YASH CLASSES ACCOUNTS-6(AUDITING)

AUDITING
SEM-6

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COMPANY AUDIT
Q. 1. Explain the provisions of Companies Act, 1955 and auditor’s duty for
(A) Shares issued other than cash for consideration.
(B) Bonus shares.
(C) Interim Dividend.
(D) Forfeiture of Shares.

A. 1. (A) Auditors duty as per Companies Act for shares issued other than cash are
as follows:-
Share issued for consideration other than cash. Any company may issue its
shares at (i) Nominal value (ii) at a higher price than the nominal value, i.e. at a
premium, and (iii) shares issued at discount at lower price, in all such cases it
has been principally considered that the issue of shares for cash and duty of
an auditor in connection therewith. The following circumstance indicates that
company has issued its shares either fully paid or partly paid for consideration
other than cash; which are as follows:

(A) Shares issued to vendors for purchase or a business.

(B) To the nominees of Vendors.
(C) To underwriters of shares.
(D) To promoters who have already defrayed the preliminary expenses.
(E) To issue share in lieu of purchase consideration for any case of
absorption, amalgamation or reconstruction,
(F) Shares issued to existing shareholder as bonus shares out of reserve.

 The auditor should verify the entries in the journal regarding the issue of
such shares.
 He should examine or inspect the details of prospectus or statement in lieu
of prospectus in respect of such contract with the vendors, promoters,
underwriters etc.
 He should check the copies of the contract with all above mentioned
parties.
 In case of issue of such shares registered Auditor has to verify that company
has been filed with the Registrar of Companies within one month of the
allotment Sec. 75 (1)(b).
 In case of no written document of a contract, he must verify that whether
the Registrar has been informed of the particulars of the contractor not.
 In case of Bonus shares, auditor should examine the minute books of the
Directors and shareholders. He has to verify the entry made for it and the
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auditor has to check that the amount of shares issued for consideration
other than cash should be shown separately in the-Balance-sheet.
 Inspection of Directors' Minute Book it resolution was passed to give notice.
 Necessary entries are given in the books of account. The received amount
should be transferred to the credit of forfeited share account. It must be
shown in the Balance sheet.
 If more than nominal value of shares is received, it must be transferred to
Capital Reserve Account, it being capital profit. Upon such forfeiture,
shareholders' name is removed from the - register of members.
 The total number of such shares should have been shown in the Annual
returns of the company.
A. 1. (B) Bonus shares:
The Auditor should verify the Articles of Association to see whether the
company has authority to capitalize reserve and profits to issue bonus shares.

- Memorandum of Association to see whether the paid-up share capital

after the issue of bonus shares would be covered in the authorized
capital.
- Resolution for the issue of bonus share passed by the directors in their
Board Meeting and also for the same which has been passed must be
approved in the general meeting of the shareholders.
- He should see whether the conditions contained in the guideline have
been complied with SEBI (Security Exchange Board of India)
- After examining the application for the bonus issue, he should give his
certificate which has to be enclosed with the application.
- He should check the sanction received.
- He should check all the accounting entries of capitalization of reserves
and profits.
- He should also check entries in the Register of Members. He should see
that the paid-up capital includes the value of the bonus shares also.
- Under the head 'Share capital' information must be disclosed regarding
bonus shares.
- He should also check that from which source they have been issued.
e.g. Capitalization of profits, Balance of Profit & Loss A/c
Free reserve
From Share Premium Account
Sinking Fund.

A. 1. (C) Interim Dividend:

A Company may distribute part of its profits during the two annual

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general meetings. It is known as "Interim Dividend." That means, the company

may-declare dividends before the close of the accounting year and finalization
of accounts. The auditor should bear in mind the following points while
checking interim dividend.

- There must be express power in the Articles to declare it, and an Auditor
must therefore, inspect the Articles and the directors minute declaring
dividend.
- Interim accounts are prepared to ascertain the quantum of divisible
profits.
- Auditor must observe that before declaring, however, the directors must
use reasonable care in order to satisfy themselves that such dividend is
justified, and for this purpose, accounts for the half-year or for period of
6 months should be prepared, full provision being made for
depreciation, reserves for bad debts and for outstanding.
- Auditor should see that Budget system is in force. It will be great
assistance in this connection,
- It should also be seen that the company has sufficient cash available to
pay the dividend.
- The amount of interim dividend shall be deposited in a separate bank
account within five days from the date of declaration of such dividend.
(Sec. 205, Sub sec. 1A of the Act) and it must be paid out of it.
Lastly, an auditor should go into all the circumstances most carefully,
and see that proper accounts have been prepared and that the whole position
has been adequately considered.

