Audit

Chapter -1
CONCEPT, NEED AND PURPOSE OF AUDIT

1. MEANING AND CONCEPT OF AUDIT:
MEANING AND DEFINITION OF AUDITING

“An audit is independent examination of financial information of any entity, whether profit
oriented or not, and irrespective of its size or legal form, when such an examination is
conducted with a view to expressing an opinion thereon.”
Analysis of the Definition

1. Audit is independent examination of financial information.
2. Of any entity that entity may be profit oriented or not and irrespective of its – size or
legal form. For example – Profit oriented – Audit of Listed company engaged in
business. On the other hand, Audit of NGO – not profit oriented.
3. The objective of the audit is to express an opinion on the financial statements.
Evolution of Auditing:
The term audit is derived from the Latin term ‘audited,’ which means to hear. In early days a
person used to listen to the accounts read over by an accountant in order to check them. He
was known as auditor.
DEFINTION BASED ON A NARROWER CONCEPT:
Montgomery defined auditing as ‘a systematic examination of the books and records of a

business or other organizations in order to ascertain or verify and to report upon the facts
regarding the financial operations and the result thereof’. The concept of audit as given by
Spicer and Pegler is somewhat similar to that of Montgomery. However, they elaborated the
concept of audit as below : ‘ an audit may be said to be such an examination of books of
accounts and vouchers of a business as will enable the auditor to satisfy himself that the
balance sheet is properly drawn up, so as to give a true and fair view of the state of affairs of
the business and whether profit or loss account gives a true and fair view of the profit or
loss for the financial period ,according to the best of the information and explanation given
to him as shown by the books and if not ,to report in what respect he is not satisfied.’
Similarly, R.K. Moutz defined auditing as being ‘concerned with the verification of
accounting data, with determining the accuracy and reliability of accounting statements and
reports.
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SCOPE OF AUDIT:
The following points merit consideration in regard to scope of audit:
1. The audit should be organized to cover adequately all aspects of the enterprise
relevant to the financial statements being audited.
2. To form an opinion on the financial statements, the auditor should be reasonably

satisfied as to whether the information contained in the underlying accounting
records and other source data is reliable and sufficient as the basis for the
preparation of the financial statements.
3. In forming his opinion, the auditor should also decide whether the relevant
information is properly disclosed in the financial statements subject to statutory
requirements, where applicable.
4. The auditor assesses the reliability and sufficiency of the information contained in
the underlying accounting records and other source data by:
(a) Making a study and evaluation of accounting systems and internal controls
and
(b) Carrying out such other tests, enquiries and other verification procedures of
accounting transactions and account balances as he considers appropriate in
the particular circumstances.
5. The auditor determines whether the relevant information is properly disclosed in the
financial statements by:
2. OBJECTIVE OF AUDIT:
Features/objectives of Independent Financial Audit:

The audit under broader concept has got the following features:
I. Systematic and independent examination: Modern audit involves a systematic and

independent examination of accounts by a professional accountant. He will arrange
the audit procedures in a logical sequence and is required to be free from any bias in
his work. He will not get influenced by any kind of pressure while discharging his
duties.
II. Expression of opinion: The main purpose of audit is to express opinion by the
auditor about the reliability and fairness of financial statements. The auditor can
never give absolute assurance about the sanctity of financial statements.
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III. Determination of proportions: Audit starts with the determination of proportions to
be examined for achieving the audit objective. Haphazard examination without a
clear idea about propositions leads the auditor nowhere.
IV. Application of logic: The modern audit has its principal roots in logic and judgement.
It is now analytical and investigative. The auditor now pushes pencil less and pushes
brain more.
V. Collective and evaluation of evidence: In order to examine the proportions, the

auditor collects evidences judiciously and evaluates them to arrive at a conclusion
about the propositions.
VI. Formation of opinion: The audit requires the auditor to form an unbiased opinion on
the assertions made by the management in the financial statements.
VII. Communication of opinion: The process of audit ends with the communication of
opinion by the auditor through the audit report to client or shareholders.
3. ADVANTAGES OF AUDIT:
Discuss the advantages of Auditing.
Advantages of Auditing:
(i)Satisfaction of Owner: It is because of audit that the owner will be satisfied about the
business operations and working of its various departments.
(ii)Detection and Prevention of Errors and Frauds: The errors whether committed innocently
or deliberately are discovered by the process of audit and its presence prevents their
occurrence in the future. No one will try to commit an error or fraud as the accounts are
subject to audit and hence, they will have a fear of being detected. Just like errors, frauds
are discovered by audit and its presence minimizes future possibility if not eliminated
totally.
(iii)Verification of Books: Another advantage of audit is the verification of the books of

accounts, this helps in maintaining the records up to date at all times.
(iv)Independent Opinion: Auditing is very useful in obtaining the independent opinion of the
auditor about business condition. If the accounts are audited by an independent auditor,
the report of the auditor will be true and fair in all respects and it will be of extreme
importance for the management of the company.
(v)Moral Check: The process of audit will establish a check on the minds of the staff working
in the business and they will not be able to commit any irregularity, as they will have a fear
and will also be aware that the accounts will be examined in the near future and
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that action would be taken against them if any irregularity is discovered. Thus, the audit
prevents the happening of any irregularity before it starts and the staff hence becomes
more active and responsible. The fear of their getting caught act as a moral check on the
staff of the company.
(vi)Protection of the Rights and Interests of Shareholders: Audit helps in protecting the
interests of shareholders in case of joint stock company. Audit gives assurance to the
shareholders that the accounts of the company are being maintained properly and their
interest will not suffer under any circumstances.
(vii)Reliance by Outsiders: Outsiders like creditors, debenture holders and banks etc. will rely
on the books of accounts and financial statements of the business if they are audited by an
independent authority (external auditor).
(viii)Ensures Compliance with Legal Requirements: Audited statements are necessary to

fulfil certain legal requirements e.g., listing requirements of stock exchange etc.
(ix)Reinforce and Strengthen Internal Control: Since auditing exercise involves the review of
internal control system, an auditor will identify the gaps in internal control system and can
suggest the necessary changes in the internal control system.
(x)Loan Facility: Money can be borrowed easily on the basis of audited balance sheet from
financial institutions. If accounts are audited the true picture will be visible to banks and it
will be easy for them to issue loans as early as possible.
4. DIFFERENCE BETWEEN ACCOUNTANCY & AUDITING:
Basis Accountancy Auditing

1.Meaning It is the process of recording, It is the process of examination
classification, summarising and book of accounts and reporting
interpreting all the financial on the financial statements.
transaction.
2. Objective Its main objective is to find out Its main objective is to examine
profit earned or losses suffering the correctness of the accounts
by a company and to show the and financial statement and
financial position of the company certify that whether the
for a particular period. company exhibits a true and fair
view of state of affairs of the
concern.
3.Nature of An accounting is a permanent An auditor is an independent
employment employee of the organised. person and is not an employee
of the organised.
4.Qualification An accountant does not require An auditor should be a qualified
any formal qualification. chartered accounting
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certificated by the institute of
charted accountment of India.
5.Report An accountant is not required to Auditor should submit the
submit the annual report on the report certifying the truth and
financial statement prepared by fairness of the financial
him. statement.
6.Remuneration An accountant is remunerated in And auditor remunerated in the
the form of salary. form of professional fees.
7.Commencement Accountancy stated where book- Auditing starts where
of work. keeping ends. accountancy ends.
5. Accounting is a necessity while auditing is a luxury for a business

enterprise’ --- do you agree? Justify the statement.
A question often arises in the minds of businessmen whether audit is luxury or not. They say
accounting is necessity and auditing is a wastage of time and money. Auditing may be luxury
from the point of view of an ordinary businessman because of following reasons: -
(a) The remuneration paid to the auditor is an unnecessary waste of funds.

(b) Too many formalities attached to auditing create difficulties for an average businessman.
(c)The businessman feels that auditing means waste of time and disturbance in routine
work of the accountant and his subordinates.
(d) Audit is not perfect method of detecting errors and frauds.
Thus, auditing for a small business may be luxury but it is a necessity for a large business
organization for the following reasons: -
(a) Accounting data needs to be verified as to their reliability and accuracy.

(b)Public funds invested in the private sector of economy need to thoroughly examined as to
their proper utilization.
(c)Various social groups who are interested in affairs of a business entity need to be assured
that the entity functions are discharged efficiently and to the best advantage of social will-
being.
(d)Absentee shareholders created out of widely dispersed ownership of management need to
be provided with sufficient assurance that the figures in the profit and loss account and
balance sheet are fair representations of the financial conditions of a business.
Thus, keeping in view the above, one cannot say that auditing is luxury. Auditing is necessity
of big organizations. Auditing is compulsory in case of Private Limited Companies, Limited
Companies, Charitable Trusts, Societies, Banks etc. The partnership firms or proprietorship
firms can also engage the auditors to have the fair view of accounts. Auditing is not wastage
of money because so many frauds can be detected from auditing and the money paid to the
auditors looks very petty amount in comparison of the frauds detected. Auditing is not the
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wastage of time also. Normally, auditors do not disturb the accounting staff. The do their
own work. Very few interferences are done by them with the accounting staff. The findings
or benefits of audit are more precious than wastage of little time of accounting staff. In my
view, every business firm whether it is small or big, must avail the services of the auditors.
6. Difference between Statutory Audit (External Audit) and Internal Audit:
Point External Audit Internal Audit

Appointment Appointment of external auditor Appointment of internal auditor is
is made by the shareholders in made by the management itself, i.e.
Annual General Meeting (ACM). Chairman, Vice chairman or
In certain cases, it is appointed by directors
directors or central Government.
Status Status of the external auditor is The internal auditor is dependent
independent. He enjoys separate on management. He does not enjoy
statutory status. separate status.
Duties The duties of the statutory The duties of the internal auditor
auditor are laid down by the law. are decided by the management.
The duties of the external auditor The duties of the internal auditor
can be extended but not reduced. can be reduced.
Objectives It is meant for management as It is meant for management. It

well as for outsides and ensures that the accounting
shareholders for reliable financial procedure and system is fulfil the
data. It ensures that the P & LA/c need of the company.
and Balance Sheet of the
organization shows true and fair
view.
Nature The external audit is carried out The internal audit is carried out
periodically. Generally, it is continuously throughout the year.
carried out at the end of the
accounting year.
Method Generally, in external audit the Internal audit is a complete audit. It
test checking system is adopted, is carried out in detail. The auditor
it is a sampling audit checks each and every item of the
account
Report External auditor submits his audit Internal auditor submits his audit
report to the shareholders in report to the management
Annual General Meeting.
Remuneration Remuneration of statutory Remuneration of internal auditor is
auditor is fixed by their holders in fixed by management.
their AGM.
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7. Difference between Auditing & Investigation:
Basis of Difference Auditing Investigation

