NANCIALAccoUNTING,COSTACCOUNTING, TAXATIONAND AUDITING 49

FINANCIALACCOU)

Cnce India is a federal country

have adopted dual model of
so we
nd SGST).However in case of supply from one state to another only GST
1GST(CGST
will be
applicable.

According to Article 279A of the Constitution, the Goods and Services Tax Council
has been constituted. It is comprised of the Union Finance Minister (who will be the
Chairman of the Council), the Minister of State (Revenue) and the State Financel
Taxation Ministers as members.
Further following are the Acts under GST which were passed and became effective
from Ist July, 2017:
(a) The Central Goods and Services Tax Act, 2017(CGST),
(b) The Integrated Goods and Services Tax Act, 2017(IGST),
(c) The Union Territory Goods and Services Tax Act, 2017(UTGST),
(d) The Goods and Services Tax (Compensation to States) Act, 2017 (Compensation
Cess).
7. Advantages of GST
(a) Uniform prices throughout the country
(6) Transparency in taxation system
(c)Reduction in multiplicity of taxes
() Mitigation of cascading/double taxation
(e) Uniform SGST and IGST rates to reduce the incentive for tax evasion
) Reduction in compliance costs as no requirement of muliple record keeping
8. Other Provisions
(a) Composition Scheme- A person who has registered under composite scheme has
lesser compliance, limited tax liability and high liquidity as taxes are at a lower
rate. They would be required to pay taxes at fixed rate without any input tax
credit facilities.
(6) Reverse Charge Mechanism- Under the normal taxation regime, the supplier
collects the tax from the buyer and deposits the same after adjusting the ourput
tax liability with the input tax credit available. But under Reverse Charge
Mechanism (RCM), liability to pay tax shifts from supplier to recipient. For
example services from e-commerce sites.
c) Input Tax Credit- Taxes paid on inward supply of inputs, capital goods and
services are called input taxes. "The credit of the above taxes is called input tax
credit, which are available as a set off against the taxes payable on ourward taxable

supplies.

65. AUDITING
Introduction
1.
Theprimary purpose of. Audit is expression of opinion on Truchfulness &
Tairness of financial statement ot besides ensuring the regulatory compliances
50 A HANDB0OK ON cOMMERCE &
ACCOUNTANCY
like Company laws / RBI guidelines / Banking Regulations / Insurance Regulation
ion
and Development Act etc.
[Note- This introduction is common for varied types of audits]
Auditing refers to an independent examination of records & transaction of an entin
(for a specific period) to enable the auditor to express opinion on "Truthfulness &
"Fairness" of financial statement.

Objective
1. Primary is to enable auditor to express his opinion.
2. Secondary to detect and prevent any frauds &t error.
3. Ancillary to ensure compliance of legal provision in certain cases.

Advantages (Need)
1. Detects & prevent frauds & errors.
2. Accounts as audited stand authentic.
3. Ensure compliance & money & time from penal provision.
saves

4. Ensure confidence of owners in management due to separation of ownership and

management.
5. Helps to obtain loan easily.
6. Promote operational improvements.

Disadvantages
1. Extra cost by paying heavy fees to auditors.
2. Rely on data provided by management (may provide false information.)
3. Auditors adopt sampling technique, which may not be 100% conclusive about
fairness.
4. Sometimes auditor and management act in concurrence to do fraud.

Technique
1. Study & Scrutiny of documents like Memorandum of Association / Article o
Association / Minutes etc.
2. Vouching- Matching of transactions with related documents such as
journal entg
with sales bill.
3. Physical verifications of items like Building, Stock, Cash etc.
Key Principle
1. Integrity- Sincerity, skills, honesty.
2. Confidentiality about company information.
3. Independence from management.
4. Due professional while performing
care
auditing.
 FINANCIALACCOUNTING, cOSTACcOUNTING, TAXATION AND AUDITING 5 1

5. Evidence based approach on opinion.

6. Fair presentation of its report.

Conclusion
Hence auditing becomes imperative to ensure, books of accounts reflects true and fair
view about the financial as well as non-financial condition of the organisation.