(D) Duties of an Auditor regarding forfeiture of shares:

The share may be forfeited due to non-payment of calls by the shareholders
or. members if Articles allow. Duties of an auditor in respect to share forfeiture
are as under :

- Articles to be examined for forfeiture of shares.

- Calls or installment of call or the interest outstands.
- Due notice is to be given to shareholders for forfeiture.
- Inspection of Directors' Minute Book it resolution was passed to give
notice.
- Necessary entries are given in the books of account. The received
amount should be transferred to the credit of forfeited share account It
must be shown in the Balance sheet.
- If more than nominal value of shares is received, it must be transferred

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to Capital Reserve Account, it being capital profit. Upon such forfeiture,

shareholders' name is removed from the register of members.
The total number of such shares should have been shown in the Annual
returns of the company.

Q.2. Discuss the points to be considered before commencing the audit of a

company.
In case of a company, audit is compulsory. Auditor appointed for audit work is
known as statutory auditor. He would require certain preliminary information
and other information that may be necessary for audit work. Before starting
audit work auditor will nee6 or consider the points as mentioned in the box.
(1) Appointment of an Auditor: Auditor must obtain his appointment in
writing along with a resolution passed by the directors in genera! meeting. He
should see the other provisions of the Companies Act, 1956 for his
appointment.
(2) Nature of Work: Auditor must obtain definite instructions from the
company regarding the nature and the scope of his work and duties. What he
has to do ? The accounting work or auditing work ? Time limit for submission
of the report and duration of the audit work. As regards his duties, rights,
powers, liabilities etc. are all laid down by the Companies Act, 1956.
(3) Accounting system: Which type of accounting system has been employed
by the company, in case of any weak point, he must examine it thoroughly and
make suggestions to remove it.
(4) Books of Accounts : The Auditor must obtain a list of all the books
vouchers, supporting evidence maintained in the office of the company, He
also try to check the names of the keepers of such books, and it must be duly
signed by the authority. The Auditor must have to give in his report that the
books of accounts which has been examined are true and correct and the
financial position is ‘True and fair’.
(5) Internal check system: If the system is in operation he should . get, if
possible, a written statement to that effect and examine the system.

(6) List of officers: In case of a company auditor must get a copy, or list of
the officers which include names, addresses, duties powers etc,
(7) Documents of the company: The business of accompany runs according to
the provisions of the Act. The following documents are required as per the Act
: (i) Articles of Association, Memorandum of Association; prospectus and other
important documents, Memorandum of Association must have at least the
name of the company.
Objects, capital including classification of shares, nominal value of shares

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names of promoters, first directors, solicitor bankers etc. are also required
(8) Nature of the company: In case of the company who has purchased the.
business, auditor must know the particulars of relevant agreements, purchase
consideration, methods for it, etc. in case of a newly started, particulars of
such a business e.g. location, product; market of a product, registered office,
head office, factory, building, depots etc. and also which type/nature of
business is run by the , company-trading, manufacturing, or any other?
Lastly, the auditor must have information in respect of directors,
shareholders, list, holding of directors in the share capital of the company. List
of public and private limited companies in which they are directors. Also
inquire whether its properties-fixed assets are properly insured or not.