1. Meaning Auditing is concerned with Investigation is the examination
examining the accounts and of accounts of a business for
reporting on financial special purpose.
statements.
2. Objective Investigation is done for some

The objective of Auditing is to
express an opinion on the specific purpose.
financial statements of the
concern.
3. Compulsion It is compulsory in case of Joint It is not compulsory

4.Period stock companies.
Auditing is done at the end of Investigation can be done over a

5.Conduct the financial year. period of years.
Audit is conducted on behalf Investigation is conducted on

of the owners of the company. behalf of outsiders and owners
at some times.
6. Scope
It is having a narrow scope. It has a wide scope
7.Appointment
An auditor is appointed by the An investigator is appointed by
shareholders or directors or by the outsider.
Government.
8. Report Auditor has to give a report The Investigator gives a report

about the true and fair view of on the basis of conclusion and
the final accounts. enquiries. Expression of the
opinion is not necessary.
An investigation need not be

Only Chartered Accountants conducted by a Chartered
9. Qualification are qualified to conduct audit. Accountant,
Generally audited books of

Investigated accounts are not accounts are taken up for
10.Process of audited in ordinary course. investigation.
Work
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8. MEANING OF S.A DISCUSS THE IMPORTANCE OF S.A:
What is standard audit?
Standard audit, according to Irish, an Australian author, is “a complete check and analysis of
certain items and, contingent upon effective internal check, appropriate test checks on
remaining items, the whole work being in accordance with general auditing standards quite
adequate to justify an unqualified opinion.”
Importance of Standard Audit:
(i) Audit programme can be suitably designed based on standard audit principle.
(ii)It influences the nature and extent of documents and evidences to be obtained through
audit procedure.
(iii)New auditing standards compatible with the changing socio-economic condition of the
country can be developed after the scrutiny of the existing auditing standard.
(iv)The criticism that collusion often exists between the management and the auditor
leading to distortion of financial statements can be stopped through the application of
standard audit procedure.
9. Can we say that ‘Detection and prevention of errors are the main
objects of auditing’ – Discuss:
DETECTION OF FRAUD & ERRORS:

The term fraud means the wilful misrepresentation made with an intention of deceiving
others. It is a deliberate mistake committed in the accounts with a view to get personal gain.
In accounting, fraud means two things. a. Defalcation involving misappropriation of either
cash or goods; and b. Fraudulent manipulation of accounts not involving defalcation.
THE AUDITOR CAN SUSPECT FRAUD UNDER THE FOLLOWING

CIRCUMSTANCES:
(i) When vouchers, invoices, cheques, contracts are missing etc.
(ii) When control account does not agree with subsidiary books.
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(iii) When the difference in trial balance is difficult to locate.
(iv) When there is greater fluctuation in G.P. and N.P. ratios.
(v)When there is difference between the balance and the confirmation of the balance by
the parties.
(vi)When there is difference between the stock as per records and the stock physically
counted.
(vii) When the explanation given by the client is not satisfactory.
(viii) When there is an overwriting of some figures.
(ix) When there is a contradiction in the explanation given by different parties.
PROCEDURE TO BE FOLLOWED TO DETECT ERRORS:
Following procedures may be adopted by the auditor to detect the errors.
(i) Check the opening balances from the balance sheet of the last year.
(ii) Check the posting into respective ledger accounts
(iii) Check the total of the subsidiary books.
(iv) Verify all the castings and the carry forwards.
(v) Ensure that the list of debtors and creditors tally with the ledger accounts.
(vi) Make sure that all accounts from the ledger are taken into accounts.
(vii) Verify the total of the trial balance.
(viii) Compare the various items from the trial balance with that of the previous year.
(ix)Find out the amount of difference and see whether an item of half or such amount is
entered wrongly.
(x) Check differences involving round figures as Rs. 1,000; Rs. 100 etc.
(xi)See where there is misplacement or transposition of figures that is 45 for 54; or 81 for 18
etc.
(xii)Ultimately careful scrutiny is the only remedy for detection of errors. 13. See that no
entry of the original book has remained unposted.
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THE AUDITOR SHOULD PERFORM THE FOLLOWING DUTIES IN RESPECT OF
FRAUD:
(i) Examine all aspects of the finance.

(ii)Vouch all the receipts from the counterfoils or carbon copies or cash memos, sales mart
reports etc.
(iii) Check thoroughly the salary and wages register.
(iv) Verify the methods of valuation of stocks.
(v)Check-up stock register, goods inwards notes, goods out wards books and delivery
challans etc.
(vi) Calculate various ratios in order to detect fraudulent manipulation of accounts.
(vii) Go through the details of unusual items.
(viii) Probe into the details of the problems when there is a suspicion.
(ix) Exercise reasonable skill and care while performing the duty 1.
(x) Make surprise visit to check the accounts.
10. Accountancy begins where book-keeping ends & accountancy ends

where auditing begins. Discuss:
Book-Keeping, Accountancy and Auditing are the three aspects of the term `Accountancy'
itself in its widest sense.
Book-keeping: Book-keeping is the art of recording the daily transactions in a set of financial
books. It is concerned with systematic recording of transaction in the books of original entry
and their posting into ledger.
Accountancy: Accountancy begins where book-keeping ends." It means that an accountant

comes into the picture only when the book keeper has done his job. The functions of
accountant can be classified as under:
(i) Checking the work of book-keeper.
(ii) Preparation of trial balance,
(iii) Preparation of Trading and Profit and loss Account.
(iv) Preparation of balance sheet,
(v) Passing entries for rectification of errors and making adjustments.
An accountant is supposed to be an expert in the accounting procedures as he has to

examine analytically the final accounts. But it is not necessary for him to pass the chartered
Accountant's examination. He it's not supposed to submit his report after the completion of
work.
Auditing: It is said, "where accountancy ends, auditing begins." It is slightly said. An auditor
has to verify the entries passed by the accountant and the final accounts prepared by him.
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Thus, auditing is the checking of the accounts of a business with the help of vouchers,
documents and the information given to him and the explanations submitted to him. An
auditor has to satisfy himself after due verification and complete. Checking of accounts as to
whether the transactions entered into the books are accurate. An auditor is required to
submit his report to the effect whether or not the balance sheet is a true and fair
representation of the existing state of affairs of a business concern. Thus, an auditor should
have the proper knowledge of accounting principles. That is why he should be a chartered
Accountant. He has to express his impartial opinion in his report which he cannot give
unless he satisfies himself completely with the proper recording of transactions.
Thus, auditing is based on accountancy and not accountancy on auditing. An auditor must
be well familiar with the principles and practical aspects of accountancy but it is not
necessary for an accountant to be an expert in the audit work.
The following table makes the distinction clear among book-keeping accountancy and
Auditing:
(a) Book-keeping:
(i) Journalizing.
(ii) Posting into Ledger.
(iii) Totalling of different accounts in the Ledger.
(iv) Balancing.
(v) Checking the work of the Book-keeper.
(vi) Preparation of Trial Balance.
(b) Accountancy:
(i) Preparation of Trading & Profit & loss account.

(ii) Preparation of Balance sheet, (Theoretical part)
(iii) Passing entries for rectification of errors and making adjustments.
© Auditing:
Checking the work done by the accountant.
11. What is the meaning of system audit? State the advantages and
disadvantages?
The audit which is conducted to examine the suitability of various systems of accounting
prevailing in the firm is called system audit. It assesses the existing systems of accounting to
determine whether they work efficiently or not so that appropriate opinion can be formed
on financial statements. It is an audit to explore inside the systems and discover whether
they produce desired results. System audit is a kind of investigation of the system of
accounts. Its purpose is to design appropriate system of accounts suitable for the business
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or revise the existing system suitably. It is no denying the fact that the business world is
dynamic in nature. The information requirement of different stakeholders is constantly
changing. So, the accounting systems frequently need to be revised so that they provide the
information desired by the stakeholders as an aid to decision making. Therefore, companies
should employ auditors to analyse their accounting systems and business methods to
ascertain whether accounting records and practices are up to date and economical; and
whether such records and practices may be changed so as to do the work better, quicker
and at less cost under the changing conditions.
Advantages:
(i)The accounting procedure can be revised or designed according to the changing business
environment.
(ii)The users of financial statements are immensely benefited as the accounting system
newly revised or designed by this kind of audit can generate information useful to decision
making.
(iii) The system does not allow opportunity to commit errors and fraud.
(iv) The profitability of the business is increased due to the introduction of system audit.
(v)The system audit is dynamic in the sense that old concepts and systems are subject to
review in the light of changing demand of the society.
Disadvantages:
(i) The introduction of system audit is likely to increase the overhead cost.
(ii)The introduction of system audit may be resisted by the accounting staff who may be
prone to orthodox ideas.
(iii)If the system fails to attain desired result, it will entail wastage of money, time and
energy.
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SHRUTI CHAMARIA CLASSES 7992469019
COMPANY
AUDIT
Sec 139: - Appointment of Auditor
Sec 140: -Removal, Resignation, Retirement
Sec 141: - Eligibility, Qualifications and
Disqualifications of Auditor
Sec 142: - Remuneration of Auditor
Sec 143: - Power and duties of Auditor
Sec 144: - Auditor not to render Certain
Services
Sec 145: - Duty to Sign report
Sec 146: - Attend AGM
Sec 147: - Punishment for contravention
Sec 148: - Cost Audit
1
SHRUTI CHAMARIA CLASSES
SEC139
1ST Auditor Subsequent Auditor
Govt CO. Non Govt Co. Non

Govt Govt
Co. CO.
(15 days) (120 days)
1. By CAG 1. By BOD By CAG At AGM

(Within 60 days from
(Within 30 days from (Within 180 (Written
the registration of
the date of registration consent days from of auditor
of Company) Company)commencement certificate from
of F.Y) auditor shall be

2. If not ,
2. If not, obtained.)
then BOD
then members at EGM
(Within the next 30 days) (Within 90
days)
3. If not, then members
at EGM
(Within 60 days) 1st Auditor & Auditor appointed at 1st AGM
Both are different

1st Auditor shall hold office till 1st AGM.
Auditor at 1st AGM shall hold office till 6th AGM.
2
(Due to death, illness, Resignation etc)
CASUAL VACANCY
GOVT CO. NON GOVT CO.
1. By CAG 1. By BOD
(Within 30 days) (Within 30 days )
2. If not , If vacancy due to Resignation
then BOD
(Within meet 30 days) then Recommendation of BOD, shall be
A Approved in GM convened within 3 months.
Rotation of Auditor
Following Companies shall appoint Auditor either for 5 years or for 10 years: -
(Individual Auditor) (Firm Auditor)
All Listed Companies.

• Unlisted Public Co. having PSC of ≥ 10 crores.
All pvt. Company having PSC of ≥ 50 crores.