66. AUDITING AND ASSURANCE STANDARDS

BOARD
1. The Institute of Chartered Accountants of India (ICA) has constituted the Auditing
and Assurance Standards Board, to review the existing auditing practices in India and
to develop Statements on Standard Auditing Practices.
2. Objectives and Functions
a To review the existing and emerging auditing practices worldwide and identify
areas in which Standards on Quality Control, Engagement Standards and
Statements on Auditing need to be developed.
(6) To formulate Engagement Standards, Standards on Quality Control
Statements on Auditing.
(c) To review the existing Standards and Statements on Auditing to assess their
relevance in the changed conditions and to undertake their revision, if necessary.
(d) To develop Guidance Notes on issues arising out of any Standard, auditing issues
pertaining to any specihc industry or on generic issues.
(e) To formulate General Clarifications, where necessary, on issues arising fromn
Standards.
3 Hence, Auditing and Assurance Standards Board plays very important function in
keeping the auditing standards updated and up to the global benchmark standards.

67. AUDIT OF DIVIDEND

1. Dividend refers to a part of divisible profit which is paid to the shareholders of a
company. The primary purpose of dividend audit is to ensure legal compliance such
as-

(a) Section 123-127 of Companies Act, 2013

(6) Companies Rules on payment of dividend, 2014
c) Article of Association & Memorandum of Association
(d) Contractual obligations etc.
2. Further auditor is required to put specials attention to- (Duties of Auditor)
(a) Check whether the company is restricted or not for dividend payment (e.g. Loss
making, defaulter, dividend out of capital etc.).
 52 A HANDBOOK ON COMMERCE &
ACCOUNTANCy
NCY
(b) Examines the minutes of Board meeting and General meeting where divida
matter is taken. lend
(c) Verify the dividend payment list with register ofmember
(d) Verify the dividend payments through bank accounts.
() Ensure that the dividend warrants are surrendered on payment.
(f) Ensure that unpaid dividend is transferred to a special account with
bank (within 7 days on unpaid).
scheduled
(g)Ensure that unclaimed dividend is transferred to investor education and
protection fund. and
3. Hence auditors role is very
significant to maintain transparency, fairness and
nd
compliance.
Compliance under Companies Act, 2013
1. Dividend is to be declared by company in its AGM the
by rate which is recommendad
by board of directors in their meeting.
2. Dividend can be paid out of current
year profit, accumulated profit, and
by government in pursuance of guarantee. money given
3. Conditions to be satisfied:
a Company shall provide for
depreciation before dividend.
b) Transfer the required amount to reserve
before dividend.
(c) Set off of previous year losses &
d) Company can declare dividend depreciation.
In case of
only out of free reserve.
inadequacy of profit in current year, resulting declaration of
previous year profits shall be in acordance with dividend out ot
of Dividend) Rules 2016. Companies (Declaration & Payment
5. Payment must be made in Cash
6. (including cheque / warrant/ electronic means)
Unpaid dividend it remains unpaid for 30 days from
7.
Appropriate resolution in Board Meeting & Annual declaration.
8. Transfer to IEPF (Investor General Meeting.
Education& Protection Fund) if unclaimed for yeas 7

68. COST AUDIT AND FINANCIAL

1. Cost Audit is an
AUDIT
and accounts and independent
also its
examination of the
correctness of the cost mena

2. Financial Audit is contormity with the cost state

accounting
systematic unbiased examination of a
a plan.
financial statements and records, to express the company or institu
3. Difference between them are follows- un-biased opinion on it.
(a) CA is conducted by Practicing Cost
Practicing Chartered Accountant. Accountant, while FA is
(b) The auditor under CA condu
is appointed by Board of
aPpointed by Shareholders. of Directo
Directors, while undet *
 FINANCIA ACCOUNTING, COST ACCOUNTING, TAXATION AND AUDITING
53

(c) CA is compulsory
for the
companies engaged in the manufacturing business.
Whereas FA is compulsory all companies.
for
Under CA reports are submitted to the Board of Directors at the Board Meeting,
which is then submitted to Central Government. Whereas under FA reports are
submitted to the shareholders at the Annual General Meeting of the company.
Under CA the subject of assessment are cost records, cost statements and cost
(
accounts. Whereas under FA the subjects of assessment are documents, financial
statement, books of accounts, vouchers, etc.

4. Therefore CA emphasis upon analysis of the efficiency of operations, whereas the FA

emphasis upon compliance with the accounting standards and effectiveness of the
internal control system.

69 SAMPLING
1. Sampling is the process of selecting a subset of a population of items for purpose of
making inference to whole populations.
2. As complete examination of transaction is neither effective nor economic. Hence
selective examination is done to ensure eficiency.
3. Need and importance:
(a) Permits auditor to draw conclusion even in complex situation.
(6) t allows to do research & auditing faster and at lesser costs.
(c)In-depth analysis of few is more effective then brief analysis ofall.
d) In computerised accounting 100% tracking of transaction is not feasible.
)Accuracy of data is high.
() Scope of sampling is high.
4. Disadvantages

(a) Chances of biased selection are high.