Q. 3. State the provisions of the Companies Act, 1958 and also mention the duties
of an auditor in respect of shares issued at discount.
Provisions of Sec. 79 of the Companies Act3 with regard to issue of shares at
discount :
(1) Lower price : Shares issued at discount i.e. shares issued at a
price less than the face value of shares e.g. nominal value is Rs. 100 but if
issued at Rs. 90 then Rs. 10 is called shares discount,
(2) Time limit: Shares can be issued at discount but only after one year has
elapsed from the date of commencement of business, i.e. after one year of
commencement of the business.
(3) Class of share: According to Sec. 79 of the Companies Act, , it can be
issued in respect of class of shares already issued.
(4) Legal provisions: The issue of the shares at a discount is authorized by a
resolution passed by the company in a general meeting. Such resolution must
be sanctioned by the Company Law Board.
(5) Rate of discount: Discount cannot exceed 10%. In certain circumstances
Law Board specifically can consider a higher percentage.
(6) Accounting effect: Shares issued at discount must be shown in the B/s at
nominal value and the amount of discount must be shown under the heading
of Misc. exp. as 'Share Discount' on the Assets side. It must be written off in
the forthcoming years.
(7) Auditor's Duties:
(1) It is the duty of the auditor to see that conditions laid down/ in Sea 79 of
the Companies Act, 1956 are complied with.
(2) He should see the resolution passed at the general meeting of the
shareholders.
(3) He should verify the sanction obtained from the Company Law Board.
(4) He should see to it that the rate of discount does not exceed 10% or a

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higher rate as sanctioned by the Company Law Board.

(5) He should see the prospectus for necessary information as required
under the Act which is disclosed therein.
(6) The Discount on the issue of shares should be shown in the B/s under the
head Misc expenditure" until it is written off.

Q. 4. State the provisions and duties of the auditor in respect of 'Issue of shares at
premium."
(1) General: Section 78 of the Companies Act, 1956 deals with the issue of
shares at a premium. The company issues shares at a higher price than their
nominal value. It may be for cash or otherwise. The excess amount of premium
must be credited to separate account called "Share Premium Account."
(2) Application of share premium account : The amount credited under the
head of "'share premium account" should be shown under "Reserve and
Surplus/' It is not utilized for paying dividend.
It can be applied for the purposes:
(a) In paying fully paid bonus shares.
(b) In writing off-preliminary expenses, underwriter's commission, Discount
allowed on issue of shares on debentures.
(c) It can be utilized for redemption premium either for preference shares or
debentures.
(3) Auditor's Duties :
(1) Auditor should examine the prospectus.
(2) Auditor should verify the Articles of company to see whether they permit
it.
(3) Auditor also should examine minute book of directors to see whether
they have authorized such an issue or not.
(4) He should confirm the rate of premium from 1, 2 and 3 above.
(5) The Auditor should check all the accounting entries.
(6) The Auditor should verify that it has not been credited to profit and loss
account.

SEBI Guidelines: The Auditor should examine the trend of SEBI

guidelines in respect of share" premium.
(1) A new company can issue shares at a premium with a five year track
record of consistent profit.
(2) In case of unlisted company the limit is of three years. Lastly, the auditor
will have to verify that the company has issued shares at a premium for
consideration other than cash, an amount equal to the amount of premium
must be transferred to share premium Account.

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Q.5. State the provisions of the Companies Act, 1956 and also the duties of an
auditor for redemption of preferences shares.
(1) Legal Provisions: Section's 100 to 105 deals with the matter of
redemption of share capital if authorized by A/A and by a special
resolution.
(2) Pre. Shares Sec. 80: In case of redeemable preference shares-section
80 deals with it if Articles of Association may issue of such shares and also
liable to be redeemed. The terms of redemption or conversion have to be
disclosed in the Balance sheet.
(3) Conditions: These shares can be redeemed
- Out of the profit which is available for dividend.
- Out of the proceeds of the fresh issue of shares.
- Shares must be fully paid-up.
- Redemption premium must be provided from Profit and Loss A/c or
shares premium account.
- The company must have to transfer a sum equal to the nominal amount
to the capital redemption reserve account.
(4) Auditor's Duties:
(1) Examine that the Articles permit issue of redeemable preference shares.
(2) Verify that such shares were fully paid up.
(3) In case of redemption of shares out of the profits, a sum equally to the
nominal value of the shares redeemed is to be transferred to the
"Capital Redemption Reserve Account."
(4) Redemption Premium must be charged to share premium account.
(5) Vouch the entries passed for the transaction
or redemptions.
(5) Resolutions: The Auditor must examine the various resolutions pass for
redemption of preference shares.

Q.6. What are the auditor's duties in regarding statutory audit.

