeiture of Shares; Re-Issue of Forfeited Shares; Redemption of
Preference Shares

PART B: FUNDAMENTALS OF AUDITING (30 MARKS)

8. Auditing
– Concepts and Objectives
– Principles of Auditing
– Types of Audit
– Evidence in Auditing
– Audit Programmes
9. Audits and Auditor’s Reports
– Internal Audit
– Statutory Auditor: Appointment, Qualification, Rights and Duties
– Secretarial Audit: An Overview
– Cost Audit: An Overview
– Auditor’s Report: Meanings, Contents, Types, Qualifications

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 LIST OF RECOMMENDED BOOKS*
PAPER 4 : FUNDAMENTAL OF ACCOUNTING AND AUDITING

READINGS

1. M. C. Shukla, Advanced Accounts Vol. I, S. Chand & Company Ltd., Ram Nagar, New Delhi-55.
T. S. Grewal &
S. C. Gupta
2. R. L. Gupta & Financial Accounting, Sultan Chand & Sons, New Delhi - 2.
V. K. Gupta
3. J. R. Monga Financial Accounting – Concepts & Applications; Mayoor Paperbacks, A-95, Sector
5, Noida (U.P.)
4. S. N. Maheshwari & Advanced Accounting, Volume I; Vikas Publishing House (Pvt.) Ltd., Jangpura,
S. K. Maheshwari New Delhi-14.
5. S. P. Jain & Advanced Accounting, Volume I; Kalyani Publishers, Daryaganj, New Delhi - 2.
K. L. Narang
6. Ashok Sehgal & Advanced Accounting (Financial Accounting); Taxmann’s, New Delhi.
Deepak Sehgal
7. Aruna Jha Student’s Guide to Auditing & Assurance, Taxmann Publications Pvt. Ltd., New
Rohtak Road, New Delhi.
8. S. D. Sharma Auditing Principles & Practice, Taxmann Publications Pvt. Ltd., New Rohtak Road,
New Delhi.
9. Anand G. Srinivasan Auditing, Taxmann Publications Pvt. Ltd., New Rohtak Road, New Delhi.
10. S. Sundharababu, A Handbook of Practice Auditing, S. Chand, S. Sundharsanam, B.N. Tondon &
Company, New Delhi

REFERENCES

1. T. P. Ghosh, A. Banerjee Principles and Practice of Accounting, Galgotia Publishing Company, New Delhi-5.
& K.M. Bansal
2. P. C. Tulsian Financial Accounting, Sultan Chand & Company, New Delhi.
3. R. Narayanaswamy Financial Accounting – A Managerial Prospective; PHI Learning Pvt. Ltd.
4. Ashish K. Bhattacharyya Essentials of Financial Accounting; PHI Learning Pvt. Ltd.

*This study material is sufficient from the point of view of syllabus. The students may refer these books for further knowledge and study
of the subject.

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 CONTENTS
PART A: FUNDAMENTALS OF ACCOUNTING

LESSON 1
THEORETICAL FRAMEWORK
Page
Accounting 3

Review Questions 5

Book Keeping 5

Systems of Accounting 6

Accounting as Information System 7

Role of Accountant 8

Accounting Principles, Concepts and Conventions 9

Accounting Standards 12
Accounting Policies 13

Accounting – A Measurement Discipline 13

Accounts and its Classification 13

Review Questions 15

Double Entry System 15

Rules of Debit and Credit 16

Accounting Equation 18

LESSON ROUND UP 18

GLOSSARY 19
SELF-TEST QUESTIONS 19

LESSON 2

ACCOUNTING PROCESS-I (RECORDING OF TRANSACTIONS)

Accounting Cycle 24

Journal 24

Ledger 29

Subsidiary Books of Accounts 33

– Purchases Book 34

– Sales Book 34
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– Purchases Returns Book 34

– Sales Returns Book 35

– Bills Receivable Book 39

– Bills Payable Book 40

– Cash Book 40

Review Questions 42

Petty Cash Book 44

General Journal 46

Trial Balance 48

LESSON ROUND UP 54

GLOSSARY 55

SELF-TEST QUESTIONS 55

LESSON 3

ACCOUNTING PROCESS-II (RECTIFICATION OF ERRORS)

Errors 60

Classification of Errors 60

Errors Disclosed by Trial Balance 61

Errors Not disclosed by Trial Balance 62

Review Questions 62

Steps to locate Errors 63

Rectification of Errors 63

– Before the preparation of Trial Balance 63

– After the preparation of Trial Balance but before the preparation of Final Accounts 67

– In the next accounting period 70

LESSON ROUND UP 78

GLOSSARY 78

SELF-TEST QUESTIONS 78

LESSON 4

ACCOUNTING PROCESS-III (CAPITAL AND REVENUE ITEMS)

Capital Expenditure 82

Revenue Expenditure 82

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Deferred Revenue Expenditure 82