(D Dificulties in selecting a truly representative sample.
()Manipulation ofdata will be easy if the management knows the basis ofsanmpling
Despite of such disadvantages, the advantage of sampling could nor be neglected.
lence it is widely used in audit procedure.

INVESTIGATION ANDAUDITING
1, Introduction
& record
An
investigation may be defined as a close examination of the accounts

and a search for the relevant data, with a view to ascertaining any fact for some

special purpose
54 A HANDBOOK ON cOMMERCE & ACCOUNTANCY

(b) Auditing is an independent examination of records & transaction of an cntin

(for a specifhic period) to enable the auditor to cxpress opinion on "Truthfulnes

& Fairness of financial statement.

2. Difference between Investigation and Audit are follows
(a) Objective- Investigation is mainly done to ascertain any uncover fact. Wherea

& fairness of financial statements.

auditing is done to verify the truth
(b) Opinion- Under investigation expression of opinion is not mandatory. Whereas
in auditing it is mandatory to express opinion on financial statements.
(c) Procedure- Under investigation the procedure followed is extra-ordinary and
extended. Whereas in auditing generally accepted procedure is followed and also
the auditing standards.
(d) Program-Under investigation there is no standard program. Whercas in auditing
auditor prepares a standard program with the scope of modification.
(c) Performed- Investigation is performed by any expett, as no specific qualification
is needed. Whercas auditing generally needs to be performed by a qualified
Chartered Accountants.
(f) Appointment- Investigator is appointed by management or interested party
Whereas auditor is appointed by board on approval ofshareholders
(R Scope- Investigation is limited in scope and less arca is covered, Whereas audiing
is wider in scope & also based on law

71. AUDITING OF BANKING ORGANISATION

1. Banking is the backbone of any economy, as it is cssential for sustainable socio-
economic and financial growth.
2. It is essential to have a healthy and safe banking sector, which can best be ensured by
providing true and fair financial information about the sector.
3. The functioning of the sector is mainly regulated by RBI.
4. Objectives of Auditing-
(a) Expression of opinion on truthfulness and fairness of financial statements o
Bank.
(b) Ensuring legal compliances, particularly *RBI guidelines, master circulars
Banking Regulation Act, 1949, Bank charter and Bye laws, Negoriable
instruments Act, lending norms, BASEL- III norms etc.
5. Appointment of Auditor-
(a) Banking company - appointed at the annual general meeting of the shareholder

(b) Nationalized bank -appointed by the bank concerned acting through its Boardo
Directors. (Under a &b cases approval of the Reserve Bank of India is
(c)State Bank of India appointed by the Comptroller and Auditor General o
requireo
India in consultation with the Central Government.
(d) Regional rural banks - appointed by the bank concerned with the approval of t
Central Government.
 EINANCIALACCOUNTING, COSTACCOUNTING, TAXATION AND AUDITING 55

6. Various Audit Steps involved

(a) Gain detailed understanding about Bank operations, accounting system, e-data
processing system, accounting information system etc.
(b) Prepare Audit plan and program considering quality of internal control system
and Reporting needs.

(c) Examine Internal Control System

(Volume of transaction - Detailed audit neither feasible, not desirable.
(i) Banks are highly regulated; hence rely upon internal control system.
(ii) Focus Areas (Service charges are not taken)- Revenue Leakage
(d) Substantive examination
) Incomes
(1) Verify Due charge of Interest/Commission/Brokerage/Services/
Discount
(2) Verify Proft from Investments/Fixed Assets/Foreign Exchange
Transaction
(3) Special Attention to - Interest on NPAs, Primary secured customer etc.

i) Expenses
(1) Verify Usual Operating Expenditure.
(2) Special attention to Interest Provision Provision / Provision /
Contingent/ Sudden and substantial changes
(iii) Assets
(1) In Advances verify things such as Procedural requirement,
Documentation, Security, insurance, Monetary, recovery, Classification
standard or NPA etc.
(2) Verify Re-structured Assets, Bank Rights, Bills, Risk, Inter Branch
transaction, Inter Bank transaction off Balance sheet items
iv) Liabilities-
(1) Verify Paid up capital is half of issued capital or not, Government
Holding. Reserves, Provisions, Deposits- large, fixed, dormant etc.
(2) Hence auditing becomes imperative to ensure, books of accounts
refects true and fair view about the financial as well as non-financial
condition of the organisation