(1) Meaning: The report that is sent to the members and which is discussed at
the statutory meeting is known as the statutory report. Statutory Audit is that
audit which is required to be performed by the auditor prior to the statutory
meeting of the company. The auditing of Statutory Report is called "Statutory
Audit". The Report is certified by the director and after that it is certified by the
auditor but it should be before the statutory meeting. The audit of and issue of
certificate of the Report is based on the terms of the Statutory Report.
(2) Particulars of Statutory Report which, auditor has to audit: It is prepared

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by virtue of Section 165 of the Companies Act, by every public company limited
by shares or by guarantee and having a share capital, must hold a general
meeting within six months, but not before one month from the
commencement of business-known as statutory meeting, the Report is
prepared For this purpose in which the following information is included in
respect of
(i) Share capital - Authorized share capital.
- Total No. of shares.
- Shares Allotted to shareholders.
- Paid-up amount on allotted shares-cash
received.
- Different kinds of shares.
- Shares allotted to directors, management,
promoters and the amount paid up on it.
- Deducting necessary expenses, the balance of
cash received on the date of submission of
Report.
(ii) Expenses: - Preliminary expenses paid and the total amount
of it.
(iii) Officers: - Names, address and occupations of directors,
Manager, Secretary and auditors of the
company.
(iv) Particulars of - Any contract, or modification or
Contract: proposed modification must disclose before
the shareholders for approval.
(v) Underwriting - The particulars of any commission,
brokerage
commission paid or to be paid in connection
Brokerage: with the issue or sale of shares, debentures, to
be paid to shareholders, directors and or to the
manager.

(3) Auditor's Duty: For the purpose of certification of Statutory Report auditor;
should perform his duty in the following manner:
(1) To check the transaction of share capital
(2) He will make enquiries about internal check for receipts payment and other
transaction.
(3) He should vouch cash book and bank transactions,
(4) Auditor has to audit the details or the shares allotted, cash received from it
and verification of cash received and payments. He has also to examine the

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Memorandum, Articles, and the prospectus, minute books of the Board of

Directors.
(5) He will verify all the receipts, documents, register applications, and
allotment of shares as referred to in the shares audit.
(6) He will vouch all the payments e.g. commission, brokerage, salary and such
other expenses.
(7) Whenever necessary, he will also examine the minutes book of the
directors.

When he is satisfied, he will issue a certificate for the Statutory Report.

Before issuing certificate he should examine the Statutory Report must be
certified as correct by the two directors, one of them must be a managing
director.

Q.7. What are the Auditor's duties for brokerage and underwriting commission?

(1) Legal Provisions: Section 76 permits the joint stock companies to pay
commission or brokerage. The person who gets commission or brokerage must
be broker or underwriter who had assured that all issued shares would be sold
and no difficulty would come up for minimum subscription. The terms for
these purposes must be fulfilled which are as follows:
(1) Articles must permit such a payment
(2) Commission must not exceed 5% in case of issue of shares and 21/2% for
debentures.
(3) Rate must be disclosed in the prospectus.
(4) A copy of the contract with the persons must be filed with the Registrar
of Companies.
(2) Purposes: Commission for procuring subscription or placing shares.
Person who procures buyers for the shares of a company gets his
commission. Brokerage is a commission payable to a stock broker.
(3) Auditors, duty:
- Auditor will examine Articles and prospectus.
- Articles and Minute Book agree to commission.
- He should examine the terms and conditions between the brokers or
underwriters and the company.
- Auditor must check the application ^for shares signed and stamped by
brokers.
- Auditor should examine all cash receipts in respect of the transaction,
e.g. application money deposited by underwriter, allotment fees on the

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shares against commission.

- Auditors should checked that amount paid for underwriter commission
and brokerage' and should be shown under the head Misc. exp. on
assets side of Balance sheet and every year part of it has to be written
off to Profit and Loss Account.

AUDITOR'S REPORT / CERTIFICATE

Q. 1 Give deference between qualified and unqualified (Clean) auditor's report.

Points of Unqualified Report clean Report Qualified Report

Difference

(1) Meaning It is a report which does not It covers or indicates mistakes in the report.
indicate any mistake or defect,

(2) Circums- (1) Books of accounts are (1) Books of accounts are not kept by
tances kept by requirement of requirement of law.
law. (2) P/L A/c and B/s can-not show
(2) P/L A/c shows correct True and Fair view,
profit or True and Fair (3) Books of Account are not prepared
view. according to requirement.,.
(3) B/s also gives True (4) It does not follow the accepted
and Fair view. principles.
(4) During examination
auditor is not able to find
out any mistakes/defects.
(5) Auditor is satisfied
with all explanations.