• All Companies having Borrowings ≥ 50 crores.
3
SOME IMP
POINTS
1. Individual Auditor + firm Auditor after completion of term,
shall not be eligible for appointment in same company for
five years.
2. If two firm has a common
or partner and one firm
partner
has completed its 10 years term, then another firm shall
also not be able to appoint as auditor in same company
for 5 years.
3. Incoming Auditor or firm shall not be able to eligible if
they are associated with out going Auditor or firm under
the same network of Audit firm.
4. If partner of (Whose tenure has been Completed 10
firm
yrs) retires from that firm &joins another firm, then
another firm shall not be eligible to be appointed as
Auditor for 5 yrs.
5. If Auditor becomes disqualified u/s 141, then it will be
termed as Casual Vacancy.
4
Sec140:- Removal of Auditor
Before expiry Retirement of By Tribunal

of term Auditor
1.Pass board resolution 1. Give special notice 1. On application of

Within 30 days CG notice for Resolution at or any other concerned
AGM. Person or Suo Moto.
2. Make application to CG
Within 60 days of approval 2. Send a copy of notice 2. Tribunal may order

Receipt to retiring Auditor. the Company to
3.pass special Resolution 3. Retiring Auditor shall make change its Auditor
The Representation in writing. (if Auditor is
( and request its notification found guilty of
Auditor may resign from the
Company filing the statement. to members of Company ) fraud)
Listed Co TO SEBI +Company 3. Auditor’s punishment

Other Co To ROC Removal from the Company.
Govt Co To CAG Not able to the Audit for 5yrs in any Co.
Liable U/S 447.
5
SEC141:- ELIGIBILTY,
QUALIFICATION, DISQUALIFICATION
QUALIFICATIONS: -
Charted Accountants
Firm of CA (Majority of partners practicing in India are qualified)
LLP (only partners who are CA shall be able to act as sign)
DISQUALIFICATION
1.Body 3.In full time employment 4.convicted

corporate elsewhere or appointed by court
2.Office as Auditor in 20 for fraud
other than LLP Companies
or +10yrs has
not
elapsed
from the
date of
such
conviction
(-) OPC
(-) Dormant Co.
(-) Small Co.
(-) Pvt Co. having PSC less than 100 cr.
(will not be counted in 20 Companies)
6
5.person whose relative is

Director or in Employment of
Company as a Director of
KMP.
6. If Auditor has directly or 7.If Auditor render any

Indirectly business service as referred in Section
144 CSH.
relationship with CASH
8. (Person
whose, or
his
relative or
Holding In debted in Given Guarantee or
provided security
security or excess of 5 in excess of 1 lac.
interest. lac Rupees.
IN ITS SUBSIDIARY
In C , A, S, H IN ITS HOLDING
COMPANY
IN ITS ASSOCIATE
7
Relatives ma hold security or Interest upto face
value notexceeding
y 1 lacs.
But, Auditor or his Partner Cannot held the security or interest even
of Small values.
SEC 142:- REMUNERARTION OF

AUDITOR
Remuneration shall be fixed In GM.

BOD may fix the Remuneration of 1ST Auditor.
Remuneration= fees payable to Auditor + Reimbursement of
expenses incurred by auditor in relation to audit.
SEC 144
1. Accounting & book keeping Services.

2. Internal Audit.
3. Actuarial Services.
4. Investment Banking Services.
5. Investment advisory Services.
6. Management services.
7. Any other Services as may be prescribed
8
SEC143:- POWERS/DUTIES
OF AUDITOR
Auditor has following Rights while conducting Audit: -

1. Right of Access to books etc Auditor of Company
shall have right of access to books of & vouchers of
Company.
Whether kept at registered office of company or at any other
place
2. Right to obtain Information & explanation from
officers
Auditor shall have right to obtain such info and explanation as he
may consider necessary from the officer of a Company
If Auditor is not provided with the info required by him or
denied access to book etcs, Auditor would report to SH that he
could not obtain all info and explanation he h ad required for
Audit.
3. Right to receive Notice and attend AGM

Auditor of Co. is entitled to attend AGM and also to receive
notice of meeting which is sent to all members.
9
SHRUTI CHAMARIA 7992469019 |
CLASSES
4) Right to Respect to Members:
Auditor shall make a report to member of Co. on the accounts
examined by him & on every F.S.
Report shall take into Account all the AS, all accounting
Provision & all the Provision of this Act.
DUTIES:
Auditor has following Duties while Conducting Audit !
1)Duty to Inquire on Certain Matter! -Auditor shall make the Inquiry

into the following Matters!
(a)Whether loan & Advances made by the company on the Basis the
Security have been Properly secured.
(b) Whether Personal expenses have been changed to Revenue.
(C) Whether loan 4 advances made by Co. have been shown as
deposit.
(d) Whether transaction of Co., represented by book entries are
prejudicial to interest of Co.
Auditor shall Make a report on the following case only if finds answers to
these matters in advance
10
2) Duty to Report!
Auditor shall make a report to members on the Aks examined by him & on
every F.S
Auditor shall report following matters also!
→ Whether the Co. has disclosed the Impact, If any of Pending loses on its
financing Position.
→ Whether Co. has made. Provision as required Under Law.
→Whether there has been any delay in transferring the amt, required to be
thousand to EPF A/C.
Auditor's Report shall also state-
→Whether he has obtained all the info & explanation which were necessary for
the purpose of his Audit.
→Whether, in his opinion proper BOA have been kept by Co.
→Whether Co’s B/S & P/S are aggreement with BOA.
→Whether F.S. Comply with A.S.
→Whether any director is disqualified from Appointment.
# However, Reporting
→ Whether Co. hasonadequate
(IF6) shall not befinancial
lnternal applicable to Pvtas
Control Co, which
per F.S. is a!
1)OPC
2) Small co.
3)Co. having to less than 50 cr. & having aggregate borrowing from banks of FI
less than 25 cr.
11
SHRUTI CHAMARIA 992469019 |8910631299
3)CLASSES
Duty to sign the Audit Report!
Auditor of Co. Shall sign the Auditor's report.
Where a firm or LLP is auditor !
↓
Only the Partners who are CA shall be sell authorised to conduct the
Audit
+
Sign on behalf of firm
4) Duty to comply with SA's!

Every auditor shall comply with Auditing Standards.
5)Duty to state the Reason for Qualification of negative

Report!
If auditor reports any negative or qualified comment, he shall state
the reason for that.
12
SHRUTI CHAMARIA 79924690191299
6)Duty
CLASSESto Report on frauds : →
↓
↓ ↓
If Any of Fraud is If Amt. of fraud is less than 1 cr.
1 Cr. or above ↓
Auditor shall report the Auditor shall report the matter to BOD
Matter to BOD or Audit or Audit committee of Co.
committee of Co. ↓
BOD shall disclose this into their
↓
Wait for their to response report:-
for 45 days. A) Amt. of Fraud

B) Parties Involved
↓
If reply or observation comes from C) Action taken thereon
BOD or Audit Committee.
↓
Auditor shall along with those
Comment send his
own observation to CA
13
SHRUTI CHAMARIA 79924690131299
CLASSES
Sec 145:- Auditors to sign Audit Report:-
Auditor of a Co. shall sign her Respect (same as duty to Report).
Sec 146: Auditor to attend AGM!

Auditor are entitled to receive the notice of AGM as other members & he is also
entitled to attend the meeting.
→He will be heard if Co. consider any Audit matter in the meeting.
Sec 147: Punishment for Contravention!
If Co. Contravenes Sec 139 to 146
↓
Fine: not less than 25000, may extend to 5 lakh
+
Imprisonment: Every officer in default upto 1 year
OR
Fine = 10000 to 1 lakh
OR
Both
If Auditors Contravenes Sec 139, 143, 144 & 145
↓
Fine: 25000 to 5 lakh Whichever is less.
OR
4 times of Remuneration
14
SHRUTI CHAMARIA CLASSES 7992469019 |
If Auditors has Contravened Knowingly or willfully with Intension to
deceive the CO, SH of Cr.
↓
Imprisonment = 1 year
Whichever
+ Fine= 50000 to 25,00,000
is less
OR
8 Times of Remuneration
15
VOUCHING, VERIFICATION & VALUATION
1. Distinguish between vouching & verification.
Difference between Vouching and Verification
Points of distinction Vouching Verification

1. Meaning it refers to the examination Verification refers to the
of all documentary evidences examination of disclosure of assets
in support of transactions and liabilities in the balance sheet.
recorded in the books of
accounts.
2. Objective Vouching is carried out with Verification is done for confirming
the objective of establishing the ownership, existence,
the authenticity, genuineness possession and valuation of assets
and correctness of as stated in the balance sheet.
transactions recorded in the
primary books of accounts.
3. Level of Vouching is usually done by Verification is done by senior level
Enterprise junior level audit clerks with audit clerks or the auditor himself
sound knowledge in as it requires expertise not only in
accounting principles. accountting principles but also in
various compliance and
substantive audit procedures and
statutory requirements.
4. Point of Review Vouching involves Verification of assets and liabilities
examination of transactions is carried out at the Financial
at their point of origin Statements stage.
5. Nature of Items Vouching is concerned with Verification is concerned only with
all items of Statement of items of Balance Sheet.
Profit and Loss and with
those Balance sheet items
undergoing change during
the year.
6. Aspects under Vouching verifies— For Assets: It involves enquiry into
Review (i) Date of voucher; the value, ownership, existence,
(ii)Existence of proper charge and proper disclosure in
authorization of the Financial Statements. For
transactions; Liabilities: To see whether they are
(iii)Supporting evidence i.e., truly owed by the entity and
Bill, challan, inspection disclosed at correct amounts.
report, etc.;
(iv) Propriety of transactions;
(v) Completeness;
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(vi) Proper accounting
2. Distinguish between verification & valuation of Assets?
Distinction between verification and valuation
Point of Verification Valuation

Distinction
(i) Meaning Apart from the examination of valuation means the examination
determined value of different of adequacy of determined value
assets, verification means the of different assets and liabilities.
examination of the existence,
ownership and title etc. This is a
whole process.
(ii) Scope In such a case, the scope of work since valuation is a part of
is comparatively extensive. verification, its scope of work is
comparatively little.
(iii) Performance The work of verification is The function of valuation is
of work accomplished by the auditor. performed generally by the
manager, director or responsible
employee or value determiner.
(iv) Object The object of verification is to The scope of valuation is to
verify the existence of the asset, justify the propriety of the
its ownership, valuation and to determined values of assets and
examine the existence of liability liabilities.
and proper valuation.
(v) Liability of an The auditor may be responsible The auditor can depend on the
auditor for negligence in case of information of responsible
verification. employee for proper valuation. If
any mistake is crept on that
information, the auditor cannot
be responsible.
3. Do you think that verification of Assets and Liabilities is necessary when

vouching has been done properly? State that!
Verification means `proving the truth' or `confirmation'. One of the most important duties of
an auditor in connection with the audit of the accounts of a concern is to verify the assets
and liabilities appearing in the balance sheet. The fact that there is an entry regarding the
purchase of an asset and has been be correctly recorded, is not a proof that the asset is in
the possession of the concern at the date of the balance sheet. It is possible that after
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purchase and passing the entries, the asset might have been disposed of or pledged and no
entry has been made concerning this before the closing of these books. Therefore, he has to
see whether a particular asset as recorded in the balance sheet on the day of the closing of
the books of account exists or not. If he fails to verify the asset, he will be liable for any
damage suffered by the client as it was decided in the case of London Oil Storage Co. Ltd.
Vs. Sear Haslock and Co. (1904).
Thus, we can say that verification is a process by which the auditor satisfies himself not only
about the actual existence, possession, ownership and valuation but also ensures that the
assets are free from any charge or lien.
The verification of assets involves the following points:
(a) Comparing the ledger accounts on the date of the balance sheet.
(b) Verifying the existence of the assets on the date of the balance sheet.
(c) Satisfying that they are free from any charge of mortgage.
(d) Verifying their proper value.
(e) Assets were acquired for the business.
4. Vouching of expenses:
How do you vouch the following items?
Director’s remuneration:
This refers to the amount paid to directors for their services rendered to the company and
for attending Board meeting. While checking this term of expense, the auditor should have
the following information:
(a) Total number of Executive Directors and Non-executive Directors.