72. INVESTIGATION ON BEHALF OF BANKS WITH

REGARD TO PROPOSED GRANT OF LOANS
auditor, in the of loan for
he bank calls for a detailed investigation by an case a new

project.
2
pecial attention to be given in following points:
a) Enquire into nature of business.
kills & qualification of managerial personne.
Gestation period of a project.
 A HANDBOOK ON COMMERCE & ACCOUNTANCy

(d) Estimated cost of project.

(c) Estimated profit earning potential based on ratios
() Adequacy of collateral offered.
(gEstimated liability such as taxes./Interest/Dividend etc.
33. Further the auditor should seek to ensure that there is sufficient ground for which
loan is required.
Also estimated the profitability of proposed project to secure repayment of loan with

interest.

73. INVESTIGATION ON BEHALF OF BANKS WITH

REGARDTOMISAPPROPRIATION OF CASH
Special attention to following points:
examined (to ascertain
1. Internal control as regard to cash receipts & payment should be
weak point
2. Employees involved in cash transaction should be closely questioned.
3. Rough cash book must be tallied with Bank & Cash balance.

4 Vouching of cash book entries.

5. Copy of passbook, cheque book should be checked.
6. Confirmation from customer over payments as well as receipt.
7. Payment to employees/Director/manager should be confirmed.

74. AUDIT OF INSURANCE COMPANIES

1.Insurance is a contract primarily used to hedge against the risk of uncertain loss.
2. The regulating agency of insurance sector is, Insurance Regulatory & Development
Authoriry which is a statutory body (IRDA act.) under Ministry of Finance.
3. Objecives:
(a) Expression of opinion on truchfulness and fairness o f financial statements o

Bank.
b)Ensuring legal compliances such as IRDA Guidelines, Insurance act 1953.
Companies Act, 2013, Policy Guidelines etc.
4. Audit Steps:
(a) Gain detail understanding of Regulatory requirements, Arcicle of association
Accounting system, Register 8& Records of Insurance business.
(b) Prepare audit plan and program, considering reporting requirements and
control system of insurance company.
intctu
(c) Evaluation of internal control system with respect tco Underwriting guidelincs
Iavestigation of risks, Premiums, Policy booking. Agency matters, Re-insurc
Co-insurers, Claims etc.
(d) Substantive examination of-
) Premiums- Verify Deposit/Recognition/Booking of Premium etc.
 eINANCIALACCOUNTING, COSTACCOUNTING, TAXATION AND AUDITINNG 57

G Expenditure- Verify Claims, Administration charges, Commission

Sources, Loss sharing with co-insurer etc. expenses,
ii) Assets- Verify Investments- limits, IRDA guidelines, Valuation, Physical
Verification, Salvage Assets, Due amount from Co-insurers, re-insurers etc.
(iv) Liabilities- Verify Equity (Minimum PUC 500C), Reserves, Reserves for
unexpired risks, Advance premium, Claims unsettled, contingent, liabilities
etc.
5. Reporting- Ihe audit report must consist details about
(a) Truthfulness and fairness of books of accounts
(b) Valuation of investments
(c) CAG matters tor General Insurance Companies etc.

75. TAX AUDIT

1. Tax Audit refers to the independent verification of the books of accounts of the
assessee to form an opinion on the matters related to taxation compliances carried out
by the assessee.
2. Tax audit is conducted under section 44AB ofthe Incomé Tax Act, 1961 by a qualified
Chartered Accountant.
3. Applicability-
(a) Business- If his annual gross turnover/receipts in business exceed Rs. 1 Crore.
exceeds Rs. 50 lakhs
gross receipts in profession
(6) Profession- If his annual
4. Auditor can conduct tax audit around contents of form 3CD which is detailed

reporting requirement.
.Accordingly audit program should be prepared, verification of transactions should
should be
be done, records should be scrutinized, and information and explanations
sought by the auditor.
covered by form 3CD are as follows:
OCertain important points of examination as
(a Nature of business and changes therein.
method accounting
of and any changes in those
DBooks of accounts maintained, deviations.
methods, details of changes & if any.
stock and details of deviation,
Method of valuation of closing of depreciation, actual depreciation,
Particulars of depreciation such
as rates
a) value etc.
details & written down
depreciation allowable, asset
brought-torward.
Details of lossesand depreciation
and payable to employees.
Bonus or commission paid expenses &
advertisement expenditure