(3) Special Note It is not required. When auditor has not given explanation he
puts special note for it.
(4) Auditors When auditor has worked During the work of examination of
Liabilities according to the requirements of books of accounts it he has found any
law and with care and skill, he is defect and not pointed out and has given
not liable for such clean report. the report without it, the auditor is liable
for the report.
(5) Directors' Directors are not responsible for In case of queries realized by the auditor,
Duty submission of any explanation. directors are responsible for explanation of
directors is required.

(6) When to When the Auditor is satisfied in Auditors is not satisfied in material
submit all material respects with the Respects with matters concerning the areas
matter, he reports it to share of his reports.
holders.

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(7) Impression Creates good impression of Creates bad impression on readers.

company.

Q.2 Diff. Audit Report Vs Auditor’s Certificate.

Points Audit Report Auditor's Certificate

Meaning : It is Auditor's opinion. Auditor's issuing or signing \l vouchsafes the
truth of the statement he makes.
Examinations Auditor examine the accounts Is not required to certify the books of
of Accounts: because he has to prepare report accounts.
for the books of accounts that
they are properly-drawn up in
accordance with the Companies
Act, so as to give True and fair
view1.
Responsibility Report is merely an opinion of an Certificate - what he states is cent per cent
of an Auditors: auditor, he may be wrong and for true and correct. Later on if. it is found that
that one he will not be held re- it was wrong, he will be held responsible.
sponsible.
To whom it Auditor is appointed by It is not addressed to any party. Simply it is
concerns : shareholder and for that reason a statement by the requirement of the
audit report is addressed to Companies Act.
shareholders.
Nature : it may be clean or qualified Certificate itself is based on correctness. So
Report. it cannot be qualified.
Period : It covers the accounting period As and when it is required by client,
yearly. Certificate can be prepared.

Q.3 "True and fair" :

The phrase "True and fair view" has been used in Sec. 211 of the Companies Act. This
means that the profit and loss account must state clearly and correctly the result of the
working of the company for the year under audit. There should be no manipulation of
accounts. Similarly, the balance sheet should show the honest position, i.e. there should be
neither over valuation, nor under valuation of assets or liabilities.
Before the Act came in force in 1956, the same phrase was used as "True and
correct" in Sec. 145 of the Act of 1913 with the help of this Phrase. There were loopholes by
which company could create the secret reserve. To prevent, it the phrase has been changed
and accepted as "True and fair". "Correct" shows that the annual accounts are according to
Books of Accounts and it is reproduced only while "Fair" denote state of affairs of the
company. The arithmetic accuracy is fair for Balance sheet and Profit & Loss Account for the
financial year. Auditor will not only trust on books of accounts but go beyond the
transactions, so that true aspect is shown in financial statements. Annual accounts must

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show ail material facts properly disclosed in a "true and fair" way. The standard of
presentation of information must be one set by the current business practice of honest men
in relation to company's accounts.
Fair view also means disclosure of unusual, exceptional or nonrecurring items of
income or expenses, Profit & Loss separately to clarify trading and financial position of the
company. Books of accounts must be kept to give "true and fair view" of state of the
company affairs and explain the transactions.

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DIVISIBLE PROFITS
Q. 1 What is capital profit? State the auditor's duties in respect
of distribution of dividends out of capital profits.
(1) Meaning : Capital profit is not normal profit. Capital profits are not
earned during the ordinary, regular course of the business. Profits which are
not earned on account of trading, or operational activities are called capital
profits. It is known as Non-Trading profit of the business e.g. the surplus of the
revaluation of fixed assets.
(2) Sources : The Capita! profits may be computed in the following
circumstances :
(A) Profits earned on the business purchased but before obtaining a
certificate of commencement of business.
(B) Premium received on issue of shares or debentures.
(C) Profits made on the reissue of forfeited shares.
(D) Profits earned on the sale of fixed assets.
(E) Surplus on the bona-fide revaluation of the assets.
(3) Auditor's duty regarding capital profits : Auditor should see that the
company has not declared dividend out of capital profits unless;
(i) The Articles of Association of the company may permit for such
declaration.
(ii) It must have been realized in cash.
(iii) It must have been computed after the proper valuation of the assets, (iv)
The Capital losses are made good.