(b) Types of remunerations and perquisites to which directors are entitled and other
terms and conditions of their appointment.
(c) Whether directors are entitled to get fees for attending Board meeting and if
executive directors get any such fess, whether specific approval has been taken from
Department of company Affairs, Govt. of India.
(d) Whether director’s remuneration has been separately shown in the profit & Loss A/c
as required under the Companies act.
(e) Whether the net profit on which commission is paid or payable to Directors has been
computed in pursuance to sec. 309 of the Companies Act, 1956.
(f) Whether the ceiling of maximum managerial remuneration as stipulated under
section 198 of the Companies Act, 1956 has been adhered to.
(g) Whether any increase in remuneration is as per sec. 310 of the Companies Act.
Following documents should be examined for the above information:
3|Page
i. Articles of Association to know the details of remuneration payable to Directors.
ii. Agreement with directors or appointment letters,
iii. Directors’ minute book or attendance register to vouch the director fees.
iv. Statement showing details of calculation of commission.
v. Directors’ receipts etc.
Travelling Expenses:
For vouching of traveling expenses, the auditor should have followed information:
1. business travel rules as formulated by management,

2. Whether every tour has got approval of competent authority.
3. Whether the tour expenses are within the prescribed limit.
4. Whether personal A/cs of the employees taking business travel advance have been
correctly debited.
5. Whether debit balances of personal A/cs of employees have been duly regularized
through submission of travelling vouchers.
6. Whether foreign travel has got Reserve Bank of India’s permission, if necessary for
withdrawing foreign exchange. The auditor should also check whether the amount of
foreign exchange spent has been separately disclosed in the accounts as per
requirement of Part I of Schedule VI to Companies Act.
To satisfy himself with the above information, the auditor should go through following
documents:
a. Business Travel Rules of the company.
b. Business Travel Vouchers as submitted by employees.
c. Personal accounts of employees.
d. Board’s Resolution etc.
Payment of dividend:
The following points must be considered while vouching the payment of dividend in case
of a public company and private company which is a subsidiary of a public company:
(a)Examine special provisions, if any, in the Memorandum and Articles of Association

regarding payment of dividends.
(b)See that in declaring dividends, provisions of the Companies (Transfer of Profits to
Reserves) Rules, 1975 have been complied with.
(c) Examine the Board’s minutes regarding rate of dividends.
(d) Examine the company’s procedure for payment of dividends including unclaimed
dividends and ensure that they are not paid without adequate safeguards as to
identification of the payee, checking of the payee’s claims etc. In this connection, internal
control of the company should be examined.
4|Page
(e) Verify the shareholders’ register and ensure that the names of all shareholders who are
entitled to receive dividends have been included.
(f)Check the computation of dividends with reference to rate of dividends and number of
shares held.
(g) See counterfoils of cheques for amounts paid to shareholders.
(h)Examine, whether all the conditions for payment and source of dividend as specified on
section 205, 205A and 205B, have been complied with. It may be noted that the Institute
has issued a Guidance Note on Audit of Payment of Dividends.
Preliminary Expenses:
Expenses incurred in connection with the promotion of a new company are known as
preliminary expenses. This expenditure includes stamp duties, registration fees, legal cost,
accountant’s fees, cost of printing, etc. while vouching these expenses, the auditor should
require following information:
a. Whether the expenses shown as preliminary expenses are actually connected with
the formation of the company.
b. Whether the expenses incurred have got due sanction from the competent
authority.
c. Whether the amount of expenses is justified from propriety angle. In other words,
the auditor should enquire into the rightness of the amount of expenses.
d. Whether the amount of expenses is within the sanctioned limit. If it exceeds the
limit, the auditor should enquire into whether approval from shareholders has been
obtained in this regard.
e. Whether preliminary expenses have been written off in the year in which they are
incurred as required under AS 26, Accounting for Intangible Assets.
In order to gather the above information, the auditor should go through following
documents:
(a) Invoices, bills etc. to ensure that expenses pertain to formation of the company,
(b) Contracts, agreement, purchase order etc. to ensure authorisation of expenses.
(c)Correspondence with various suppliers, their quotations, price comparative statement
etc. to ensure Tightness of expenses,
(d) Board's Resolution, Prospectus etc. to see that amount is within limit,
(e)Agreement with promoters to see the terms and conditions of reimbursement of
expenses to them.
Vouching of income:
Rent received:
5|Page
The following points must be considered while vouching the rent received:
(a)Before proceeding to vouch rental receipts, copies of bills issued to tenants should be test
checked by reference to copies of tenancy agreements and bills of charges paid by the
landlord on behalf of the tenants, i.e., house tax, water tax, electricity consumed, etc.
(b)The entries in the Rental Register in respect of rents accrued afterwards should be
verified by reference to copies of rental bills.
(c)The amounts collected from tenants on account of rent should be checked by reference to
receipts issued to them. These afterwards should be traced into the Rental Register.
(d) At the end, the register should be scrutinized to find amount or rents which have not
been recovered and are considered bad or irrecoverable, for deciding whether these should
be written off or as provision against the same should be made.
(e) An overall check over rental receipts are also necessary. For this purpose, particulars of
total accommodation available for being let out, in different buildings, belonging to the
client, should be ascertained.
(f)It should be verified that every available accommodation has been let out and rental
income has been duly accounted for.
(g)If it is reported that one or more tenements have remained vacant a certificate in
respect thereof should be obtained from the client.
Interest & dividend received:
The following points must be considered while vouching the receipt of interest & dividend
in case of a public company and private company which is a subsidiary of a public
company:
(a)The auditor should examine the separate ledger accounts kept for each investment or
loan given.
(b)The dates on which dividends or interest payments generally fall due should also be
noted.
(c)The counterfoil of dividend warrants should be seen. These should be tallied with the
records of investment.
(d)Where investments are sold ex-dividend, it should be seen that the dividends are
subsequently received.
(e)Similarly, when a purchase is on cum dividend basis, the receipt of dividend should be
checked.
(f) In case of interest on deposit with banks, verification should be done by reference to the
bank’s statement and the agreed rate of interest.
(g)The receipts of dividends and interest should be addressed to the bank statement for
encashment.
(h) It should be ensured that the interest and dividend received are credited to the
respective account in full i.e., before deduction of tax at source and the tax deducted at
source should be debited to an appropriate account.
(i)It should be further seen that the certificate for tax deducted at source exists in each
case.
6|Page
(a) Documents to be verified:
a. The documents to be verified for interest received are (a) Loan agreement
b. Fixed deposit or debenture certificate
c. Interest warrant for debenture
d. Mortgage deed
e. Bank pass book etc.
(b) The documents to be verified in connection with dividend are

a. Dividend warrant
b. Investment Register
c. Bank pass book. For checking the interest, the auditor should.
Vouching of cash sales:
Fraud frequently occurs in the areas of cash sales. So, the auditor should be very careful
while vouching cash sales. He will adopt following procedures for this purpose:
1. To check the internal check to assess its efficacy in preventing fraud.

2. To verify each sale with copies of cash memos. If the number of transactions is large,
a cash sales summary book is maintained from which the daily total of cash sales is
recorded in the cash book. So, cash memos will be traced in cash sales summary
book and daily totals of summary book are traced in the cash book. He will see those
dates of cash memos tally with the dates of entry in the cash book.
3. To verify the calculations of price of goods sold on selective basis and to check the
price with reference to the price list.
4. To ensure that there is proper authorization of discount and rebate.
5. To see that cancelled cash memos have signature of responsible officer.
6. To make sure that total cash sales of the day is deposited into bank next day. Pay-in-
slips should be verified in this respect.
7. To see that proper sales tax declaration forms have been obtained from customers
for charging sales tax at reduced rate.
5. Verification of assets:
Investment:
Investment may be a share certificate, government bond certificate, government loan
certificate, debenture certificate, etc. For verification of such securities, the following
procedure is adopted.
(a) Obtain a schedule of investments in hand at the beginning of the audit period. Obtain
the details of description of investments together with distinctive number of face value,
date of purchase, book value, market value, rate of interest, date of payment of interest or,
7|Page
date around which dividend is declared, etc., with also the details of interest or dividend
received along with tax deducted at source.
(b)Add to the above list, purchase made during the year and delete the investments sold
during the year with all the above details.
(c) Balance this schedule and compare the balance with general ledger and Balance sheet.
(d)Check the market value of investments with reference to stock exchange quotations or
other suitable method, on Balance Sheet date and see that the values are disclosed in the
Balance sheet.
(e) Inspect the certificates or securities physically on the Balance Sheet date.
(f) Compare the income received with amount due and adjust the accrued income.
(g)Confirm the uncalled liability on partly paid shares held as investment shown as
contingent liability by way of a note to the Balance Sheet.
(h)See that adequate provision is made for any shortfall in the book value of investment
shown in the Balance Sheet.
(i) See that, regarding the investment in subsidiaries, disclosure requirement of the
Companies Act, 2013 are complied with.
(j)For investment in the capital of partnership, the partnership deed and copy of accounts
of partnership firms, is to be verified. Also adjust the share of profit and loss for the
partnership period.
(k)Investments which stand in the name of persons other than that of the company are to
be confirmed with appropriate sanction.
(l)For investment lodged with others as security or lying with banks or share brokers, obtain a
certificate from the parties concerned.
(m) In case of application money paid for shares which are still to be allotted, that fact is to
be specially disclosed in the Balance Sheet.
Stock:
As the correctness of the profit of a business depends to a great extent on the accuracy of
the valuation placed on the closing stock, it will be readily appreciated that the verification
of this asset forms one of the most important parts of an auditor’s duty. While verifying the
stock-in-trade the auditor has the following duties –
(a) Ascertain the method of stock-taking and the basis of valuation.