5 Details about Capital Expenses, personal

etc. charged to profit and
loss Account.
bonus, commission etc.
amount interest, salary
of
Details about inadmissible
charged to P&L alc. Hundi.
() Details of borrowings on
 58 A HANDBooK ON COMMERCE & ACCOUNTANCY

(Particulars of loans and deposits taken or accepted such as Names, address,

amount, repayment, cheque etc.
(k) Quantitative details about principle items of goods traded such as: opening
stock, purchases, sale, closing stock, shortage etc.
0) Details about tax on profits distributed among shareholders.
(m) Details about Turnover, Gross Profit Ratio, Net Profit Ratio, Stock Turnover
Ratio etc.
(n) Details about transaction in land/building like price, valuation method, profit or
loss of transaction etc.
Auditors have to report their observations on above matters in the form 3CD itself. If the
auditor wants to make any qualifcation than he can mentioned it separately in written
audit report.

76. AUDIT OF CHARITABLE HOSTEL

1. Primary purpose of audit of charitable hostel or institution is to express opinion on
truthfulness and fairness of final Accounts and establish compliances of its rules &
regulations.
2. At first auditor should examine the legal form of hostel and gain understanding of its
internal controls concerning main items of revenue, expenses and asset security.
3. Detailed substantive examination would be as follows
a) Examine admission fee and regular fee charges with cross-reference to hostel
student's register and receipt book.
(6) Also examine donations, grants, guest, fees, fines and penalties etc. with respective
documents like donation letter, grant letter etc.
(Income from investments like interests and dividend should be examined with
reference to investment registers, accrued interest and company correspondence
etc.
(d) Total receipts and their sub-heads should be matched with budgets proposals to
identify any clear major deviations.
()Expenses should be verified in usual manner. Comparison with budgeted
expenses; extra-ordinary expenses on capital items like hostel renovation would
require special audit attention. Here bills and expense registers should be verified.
(Atention is also needed on library expenses of books, periodicals,
newspapers etc. comparing budgets and bills.
(i) Expenses on seminars, workshops and special chasses should be checked to
match procedures, special account & fund etc.
( Special attention also needed for recording, removal, disposal and depreciation
of assets like furniture, utensils, books etc. It should be well authorized and
recorded. Auditor should physically verify fixed assets and ensure compliance
with income tax exemption.
 FINANCIAL ACCOUNTING, COST ACCOUNTING, TAXATION AND AUDITING 5 9

77. AUDIT OF CHARITABLE INSTITUTIONS

NGOs/SoCIETY/TRUST
1 Primary purpose of audit of charitable institution is to express opinion on truthfulness
and fairness of final accounts and ensure the compliances of its rules, regulations and
charters.
2. At first auditor should examine and gain understanding of
(a) Legal form of charitable institutions like trust, society or non-profit company,
(b) Constitution, charter, bye laws and minutes of the institution
(c) Internal controls system concerning main items of revenue, expenses, donations,
subscription, grants and assets.
3. Specific attentions nceds to be given for-
(a) Subscriptions and donations-
) Verify the total amount of subscription/membership fee received
(i) Test checking with counterfoils of register
(iii) Usual verification steps for Rent, interest and Dividend Income.
(iv) Verify the System of receipt of donations in kind such as Gold receipts at
Tirupati Balaji.
(b) Grants- Verify the certificate of grants received
() Rent- Examine the rent roll and tenancy agreement with more focus over the
rent amount.

(d) Income Tax Refund- Vouching the income tax refunds and verify through bank
account.
(e) Liabilities-
) Pay attention to increase or decrease in general fund as well as specific
corpus
(i) Verify genuineness of current liabilities by direct confirmation
(6) Assets-
) Physically verify stock of Consumable, Medicines, Books, Equipmen
i) Verifying the cash and bank balances
Expenditure-
) Vouching payment of grants, also verifying that the grants have been paid
only for a charitable purpose
(i) Verify asset purchase transaction (if any)
ii) Check and take care of various budgets limits on expenses.
iv) Usual Audit steps for general and Admin. Expenditure
hPrograms/Events like drama, artifacts etc-Verify the receipts received from such
events and also proper records are maintained.

nce government and public contribute large charitable instirutions, hence in

at to
order to ensure transparency and fairness in its function, audit becomes imperative.