Q.2. "Divisible Profit" :

Profits are different from "Divisible Profits". Profits imply a comparison
between the state of a business at two specific dates. The fundamental
meaning is the amount of gain made by the business at two dates. The total
assets of the business on the two dates may be compared, and the increase
which they show at the latter date as compared with the earlier date,
represents the profits of the business during the period.
All profits are not divisible profits. "Divisible profits" represent that
portion of profits which can be legally distributed by the company as dividends.
This will depend upon the :
(i) Provision in the Articles of Association of the company.
(ii) Provisions of the Companies Act, 1956 and other related Acts. e.g.
Income Tax Act, 1961.
(iii) Principles of Accountancy.

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(i) Provisions- contained in A/A :

Clauses 85 to 94 Table A (Schedule 1 of the Companies Act, 1956) deal
with- dividends and reserves.
The Board may, by recommending any dividend, set aside out of-the
profit of the company after making provision for meeting contingencies or
equalizing dividends. Dividend must be declared and paid; on paid up amount
of share capital of the company. No amount of profit can be distributed as
dividend which is against the provisions of Articles of Association.
In case of limited companies in general, the determination of divisible
profits has always been found to be problematic specially in view of the
following factors :
(1) Depreciation, Reserve for probable losses etc. are charged to Profit and
Loss Account. It is often a matter of dispute as to what should be the
correct amount of such charge which vitally affects the state of affairs.
(2) Capital Profit - whether such profit can be distributed.
(3) Capital Losses - whether they will be taken account of before arriving at
profits available for dividends.
(4) Capital and revenue items - How to ascertain their nature and on what
basis to apportion the same.

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AUDIT PROGRAMMES
Q. 1 Draft audit programme on a "Self-finance commerce college."
The following special points should be observed by the auditor:
(1) Examine carefully the University Act. He must also refer the trust deed or
constitution of the self-finance college.
(2) Go through the minutes book and carefully study the resolutions and
official orders.
(3) Examine the internal check-system or an internal audit system.
(4) The auditor must check the cash receipts on account of fees. He must
vouch from the fees register and the counter foils of the fees receipt issued. He
must also compare the fees receipt with the application forms approved and
signed by the principal of the college or by the Head of the Managing
committee.
He should check that fees other than tuition fees like examination fees,
library fees, caution money, hostel fees, sport fees etc, are credited to their
respective heads. Income from donation, if permissible, income from
investment, if any, Govt. Grant should be properly verified. Income from
endowment, if any, should be separately vouched.
(5) Payments: The auditor should see that management expenses are not
mixed up with the college expenses. He should vouch all the expenses
carefully. He should see that the internal check system-regarding purchase of
stationery, provisions etc. is proper.
Salary paid to teaching and non-teaching staff should be verified. He
should see that the increments to the staff are within the rules and approved
by the managing committee. He should also check the leave records and
statutory deduction and tax deduction. He should also see that the adequate
provisions for provident fund, gratuity, medical aid etc. are made.
He should examine the cases of fee-concession and scholarship. It must
be within rules should have been and sanctioned by the committee.
(6) Verification: The auditor must verify the cash on hand, petty cash on hand
and Bank balance. He must also verify the balances as regards to stores and
stationery, and existence of fixed assets acquired by the college.
(7)The auditor should see the proper record for capital expenditure like
furniture, building, equipment; library books, sports goods, are maintained. He
should also see that adequate depreciation is provided and the assets are
shown in the balance-sheet. He must check all the revenue expenditures
debited to income & expenditure account.

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Q.2 Audit Programme of a ‘Hospital’ run by Public Charitable Trust.