(b)Ensure that the stock-sheets have been subjected to a good internal check, e.g., they are
certified as to have taken prices, extension and additions while determining the stock and
also generally approved as correct by managing director.
(c) Check calculations and additions.
(d) Check a few of the important items with actual invoices as to prices.
(e)Examine some of the quantities in stock-sheets with those shown by the stock books, if
such stock books are kept.
(f) Ascertain that the stock is valued on the same basis as in the previous year.
(g) Ascertain that obsolete and unsalable stock is shown at fair market prices.
(h)Compare the percentage of gross profit on turnover with that of the previous period and
also enquire into the cause of any notable fluctuation.
(i) Ensure that the goods entered as sold and not delivered are not included.
(j) Ensure that the goods bought and not entered in the invoice book are included. 8 | P a g e
(k)
(i)Ascertain that the value of unfinished goods is taken at actual cost and the basis of
valuation is the cost of the materials consumed and the wages spent thereon upon
the date of the Balance Sheet. Sometimes a percentage is added in the above to
cover the factory cost, such as foreman’s wages, fuel, power, lighting, heating,
depreciation of plant etc.
(ii)In case of finished goods, a reasonable percentage in respect of office cost has
also to be added to the works cost.
(l) See that the goods sold on approval basis are properly included in closing stock.
(m) See that the stock held does not include goods held on consignment as an agent.
(n)Examine carefully the stock sheets and ensure that the stock includes only the goods
dealt with by the client and does not include any asset purchased.
(o) Confirm that stock has been valued at cost or market price, whichever is less.
(p)Obtain from a responsible officer of the organization a certificate regarding the
procedure followed in valuation of stock.
(q) Obtain a certificate from client certifying that:
i. Physical verification of stock is done.

ii. All goods included in the stock are property of the company.
iii.Cut off procedure is properly followed. (Cut off is a transaction which
separates one accounting year from the next accounting year. Last document
nos. of goods 193 received notes, goods accepted notes, debit and credit
notes etc. should be obtained at the time of stocktaking).
iv. The basis of valuation is the same as was followed in the previous year.
Leasehold Property:
Normally the lease or right to use the property is granted for certain number of years. At the
expiry of the period of lease, the rights go back to the original lessor. Various steps involved
in the verification of leasehold rights are stated below.
(b)Inspect the lease agreement to ascertain the amount of premium paid, period of lease,
other terms and conditions, like maintenance, insurance, etc.
(c)See that the lease is properly registered with the Registrar because a lease for a period
exceeding one year is not valid unless it has been granted by a registered document.
(d)Ascertain those conditions, the failure of which might result in the forfeiture or
cancellation of lease, and see whether they have been properly complied with.
(e)See whether sub-lease is valid as per lease agreement, in case if it is granted, by referring to
sub-lease agreement.
(f)See that the premium paid and acquisition expenses of lease are being amortised
(written off) over the period of lease adopting a suitable basis.
(g)In case, any provision is to be made under the dilapidation clause for payment on the
expiry of the term of lease, see that the same is properly and continuously provided.
9|Page
(g) In case of leasehold land, if any building is constructed by the lessee, see the position
and ascertain the correct method of presentation of such expenditure for disclosure in the
Balance Sheet.
Plant & Machinery:

(a)Now-a-days as per provision of the Companies Act, 2013 every company is required to
maintain a Fixed Asset Register showing full particulars including cost, location,
depreciation, details of purchase, expenses capitalised, etc. Therefore, the auditor should
ask for such a register maintained by the client and see that all items of plant and machinery
are recorded properly giving full details.
(b)As per the provision of the same section, all fixed assets are required to be physically
verified by the management. Therefore, the auditor should enquire whether such physical
verification was undertaken or not. If yes, he should ask for necessary papers pertaining to
the same. If there is any discrepancy, reasons for the same should be asked.
(c)Any new purchase made during the year are to be verified with reference to purchase
invoice and other papers regarding installation of the same.
(d)Total value of plant and machinery as shown by Fixed Asset Register should tally with
ledger account maintained in the financial books.
(e) Where any item of plant and machinery is sold, scrapped or transferred the auditor
should check relevant entries for the same and verify that they are removed from the Fixed
Assets Register.
(f)The auditor should verify that adequate depreciation is provided on all items of plant and
machinery and method of depreciation is consistently followed from year to year.
(g) Auditor should see that the entire plant and machinery stands in the name of the client
and are free from any charge or encumbrances. If plant and machinery is mortgaged, then
he has to verify that the documents are properly executed and mention of mortgage is
made in the Balance Sheet.
(h)He will ensure that plant & machinery have been disclosed under non-Current assets as
Fixed Assets as per Schedule III Companies Act, 2013.
Goodwill:
The duty of an auditor regarding verification of goodwill is stated below:
(a)Whenever the company has purchased or acquired a running business and has paid for it an
amount, in excess of the book value of its net assets, the excess is called `Goodwill’. It can be
verified from the vendor’s agreement and the auditor has to see whether there is a specific
sum which is paid or whether it is the excess of price paid over the tangible assets and see
that it is properly recorded.
(b)When the company has written up the values of all its assets on a revaluation and has
raised a Goodwill Account in the books, the Goodwill appears in the Balance Sheet. In this
case, the auditor has to see the basis of valuation and get satisfied about the same. If he is
not satisfied, the fact should be reported to the shareholders.
10 | P a g e
(c)He has to see that such excess is credited to a Capital Reserve or Revaluation Reserve
and no dividend is being declared from it.
(d)He has also to see the disclosure requirement of Schedule VI and ensure that the fact is
disclosed for 5 years subsequent to the date of revaluation.
(e)Sometimes, Goodwill which is written off earlier may be brought back in the books of
account to adjust the debit balance of Profit and Loss account. In this case, the auditor
should investigate the fact and satisfy in full before approving such method of creating
Goodwill. He should also refer to the board resolution. In case he is not satisfied, the fact
should be reported to the shareholders.
(f)If Goodwill has been created by any other means, the auditor should see that all relevant
facts are properly disclosed and are supported by documentary evidence.
Copyright:
(a)The auditor has to examine the written agreement of assignment along with the royalty
paid to the authors etc., for such copyrights.
(b) He has to see that such assignments are properly registered.
(c)If the client is the owner of many copyrights, the auditor should ask the client to prepare a
schedule of copyrights and get the detailed information to confirm that the same is shown
in the Balance Sheet.
(d)Regarding the value of copyrights, it should be remembered that this asset has no value in
the long run. Hence, value is determined on revaluation basis and period of copyrights.
(e) If any copyrights do not command the sale of any books, then the same should be
written off in such year. The auditor has to verify the same in detail.
Patent and Trade Mark:
(a)The ownership of patent rights is verified by inspection of certificate issued for grant of
patent, by the prescribed authority.
(b)If it has been purchased, the agreement surrendering it in favour of the client should be
examined.
(c)If there are a number of patents held by the client, obtain a schedule giving the full
details thereof or verify with reference to the register maintained by the client.
(d)It must be verified that patent rights are alive and legally enforceable and renewal fees
have been paid on due dates and charged to Revenue Account. The last renewal receipt
should be examined to ascertain that the patent has not lapsed.
(e) See that the patents are properly registered in the name of the client only.
(f) See that the cost of patent is being written off over its useful period of life.
(g)In case the patent is acquired, cost paid for the same and all relevant expenses are to be
capitalized.
(h)If the patent is created by the client by the research experiments and laboratory work,
only the actual expenses incurred for it in the process are to be capitalised.
11 | P a g e
Cash in hand:
(a)Special care is necessary with regard to verification of cash balances. There can be no
certainty that the cash produced for inspection was in fact held by the custodian.
(b)For this reason, the cash should be checked not only on the last day of the year, but also
checked again sometime after the close of the year without giving notice of the auditor’s
visit either to the client or to his staff.
(c)If there is more than one figure for cash balance e.g., when there is a cashier, a petty
cashier, a branch cashier and in addition, there are impress balance with employees, all of
them should be checked simultaneously, as far as practicable, so that the shortage in one
balance is not made good by transfer of amount from the other.
(d)It is desirable for the cashier to be present while cash is being counted and he should be
made to sign the statement prepared, containing details and the cash balance counted. If he
is absent at the time the cash is being verified, he may subsequently refute the amount of
actual cash on hand which may put the auditor in an embarrassing position.
(e)If the auditor is unable to check balance on the date of the Balance Sheet, he should
arrange with his client for all the balance to be banked and where this cannot conveniently
be done on the eve of the close of the financial year, it should be deposited the following
morning. The practice should also be adopted in the case of balance at the factory, depot or
branch where cash cannot be checked at close of the year.
(f)Should this not be possible, the auditor should verify the receipts and payments of cash up
to the date he counts the cash. This should be done soon after the cash balances have been
counted. The cash book of the day on which the balance is verified should be signed by the
auditor to indicate the stage at which the cash balance was checked.
(g)If any cheques, or drafts are included in cash balance the total there of should be
disclosed.
(h) If there is any rough Cash Book or detail of daily balance are separately kept, the auditor
should test entries from the rough Cash Book with those in the Cash Book, to prove that,
entries in the Cash Book are correct.
(i)If the auditor finds any slip, chit or I.O. Us in respect of temporary advances paid to the
employees, included as part of the cash balance, he should have them initialled by a
responsible official and debited to appropriate accounts.
Verification of Liabilities:
Secured loan:
Verification of secured loan may be carried out by employing the following procedures:
1) The auditor should examine the Article of Association and Memorandum of