Capital and Revenue Receipts 83

Capital and Revenue Profits 84

Capital and Revenue Losses 84

Review Questions 84

Contingent Assets 86

Contingent Liability 87

LESSON ROUND UP 87

GLOSSARY 88

SELF-TEST QUESTIONS 88

LESSON 5

BANK RECONCILIATION STATEMENT

Introduction 92

Review Questions 93

Causes of difference between Bank Balance as per Cash Book and Pass Book 93

Significance of Bank Reconciliation Statement 94

Procedure of preparing Bank Reconciliation Statement 94

– Preparation of Bank Reconciliation Statement when overdraft balances are given 96

– Preparation of Bank Reconciliation Statement when extracts of cash book and pass book are given 98

Illustrations 98

LESSON ROUND UP 108

GLOSSARY 108

SELF-TEST QUESTIONS 109

LESSON 6

DEPRECIATION ACCOUNTING

Introduction 114

Accounting Concept of Depreciation 116

Review Questions 117

Methods of Providing Depreciation 118

– Uniform Charge Methods 118

– Fixed Instalment Method or Straight Line Method 118

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– Depreciation Fund (Sinking Fund) Method 120

– Insurance Policy Method 124

– Annuity Method 126

– Declining Charge Depreciation Methods 128

– Diminishing Balance Method (Reducing Balance Method) 128

– Sum of Years’ Digits Method 130

– Double Declining Balance Method 130

– Other Methods 131

Change in Method of Depreciation 132

Calculation of Profit or Loss on Assets Sold 133

Depreciation and Replacement of Assets 136

LESSON ROUND UP 137

GLOSSARY 137

SELF-TEST QUESTIONS 137

LESSON 7

PREPARATION OF FINAL ACCOUNTS FOR SOLE PROPRIETORS

Introduction 142

Trading Account 142

Profit & Loss Account 143

Review Questions 144

Balance Sheet 145

Review Questions 146

Classification of Assets 146

Classification of Liabilities 146

Adjustment Entries 148

Closing Entries 157

Manufacturing Account 158

Limitations of Financial Statements 159

Illustrations 160

LESSON ROUND UP 172

GLOSSARY 172

SELF-TEST QUESTIONS 172

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LESSON 8

PARTNERSHIP ACCOUNTS

Basic Concepts of Partnership 180

Goodwill 182

Methods of Valuation of Goodwill 183

Preparation of Final Accounts of Partnership 185

Profit & Loss Appropriation Account 185

Reconstitution of Partnership 195

– Change in Profit Sharing Ratio 195

– Admission of a Partner 197

– Retirement of a Partner 217

– Death of a Partner 232

Dissolution of Partnership Firm 239

LESSON ROUND UP 254

GLOSSARY 255

SELF-TEST QUESTIONS 256

LESSON 9

INTRODUCTION TO COMPANY ACCOUNTS

Basic Concepts of Company Accounts 262

Issue of Shares 263

– For Cash 264

– Under Subscription of Shares 272

– Over Subscription of Shares 272

– Calls in Advance and Interest on Calls in Advance 273

– Calls in Arrears and Interest on Calls in Arrears 277

– Issue of shares for consideration other than cash 279

Forfeiture of Shares 283

Re-issue of Forfeited Shares 285

Review Questions 291

Forfeiture and Re-issue of Shares allotted on Pro-Rata basis in case of over subscription 291

Issue of Debentures 295

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– For cash 295

– For consideration other than Cash 301

– As Collateral Security 302

Redemption of Preference Shares 304

LESSON ROUND UP 313

GLOSSARY 314

SELF-TEST QUESTIONS 315

PART B: FUNDAMENTALS OF AUDITING

LESSON 10

CONCEPT OF AUDITING

Introduction 319

Meaning of Audit 319

Principal Aspects to be Covered in Audit 320

Benefits of Auditing 321

Limitations of Auditing 321

Review Questions 322

Investigation 322

Difference between Auditing and Investigation 322

LESSON ROUND UP 323

GLOSSARY 324

SELF-TEST QUESTIONS 324

LESSON 11

TYPES OF AUDIT

Internal Audit 329

Review Questions 331

Financial Audit 331

Secretarial Audit 332

Cost Audit 332

Tax Audit 333

Review Questions 333

Bank Audit 333

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Co-operative Society audit 333

Trust Audit 334

Insurance Audit 334

Partnership Audit 334

Sole Proprietorship Audit 334

Government Audit 334

Management Audit 334

Functional Audit 334

Propriety Audit 334

Efficiency Audit 335

LESSON ROUND UP 335

GLOSSARY 336

SELF-TEST QUESTIONS 336

LESSON 12

TOOLS OF AUDITING

Audit Plan 340

Audit Programme 340

Review Questions 342

Audit Evidence 342

Working Papers 343

Review Questions 345

LESSON ROUND UP 345

GLOSSARY 346

SELF-TEST QUESTIONS 346

LESSON 13

AUDITOR AND RELATED PROVISIONS

Who is an Auditor 350

Appointment of Auditor 350

Qualification of Auditor 351

Review Questions 351

Disqualification of Auditor 351

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Rights and Powers of Auditor 352

Duties of Auditor 352

Auditors Report 353

Auditors Opinion 355

Review Questions 356

LESSON ROUND UP 356

GLOSSARY 357

SELF-TEST QUESTIONS 358

TEST PAPERS 2012

Test Paper 1/2012 359

Test Paper 2/2012 376

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