A hospital is a medical institution offering health-services. It may be
established by the government or by a private trust. The main object before
the auditors must be to look at the budget allocations and proper accounting
of incomes and expenditure.
The following points should be examined before preparation of an audit
programme.
(1) Constitution: In case of hospital run by government auditor should examine
the rules and regulations or bye-laws of the institution. Examine, in particular,
those clauses which affect the accounts directly or indirectly. In case of Trust,
he has to examine the constitution of the hospital See that the provisions of
the applicable Trust Act, 1950 are complied with. Verify the minute books of
the managing committee or the governing body, as the case may be.
(2)Act and provision of Act: He has to see that to run the institution-hospital
rules framed by the medical council are properly applicable or not. If it is run
by the Trust. The auditor should see the provisions of Trust Deed which are
applicable to the hospital e.g. investments of trust-funds, transfer or
immovable properties, trust income and expenses etc.
(3)Internal check: Examine the internal check as regards the receipt and issue
of stores, medicines, linen, clothing instruments, etc. so as to ensure that
purchases have been properly recorded in the stock register and that issues
have been made only against proper authorization.
(4)Books of accounts and its preparation: The auditor should examine the
method of accounting system followed by the hospital. If it is run by the
government, the accounts" are required to be maintained in accordance with
legal requirements of government accounting policy. In case of trust, auditors
should see that forms prescribed in schedules 8, 9, 9C of the Trust Act, 1950
are filed in time in the office of the charity commissioner. He has to submit
auditor's report every year.
(5) Vouching of cashbook:
(A)Receipts : The following are the receipts in case of the hospital -Donations,
membership fees, e.g. x-ray charges operation theatre charges, operation
charges, medicines other facilities, other receipts like dividends, interest on
securities, rent etc. Vouch the receipt of all these types from the counterfoils
of the receipts issued. See that all receipts are credited properly in" the books
of accounts.
Auditor must verify the total fees received as per patients' registers also
examine that bills are prepared properly from such register Vouch the grants
received from government authorities and other sources Copies, calculation
and other documents should be examined

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(B) Vouching of expenditure or payments : The following are the important

expenses of capital nature, e.g. purchases of Land-construction of building,
operation theatre, purchases of different kinds of machineries, revenue
expenses includes administrative expense, e.g. salary, remuneration paid to
hospital staff, doctors and administrative staff, purchases of medicines,
medical instruments, stores, drugs, lien, cloths, repairs.
All these payments should be properly authorized and accounted for.
Payments should be vouched with vouchers. Compare the bills with the
attendance register of the patients. Vouch the administrative expenses in the
usual manner.
(6) Valuation & Verification of Assets & Liabilities: Auditor must examine &
verify the value of assets. In case of fixed assets, it must be shown in the
balance-sheet cost value less depreciation. Investment at market price and
other stocks are at lower price.
Verify equipments, furniture, fittings, and stocks of medicine on hand.
See that the capital expenditure under different heads does not exceed the
budgeted amounts.
(7)Allocation of expenses: Auditor should verify the expenses paid also try to
consider the proper head of capital expenses and revenue expenses. Auditor
should see that it is shown in the balance sheet and charged to Profit & Loss
account properly.

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INVESTIGATION
An audit is the inspection, examination or verification of a person, organization,
system, process, enterprise, project or product. It is used to determine the
authenticity and validity or to ensure that a process is being followed. Also, an
audit is mainly used in accounting to ensure the validity and reliability of
information in the statements and that the information is free from material
error. An audit can be done anytime.

An investigation is the process of detailed examination of activities so as to

achieve certain objectives. It is the act of investigating; or is the study to enquire
about a particular thing. It is an important factor in journalism for investigating
various cases. It is the best method to tackle or identify the case; and make a
thorough report about the case. Investigation is made in suspected places. In this,
the main focus is on an inquiry into the accounts and financial matters of a
business and to the overall aspects of it.

Comparison between Audit and Investigation:

Audit Investigation
Description Audit means the inspection, Investigation means an
examination or verification inquiry, or is the act of
of a person, organization, detail examination of
system, process, enterprise, activities so as to achieve
project or product. certain objectives.
Owners Audit is conducted on behalf Investigation may be
of owners only and they conducted either by owner
make the appointment. of the undertaking or by an
outsider.
Purpose To determine the true and Varies from business to
fair view. business
Process Routine process Investigation is not a
regular process
Scope It includes only an It covers an examination of

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examination of the accounts the accounts bur also covers

of a business
Period Year or six months
Employees Does not examine
personally
Sequence Usually conducted before
investigation of accounts
Person performing work Audit is to be conducted by
a chartered accountant
Legal Obligations Audit is mandatory under
law
an inquiry into other matter
that are connected with the
purpose for which it
is undertaken
May cover several years
May examine personally
Usually conducted after the
audit of accounts
Investigation may be take
on even by a non-chartered
accountant
There is no such legal
obligations with regard to
investigation

Q-2 INVESTIGATION ON BEHALF OF TH PURCHASER OF THE RUNNING

BUSINESS:-
The purchaser of the business wants to know the real position of the business.
Keeping in view the business condition he has to decide whether he should
purchase the business on that price or not ?
So the investigator should pay special attention on the following points :

1. Cause Of Selling :-
The investigator should pay special attention to this point that why the seller
wants to sell the business? He should see that it is a genuine case of sale.