Association to know the power of the company to raise loan and its limit.
2) He is required to go through the minutes of Board to see whether there is
authorization of raising loan.
12 | P a g e
3) The auditor should enquire into the purpose of taking loan and whether the amount
of loan has been utilized for that purpose.
4) The loan agreement entered into between the client and borrower should be
examined to know whether terms and conditions are in the interest of the company.
5) The auditor will see whether there is fixed charge or floating charge on assets for
taking secured loan. In case of fixed charge, the particular asset placed as security for
loan should be clearly stated in the balance sheet.
6) He will verify whether terms and conditions of taking loan have been duly complied
with.
7) The auditor will obtain certificate from lenders to confirm the validity of the amount
of loan standing on the balance sheet data and any outstanding interest thereon.
8) He will see that secured loan has been properly disclosed in the balance sheet as per
Schedule III of the Companies Act, 2013.
Contingent liability:
Contingent liabilities are those liabilities which may or may not arise in the future for
payment. The auditor’s duty is to see that all known and unknown liabilities have been
brought into the accounts at the date of the Balance Sheet and have been shown in the
Balance Sheet separately as such.
Examples:
(a) Liabilities on Bills Receivable discounted and not matured
(b) Liabilities for calls on partly paid shares:
(c) Liability under a guarantee:
(d) Liability for cases against the company not acknowledged as debts:
(e) Liability in respect of arrears of Dividend on Cumulative preference Shares:
Auditor’s duty:
(a)The auditor should very carefully check the various contingent liabilities named above.
There may be some such liabilities for which no provision has been made in the books but
merely a note has been made at the foot of the Balance Sheet, e.g., Bills Receivable which
have been discounted and which have not matured at the date of the Balance Sheet, arrears
of fixed cumulative dividends, etc.
(b) For liabilities in respect of which provision has to be made in the Balance Sheet, viz a
suit, etc., the auditor should examine such cases and ascertain the amount to be specifically
reserved for the purpose.
(c) The auditor should examine the Director’s Minute Book, correspondence made with the
legal advisers and the information obtained from the officials of the business.
(d)He has to ensure that proper provision has been made for all such liabilities and if he is
not satisfied, he should mention the fact in his report.
(e)It is to be remembered that the requirements of the Companies Act regarding the
contingent liability should be complied with in the Balance Sheet on the liabilities side.
13 | P a g e
Creditors
(a)The auditor should ask for a schedule of creditors and check the same with the purchase
ledger as that is already examined by him.
(b)He should ensure that all purchase made during the year especially at the end of the
year are included in the accounts of the creditors.
(c)In case of suspicion about any creditors, the auditor with the consent of the client can ask
the statement of account to be sent and verify the same by scrutinizing ledger accounts.
(d)He should see the various debits given for discount, goods returned etc, and confirm that
the same are genuine.
(e) The auditor should ask for the reason for not paying any overdue creditors.
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AUDITING | SEMESTER V| B.COM
AUDIT AND CERTIFICATE(10 MARKS)

1)
CONCEPT OF AUDIT CERTIFICATE:
REPORT -
AUDITOR’S REPORT-
a) Audit report is the end of audit work. After completing the Audit of Financial
statements of an organization.
product Auditor prepares the Audit report in which he
expresses his opinion. isNogiven in Audit Report.
guarantee
b) The Audit report should be clear, unambiguous and specific.
c) SA 700 deals with the responsibility of the auditor in forming his/her opinion on
financial statements. This standard also deals with content and form of theauditor’s
report that is issued as an outcome of the audit of the financial statements.
(In this Chapter we shall also discuss about the Type of Audit Report,
Content of Audit Report and Characteristics of Audit Report)
AUDITOR’S CERTIFICATE-
a) Audit Certificate is a document through which the auditor confirms certain facts.
b) It gives the guarantee
of correctness or accuracy of information. It does not involve
any estimate.
c) Certification of the statutory report, certification of share transfer, certification of the
value of imports and exports of a company, etc. are some of the examples of auditor’s
certificate.
CA SHRUTI CHAMARIA (7992469019) 1

2)
DIFFERNECE BETWEEN AUDIT REPORT AND AUDIT

CERTIFICATE
POINTS AUDIT REPORT AUDIT CERTIFICATE
MEANING Audit report is the expression Audit Certificate is

of opinion of Auditor on confirmation of
correctness or accuracy of
Financial statements.
certain matters.
BASIS Audit report is based on Audit certificate is based
estimates and assumption. on actual figures and
facts.
CRITICISM It may contain Criticism as It does not contain any
well as Suggestions. Criticism.
SCOPE Its Scope is large as it covers It is sought for specific
the entire financial matter of matter like Raw material,
the Entity. Fixed assets etc. Its Scope
is narrow.
TIME OF Audit report is submitted after Audit Certificate is
ISSUE the expiry of Financial Year. submitted as and when
required.
LIABILITY The Auditor may not be held The Auditor will be held
OF AUDITOR responsible for what he has responsible if there is any
opined in the Audit Report. Mistake in the Certificate.
PARTIES Audit Report is meant for all Audit Certificate is
CONCERNE the Stakeholders of the entity sought by External
namely as Shareholders, parties namely as
D
creditors ,Bankers, Bankers, Government
Government etc. and loan providers.

3)
CHARACTERISTICS OF AUDIT
REPORT
ACRONYM
(UP M SIRF CABS)
U P M S I R F C A B
S
Unambiguous Signature Relevant Pointing Brief
Mistakes Information Based Addressee

Criticism
Simple Firmness
Mention Reasons
4)
TYPES OF AUDIT REPORT
CLEAN REPORT • EVERYTHING IS PERFECT

QUALIFIED • SOMETHING IS WRONG
REPORT • EVERYTHING IS WRONG
ADVERSE
REPORT WITH • DID NOT FIND THE INFORMATION
REPORT
DISCLAIMER
1) CLEAN REPORT:-When Auditor gives positive opinion on true and fair view of
Financial Statements, then the Auditor issues Clean Report. When He is satisfied with
following matters, he gives Clean Report-
a) All entries have been passed as per GAAP.
b) Financial statement is in Agreement with Books of account.
c) Information in Financial statements is true, reliable and Relevant.
d) He got all material Evidence.
2) ADVERSE REPORT:- ‘’Just Opposite of Clean Report’’. An Adverse Report

should be given by the Auditor, only when he has strong and convincing evidence to
support his conclusion. He should disclose all the reasons of Adverse Report.
3) QUALIFIED REPORT:- When Auditor gives his opinion with some

Reservatio then he issues Qualified Report. Example- Financial statement gives the
true
n and fair view of the affairs of the company but Depreciation has not been
calculated correctly. He should disclose all the reasons of Qualified Report.
4) REPORT WITH DISCLAIMER- When Auditor is unable to collect the

Informatio which are necessary for expression of Opinion on Financial statements
the
n he issues the Report with Disclaimer. When Auditor gives this Report then he
should give the justification for such Disclaimer in his Report. In the following two
cases Auditor gives the Report with Disclaimer-
a) Incomplete accounts by the Client.
b) Refusal of client to provide information.

AUDITING | SEMESTER V| B
5)
ELEMENTS OF AUDIT REPORT (AS PER STANDARD ON
AUDITING)
ACRONYM
(TAI MAAR DPS)
M A
T A I A R
Auditor opinion Reporting

Title Introduction Auditor’s responsibility
Mgt Responsibility
Addressee
D P S
Place
Date Sign

Title- Title should mention that it is an ‘Independent Auditor’s Report’.

Addressee- Should mention clearly as to whom the report is being given to.
Introduction- Introduction about the entity, specify the date or period covered by
Financial Statement and the summary of the Significant Accounting policies.
Management’s Responsibility-
Auditor’s Responsibility-Mention that responsibility of the Auditor is to express an
unbiased opinion on the financial statements and issue an audit report.
Auditor’s opinion- Should mention the overall impression obtained from the audit of
financial statements.
For Example Modified Opinion, Unmodified Opinion
Reporting Responsibility-If any other reporting responsibility exists the same should
be mentioned.
Date- Date on which the audit report is signed
Place- The city in which audit report is signed.

Signature- The engagement partner (auditor) shall sign the audit report.
) CONTENTS OF AUDIT REPORT (AS PER COMPANIES

ACT, 2013)
Refer Chapter COMPANY AUDIT.

(WE HAVE ALREADY COVERED THIS TOPIC IN CHAPTER
NAMED AS “COMPANY AUDIT” IN TOPIC MATTERS TO BE
REPORTED IN AUDIT REPORT)

CA SHRUTI CHAMARIA
OTHER TRUST AREAS

OVERVIEW OF THE CHAPTER:-
A) COST AUDIT, ITS OBJECTIVES, ITS ADVANTAGES, AND
PROVISION OF COMPANIES ACT ,2013.
B) MANAGEMENT AUDIT AND ITS OBJECTIVES.
C) SOCIAL AUDIT, ITS OBJECTIVES, AREAS AND ITS
ADVANTAGES.
D) ENVIRONMENT AUDIT, ITS OBJECTIVES AND
ADVANTAGES.
E) PROPRIETY AUDIT, ITS OBJECTIVES AND IMPORTANCE.
F) PERFORMANCE AUDIT AND ITS OBJECTIVES.
(We shall discuss the Tax Audit with Company Audit chapter)
1)
COST AUDIT, OBJECTIVES AND

ADVANTAGES
MEANING OF COST AUDIT
“Verification of cost accounting records such as, the accuracy of the

cost accounts, cost reports, cost statements, cost data, costing
EDULAKSHYA CLASSES I 7992469019
techniques, and examining these records to ensure that they adhere to

the cost accounting principles, plans, procedures and objectives.”
The audit usually involves
∙ Verification that costing records are accurate.
∙ Detection of errors in cost records
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OBJECTIVES OF COST
AUDIT
GENERAL
OBJECTIVES
SOCIAL
OBJECTIVES
GENERAL OBJECTIVES-
1. To detect the errors of principle of cost accountancy, and frauds
that are usually made in the cost records.
2. To verify the adequacy of the books of account and
records relating to cost.
3. To arrive at the value of work-in-progress and closing finished

goods as accurately as possible.
4. To verify the total cost of each product, process, operation and

job to ensure that they are ascertained accurately.
5. To verify that the cost records have been duly reconciled

periodically with the financial books of account so as to ensure
accuracy.
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6. To assist the management by highlighting deficiencies or

inefficiencies in the use of material, labour and machines.
SOCIAL OBJECTIVES-
1. Increasing productivity:
Efficient management of material and labour and optimal utilisation
of installed capacities increase productivity. Cost audit brings to light
these factors, and so aids the management and the Government to
bring about improvements of existing economic conditions of the
country.
2. Price fixation and price control mechanism:

The Government’s order to conduct cost audit acts as a counter-
weight to the monopolistic attitude of certain industries to increase
commodity prices.
3.Cost consciousness in both public and private sectors:

Compulsory maintenance of cost accounting records is also applicable
to the public sector companies. Cost audit creates cost consciousness
in respect-of utilisation of national and human resources in these
sectors of economy.
4. Identifying uneconomic product line:

Cost audit, aimed at locating uneconomic product, gives a clue to the

industry to divert their resources into productive and remunerative
channels—which in turn serves the society.
5. Guard against evasion of tax:

Cost audit ensures correct valuation of the work-in- progress and
stock-in trade, and eliminates the tendencies of inflating costs and
reporting least profit of the business. So “the interest of the
Government regarding payment of correct taxes by the industry
is also taken care of in the process”
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S O B JE C T IV E O F
A D V A N T A G E S O
C O S T A U DI T
F C O S T A U DIT
Earning
Increasing Decision Foreign
productivity making Exchange
Control over Creation of

Monopolistic Employment
Price Opportunity
• INCREASING PRODUCTIVITY- Cost Audit highlights

wastages and inefficiency in the manufacturing operation of
business. This leads to improvement in Productivity.

• DECISION MAKING- Cost Audit provides very useful data
on the basis of which management can take various decision
such as Product Mix, Pricing policy etc.
• EARNING FOREIGN EXCHANGE- Cost Audit ensures the
optimum utilisation of resources and thus helps the industry to
produce the quality goods at reduced price. In this way Home
country Penetrate into Foreign market.
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• CONTROL OVER MONOPOLISTIC PRICE- Many firms

fixes
the prices of product without seeing the customer’s interest. This
tendency can be stopped by the government based on the
Audited cost structure of the company.
• CREATION OF EMPLOYMENT OPPORTUNITY- By
eliminating the wastages and increasing the efficiency and
thereby increasing the investment , cost audit helps to make
new investment which is the most needy requirement for
solving the problem of unemployment.
PROVISION OF COMPANIES
ACT
❖ APPLICABILITY OF COST RECORDS- Every company engaged

in the production of the goods or providing services, specified in
Tables (Table A – Regulated sectors and Table B – Non-regulated
Sectors), having an overall turnover from all its products and
services of Rupees thirty five crore or more during the
immediately preceding financial year, shall maintain the cost
records.
❖ This means that applicability of maintenance of Cost Records
shall be for those sectors which are mentioned in the tables (Table
A – Regulated sectors and Table B – Non-regulated Sectors).
❖ Every company which is required to get its records audited shall
appoint a cost auditor within 180 days of commencement of every
financial year.
❖ The duty of company shall be to give all assistance and facility to
the cost auditor for auditing the cost records of the company. 5
CA SHRUTI CHAMARIA
❖ APPLICABILITY OF COST AUDIT- These companies are

required to get its records audited by a Cost Management
Accountant.
REGULATED SECTOR NON

REGULATED
SECTOR
OVERALL AGGREGATE OVERALL AGGREGATE
ANNUAL TURNOVER ANNUAL TURNOVER
TURNOVER FROM TURNOVER FROM
FROM ALL INDIVIDUAL FROM ALL INDIVIDUAL
PRODUCTS PRODUCTS PRODUCT
AND SERVICES
PRODUCT
AND SERVICES AND SERVICES AND SERVICES
IS 50 CRORE OR IS 35 CRORE
MORE. IS 25 CRORE IS 100 CRORE
OR MORE. OR MORE. OR MORE.
❖ CRA UNDER COST AUDIT-

CRA 1- Companies required to maintain cost records
shall maintain the records in CRA1.

CRA2- Company shall inform the central government
about the appointment of cost auditor in form CRA2.
CRA3- Cost auditor shall submit his report to board of
directors in form CRA3.
CRA4- Company shall furnish the cost audit report
given by cist auditor with full explanations on every
qualifications or reservations in form CRA4.
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CA SHRUTI CHAMARIA
❖ REMAINING IMPORTANT PROVISION FOR COST

AUDIT
• COST ACCOUNTANT IN PRACTICE.
ELIGIBILITY • HE SHOULD COMPLY WITH COST ACCOUNTING STANDARDS.
• RIGHTS AND DUTIES OF COST AUDITOR ARE SAME AS OF
DUTIES AND POWERS STATUTORY AUDITOR US 143.
• COST AUDITOR SHALL SUBMIT THE REPORT TO

TIME LIMIT FOR SUBMISSSION OF
BOD WITHIN 180 DAYS FROM THE CLOSURE OF
REPORT
FINANCIAL YEAR.
• PERSON MENTIONED U/S 141(3)

DISQUALIFICATIONS • AUDITOR APPOINTED U/S 139.
•CASUAL VACANCY IN THE OFFICE OF COST AUDITOR

CASUAL SHALL BE FILED BY BOD WITHIN 30 DAYS .
• INFORM THE CG IN CRA2 WITHIN 30 DAYS OF SUCH
VACANCY APPOINTMENT.
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2)
MANAGEMENT AUDIT AND ITS

OBJECTIVES
MEANING OF MANAGEMENT AUDIT
“Management audit can be defined as an objective and independent

appraisal of the effectiveness of managers and the effectiveness of the
corporate structure in the achievement of company objectives and
policies. Its aim is to identify existing and potential management
weaknesses within an organization and to recommend ways to rectify
these weaknesses”.
OBJECTIVES OF MANAGEMENT AUDIT
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3)
SOCIAL AUDIT, OBJECTIVES AND

ADVANTAGE
MEANING OF SOCIAL
AUDIT
“A commitment to systematic assessment of and reporting on some

meaningful, definable domain of a company’s activities that have a social
impact”.
social audit refers to the systematic evaluation of an organization’s
social performance. Here, its economic performance is not
considered. It discloses the company’s involvement in socially
oriented activities, activities taken for the well-being of the employers
of the concern, activities as to prevention of environment from
pollution etc.
OBJECTIVES OF SOCIAL AUDIT
Goyder defined the objectives of social audit in clear terms. He

classified the objectives into two broad categories namely,
1. Principal objectives, and

2. Secondary objectives.
Principal Objectives of Social Audit

The principal objectives according to Goyder are as follows.
1.The extension, development and improvement of the company’s

business and building up of its financial independence.
10
2. The payment of a fair and regular dividend to the shareholders.
CA SHRUTI CHAMARIA
3.The payment of fair wages under the best possible conditions to the
worker.
4. The reduction of prices to the consumers.
Secondary Objectives of Social Audit

1. Provision of a bonus to the workers.
2. Assist in promoting the amenities of the locality.
3. Assist in developing the industry in which the firm is a member.
4.Promote education, research and development in the techniques of

the industry.
ADVANTAGES OF SOCIAL AUDIT
MEMORY TECHNIQUE –
“PEASE”
Prevention of unfair Establishing the
Assessment of Social
trade practice- justifiability of a
performance
business-
The unfair trade practice will Social audit assess the
be revealed by social audit. With the help of social audit contribution made by firm to
justification of continuance the society.

of firm can be established
Social awarness Effective allocation of
Social audit creates the scare resources
awarness among the
businessman for Different Social audit evaluates the
pollution and steps for project to ensure the
cotrolling the pollution. effective allocation.
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CA SHRUTI CHAMARIA
4)
ENVIRONMENT AUDIT, OBJECTIVE

AND ADVANTAGES
MEANING OF ENVIRONMENT AUDIT
The concept of Audit is not confined to Accounting and Finance.

One such area where audit is playing the role is Environment. As
we know that our environment is getting polluted day by day by
many Industries also. These damages cannot be avoided but can be
restricted to great extent through Audit.
“A management tool comprising a systematic, documented periodic
and objective evaluation of how well environmental organization,
management and equipment are performing, with the aim of
helping safeguard the environment by:
(i) facilitating management control of environmental practices and
(ii) assessing compliance with company policies which would
include meeting regulatory requirements.”
OBJECTIVES OF ENVIRONMENT AUDIT
∙ Determine how well the environmental management systems and

equipment are performing
∙ Verify compliance with the relevant national, local or other laws
and regulations
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CA SHRUTI CHAMARIA
∙ Minimize human exposure to risks from environmental, health and

safety problems.
∙ To see that natural resources are not being extracted and consumed
in the way detrimental to society.
∙ To see whether the social cost incurred due to manufacturing
process is more than the social benefits rendered by it.
ADVANTAGES OF ENVIRONMENT
AUDIT
MEMORY TECHNIQUE – “PM COD”

A) Preparation of environment cost budget- Environment audit
provides the required information for pollution free environment
and thus helps in preparation of Budget.
B) Maintenance of Ecological balance- Ecological balance is
getting disturbed by industrial pollution. Bhopal gas leak,
Chernobyl disaster etc are examples which destroyed many
living creatures. Audit can prevent the occurrence of such
Disasters.
C) Cost effective measures- It ensures that environment
protections are cost effective and not causing wastage of money.

D) Optimum utilisation of resources- Very often scare resources
are used recklessly ignoring the need of next generation.
Environment audit ensures the proper utilisation of those
resources.
E) Developing environmental consciousness- Environmental
audit compels to take necessary precautions so that the
company’s operations cannot damage the environment beyond
an acceptable level.
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CA SHRUTI CHAMARIA
5)
PROPRIETY AUDIT, OBJECTIVE &

ADVANTAGES
MEANING OF PROPRIETY AUDIT
The term “propriety’’ means rightness or appropriateness.

Propriety can be defined as assessment of rightness of managerial
decisions in connection with various financial events or transactions
of the business.
Propriety audit is concerned with scrutiny of executive actions and
decisions bearing on financial and profit and loss situation of the
company.
OBJECTIVES OF PROPRIETY AUDIT
(a)The expenditure should not be prima facie more than what the
occasion demands and that every officer exercises the same
degree of vigilance as in respect of his own money.
(b)No authority in the exercise of its powers of sanctioning

expenditure should pass an order which will directly or indirectly
accrue to its own advantage.
(c)The funds should not be utilized for the benefit of a particular

person or group of persons.
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CA SHRUTI CHAMARIA
6)
PERFORMANCE AUDIT AND ITS

OBJECTIVE
MEANING OF PERFORMANCE AUDIT
Performance auditing may thus be defined as an independent auditing

process to evaluate the measures instituted by management to ensure
that resources have been procured economically and are used
efficiently and effectively. It can be said that performance audit is to
review whether an entity has been able to reach its targets and
achieves its standard level of performance.
“Performance Audit evaluates the performance of company in its

various areas like production, supply, staffing, costing etc.
Auditor enables the company to improve its performance in
various areas.
The objective of performance auditing includes the following

three assertions:-
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AUDIT PROCEDURE AND TECHNIQUE (PART 1)
AUDIT OF DIFFERENT ENTITIES
“IN THIS PART WE SHALL DISCUSS ABOUT THE PROCESS OF AUDITING OF

VARIOUS ENTITIES LIKE HOSPITAL, HOSTEL, EDUCATIONAL INSTITUTES
ETC.”
1) AUDIT OF EDUCATIONAL INSTITUTION (4 ASPECTS)

A) PRELIMINARY MATTER-
1) Study the trust deed or regulations of educational institute.

2) The Auditor should obtain a list of books, documents, register and
other records as maintained by the educational institutions.
3) He should examine the audit report of last year and should note
down the observation and qualification, if any.
4) He should examine the Minutes of Meetings of the Board of
Trustee or the Governing Body for important decisions regarding
the sale or purchase of fixed assets.
B) INCOME-
E D U LAKSHYA CLASSES|
1) Fees and charges received on account of admission fees, tuition

fees, sports fees, examination fees etc. should be verified based on
the approved fees structure.
2) Verification of counterfoil copies of fees receipt with fees received
7992469019
register should be done.

[ D at e]
3) Fees receivable and actual fees received should be reconciled.