2. Examine The Trend Of Business :-

Investigator should examine carefully the trend of business whether it is going on
the road of prosperity or not. In this regard he should compare expenses revenue
and profit of the previous years.

3. Checking Of Liabilities :-
Investigator should verify that liabilities of the business are properly valued. It

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should be compared the figures shown and decide that it is correct or not.

4. Value Of Assets :-
Investigator should check that the assets have been properly valued and
sufficient depreciation has been provided on these assets.

5. Verify The Goodwill :-

Investigator should also check that good will of the business that is properly
valued or not? He should also examine that sufficient provisions have been made
for doubtful debts or not?

6. Checking Of Auditors Report :-

Investigator should also examine the auditors report if it is previously audited.

7. Verify The Profits :-

Investigator should verify the profits of previous years which might have been
inflated by inflation of closing stock.

8. Competition Situation :-
He should also check the competition situation which the concerned firm is facing
in the market.

9. Examine The Capital :-

Investigator should examine that working capital of the business is sufficient or
not?

10. Proper Vouching :-

Investigator should check that capital, expenditure, and revenue is properly
vouched or not ? He also pay proper attention to the deferred revenue and
expenditure.

11. Examination Of Machinery :-

Investigator should check the condition of machinery. Whether it is new, old or
replaceable.

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Q-3 INVESTIGATION ON BEHALF OF BANK GRANTING LOAN :-

Generally banks require complete and detailed informations about the
borrower's. The lender of money wants complete satisfaction of repayment. So
investigation is made on the behalf of the lender.
Investigator should pay special attention to the following points :

1. Reason For Loan :-

Investigator should know the real cause that why the borrower is demanding the
additional loan for the business.

2. Use Of Loan :-
Investigator should also examine that for which purpose loan will be used. It
should be used properly for that object for which it is demanded.

3. Character Of The Borrower :-

Investigator should also investigate about the character of the borrower. If
borrower is honest, efficient and a man of character then he will repay the loan in
time.

4. Examine The Security :-

He should also examine the securities offered against loan. Are these sufficient or
not?

5. Loans Against General Assets :-

If the loans are to be advanced against the general assets of the company then he
should examine the net value of the assets.

6. Description Of Property :-
Investigator should give full description about the real property, plant, building
and decoration.

7. A List Of Investment :-
He should give the list of all the investment shown in the books which market
value.

8. Earning Capacity :-
Investigator should check the earning capacity of the borrowers. He should verify
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the profit and loss accounts of the past several years. If earning capacity is better
then repaying capacity will also be better.

9. Reputation Of The Firm :-

Investigator should examine the reputation of repayment of loan in the past if any
party has refused to advance the loan then what were the reasons.

Q-4 In case of fraud suspection investigator should keep in view the

following points :

1. Checking The System Of Accounting :-

Investigator should study the system of accountancy and internal check which is
followed in the business.

2. Confirm The Balance :-

Investigator should confirm the balances by writing letters to the creditors with
the permission of his client.

3. Check The cash Sales :-

Investigator should compare the cash sales and sales of goods. He should detect if
any sale is omitted from the book.

4. Checking Of Payment System :-

He should check the salaries and wages payment system. There is a chance that
payments have been made to the fictitious employees. He should also check the
signs and endorses of cheques.

5. Examine The Petty Cash :-

He should check the petty cash transactions very carefully. Also check the
vouchers if possible.

6. Verify The Discount :-

Investigator should also verify the rules regarding the discounts allowed and
paid.

7. Examine The Profit And Loss :-

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He should examine the profit and loss account transactions by using his skill and
experience.

8. Point Out The Fraud :-

He should indicate the amount of fraud and the person who committed the fraud.

9. Suggestions :-
Investigator should also suggest the ways and means to protect the business from
fraud.

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