4) Donation received should be accounted for according to the nature
of donation means careful distinction should be there for revenue
nature donation and capital nature donations; the same procedure is 1
to be followed for Grants received.
CA SHRUTI CHAMARIA
5) The purpose and utilization of grant should be same.

6) Investment register and cash book should be verified for income
received on account of interest on investment and dividends, etc.
C) EXPENSES-
1) Electricity expenses, telephone expenses, water charges,

stationery and printing, purchase of sports items should be properly
verified with quotation, purchase bills, inward register and Bills.
2) Payment made on account of salary should be verified from terms
of appointment and increment policy. Auditor should verify the
computation of salary and check whether all required deductions
are made out of it.
3) Terms and conditions, cash book, voucher and receipts should be the
basis for the verification of scholarship paid.
4) Vouch all the capital expenditure to confirm that norms have been
followed in respect of capital expenditure.
5) Verify that all the expenditure has been made after proper sanction
by authority.
6) Examine that all the salary, allowances has been paid as per the
terms and condition of appointment of staff.
D) ASSETS & LIABILITIES-

1) Verification of Assets register should be done considering grants on

purchase of assets, if any received from State Government/
University Grant Commission (UGC).
2) Verification of depreciation is very important; it should be
7992469019
according to useful life of assets or as per the Companies Act,

whichever is applicable.
[ D at e]
3) Auditor should enquire about the Contingent liabilities of Institutes.

4) See all the liabilities in respect of purchase of assets, maintenance
expenses has been provided in books of accounts.
2
5) Verify that Assets have been properly accounted in books as per AS
10.
CA SHRUTI CHAMARIA
2) STEPS OF AUDIT OF HOTEL (4 ASPECTS)

1) The Auditor should obtain a list of books, documents, register and

other records as maintained by the educational institutions.
2) He should examine the audit report of last year and should note
down the observation and qualification, if any.
3) Auditor should study the Memorandum and Article of
Association.
4) Auditor should verify the Title Deed and other related documents
to verify the land and building.
B) RECEIPTS OF HOTEL( REMEMBER ALL THE POINT OF SALE)
1) Revenue from room rent

2) Revenue from Minibar
3) Revenue from Banquets
4) Revenue from Laundry
5) Revenue from Beauty parlour and health club
6) Revenue from sale of scrap
7) Revenue from housekeeping.

C) EXPENSES OF HOTEL
1) An Auditor should verify the appointment letter, policy of increment,
time record, salary register, cash book and bank book to verify the
salary payments of employees.
7992469019
2) He should verify all purchases through requisition slip, quotations,

[ D at e]
purchase order, inward register, quality control verification record

and stock ledger.
3) Every purchase should be passed by appropriate authority in this
regard. 3
CA SHRUTI CHAMARIA
4) An Auditor should apply all other precautions and experience to audit

the expenses as he does in any other industries.
D) ASSETS AND LIABILITIES-

“Write all the points ‘Same’ as of Educational Institute”
3) STEPS OF AUDIT OF HOSPITAL (4 ASPECTS)

1) He should obtain a list of books, documents, register and other records

as maintained by the Hospitals.
2) He should examine the audit report of last year and should note down
qualifications
3) He should note down the important clause of Trust Deed or Charter,
which may affect the audit and accounts of hospitals.
4) Heshould examine the Minutes of Meetings of
the Board of Directors/Trustees or the Managing Committee.
5) He should examine the internal control system regarding purchase of
fixed assets, medicines, stores, consumables, clothing and provisions, etc.
B) INCOME OF HOSPITAL-
1) An Auditor should check the bill book, bill register and copy of bills.
2) It should be verified that bills are prepared properly according to visit
charges of doctors, medicine, stay charges, room rent, etc.
3) Bills should be verified with the fees/charges structure.
7992469019
4) Concession and waiver on account of fees and other charges should be

verified.
[ D at e]
5) Rental income should be properly verified. He should properly vouch

property register, arrear of rent, advance rent and provisions for the
same.
4
6) Interest and dividend income should be verified with investment
register, cash book and share warrants, etc.
CA SHRUTI CHAMARIA
7) Documents and correspondence relating to donations and grants should

be verified; the list of donors, grant sanction letter should be obtained to
verify the same.
8) Distinction between revenue and capital donation should be checked
and verified. In case donation is for some specific purpose, the Auditor
should assure that the money is used for the same purpose only.
C) EXPENSES OF HOSPITAL-
1) An Auditor should adopt the usual way to vouch purchases and other
expenses of the hospitals.
2) Clear distinction should be made between capital and revenue expenses.
3) Salary of staff should be vouched according to general auditing
principles.
4) Auditor should examine the payment relating to purchase of medicines,
foodstuffs and medical items.
5) Auditor should verify the computation of salary of Doctors, Nurses
and staffs of Hospital and check whether all required deductions are
made out of it.
6) Auditor should compare the expenses of the Current year with the
expenses of last year.
D) ASSETS AND LIABILITIES-

1) Title documents and other records relating to land and building should
be carefully examined by the Auditor.
2) Resolution of Trustees/Managing committee should be verified for sale
and purchase of fixed assets.
7992469019
3) Depreciation should be charged on the basis of the policies of the

[ D at e]
Managing Committee.
4) Liabilities should be verified in the usual manner.
5) Stock and stores of medicines, clothing, consumables, etc. should be
physically verified at the end of the year. 5
6) Auditor shall physically verify the Cash, Medical equipment and all
other assets of Hospital.
CA SHRUTI CHAMARIA
4) STEPS OF AUDIT OF MEDICAL COLLEGE (4 ASPECTS)
“COMBINE ALL THE POINTS OF EDUCATIONAL INSTITUTE AND

HOSPITAL”
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[ D at e]
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AUDIT | SEMESTER V| B.COM
AUDIT PROCEDURE AND TECHNIQUE (PART

2)
“In this part we shall discuss about the Audit planning, Audit
programme, Audit note book, Audit working papers, Audit memorandum,
Audit File.”
1) MEANING OF AUDIT
PLANNING
An audit is a professional service to a client. Before commencing audit, an
auditor must prepare himself well. Preparation for an audit relates to Audit
engagement, audit planning, audit programme, audit note book, audit
working papers, audit memorandum, Audit File.
“Audit planning is a process of deciding in advance what is to be done, who

is to do it, how it is to be done and when it is to be done by the auditor in order
to have efficient and effective completion of work.”
As per SA300 Audit planning involves the following activities-

∙ Size of the company and nature of its operations.
∙ Accounting system, internal control and adherence to standard.
∙ Environment in which the company operates.
∙ Previous experience with the client; and
∙ Knowledge of client’s business.
∙ Determining the amount of resources to be allocated to audit.
∙ Deciding how such resources are managed and directed.
∙ Setting the Nature, Timing and Extent of Audit procedure. (NTE)
EDULAKSHYA CLASSES|7992469019 1
CA SHRUTI CHAMARIA
ADVANTAGES OF AUDIT PLANNING
Accomplishment of Objectives
Identification of Problems
Timely Completion of Work
Better Audit Work
Facilitates Coordination
An efficient and effective audit plan provides the following benefits:
∙ Accomplishment of Objectives: Audit plan ensures that it provides

right means to accomplish audit objectives. Further it also ensures that
appropriate attention is devoted to important areas of audit.
∙ Identification of Problems: A well drawn and established audit plan

helps in identifying potential problems.
∙ Timely Completion of Work: It ensures that work is completed

properly within the specified time and no important area is left out. It
also ensures that all important areas of management receive attention.
∙ Facilitates Coordination: It facilitates coordination of the audit work

done by auditors and other experts.
∙ Better Audit Work: It helps in improving the quality of audit work

and provides promptness and perfection in audit performance.
CA SHRUTI CHAMARIA
2) MEANING OF AUDIT
PROGRAMME
An audit program is a set of directions that the auditor and its team members
need to follow for the proper execution of the audit. After preparing an audit
plan, the auditor allocates the work and prepares a program which contains
steps that the audit team needs to follow while conducting an audit.
“An audit program provides a basic plan for the audit team regarding the
entity’s business, its size, how to conduct the audit, allocation of work among
team members and the estimation of time within which it should complete the
work.”
ADVANTAGES OF AUDIT PROGRAMME
Supervision of work: The auditor can judge the efficiency of his audit
team, by having a well develop audit program. He is in the position to know
the progress of work. He can see at any time that what part of the work has
been completed and what remains to be done.
Distribution of work: Audit program is very useful in distributing the

audit work properly among the member of the audit team according to their
talent.
Uniformity of work: Audit program help is setting all the things in

advance, so the provides training and guidance to them.
Basic instrument for training: Audit program is very useful for the new
auditor. It provides training and guidance to them.
Legal evidence: Audit program is legal evidence for work done by every
assistant of the audit team. Audit program can be presented in the court of law
if any action is taken against the auditor of negligence.
Fixation of responsibility: If any error of fraud remains undetected the

responsibility of negligence will fall on that particular assistant who has
performed that job.
CA SHRUTI CHAMARIA
3) MEANING OF AUDIT NOTE

BOOK
Audit notebook is a diary on which auditor scribble down all important

inquiries to avoid the possibility of unquestioned material facts.
A notebook that is prepared by the audit staff to note down all the uncleared
queries which he/she may find in the course of the audit and requires further
clarification and explanation is known as an audit notebook.
Audit notebook contains information regarding day-to-day work performed

by the audit staff on any particular date.
CONTENT OF AUDIT NOTE BOOK
1. The nature of the business carried on and the important documents relating
to the constitution of the business.
2. The name of the client and the audit year.
3. A list of books of accounts in use.
4. Names of principal officers, their duties and responsibilities.
5. Particulars of the accounting and financial system followed and the internal
check-in operation in the business.
6. Details regarding accounting and financial policies followed in the business.
7. The technical terms used in the business.
8. Notes and queries which might be required at a subsequent audit.
9. The accounting method followed in the business.
10. A copy of audit programme.
CA SHRUTI CHAMARIA
ADVANTAGES OF AUDIT NOTE BOOK
1) Audit Report
The audit notebook helps prepare an audit report. The auditor can record the
weakness of accounting records. The queries not properly answered are started
in the audit report when the auditor is satisfied, he can submit a clear report.
2) Staff Honesty
The audit notebook is used to determine the integrity and honesty of audit
clerks. The moral and ethical values can be examined through audit work.
3) New Auditor
The audit notebook is useful for a new auditor. They can see the weakness of
previous years. The old, weak points may not be repeated this year.
4) Reference
The audit notebook is useful for reference. In the future, it can provide
information to the audit staff. The past data gives an insight into business
matters. The auditor can note the changes.
5) Helpful for Memory

The audit notebook helps to keep things fresh in memory. The auditor can read
the book daily. He can note the weakness on fingertips. The auditor can retain
the data in his memory for a longer period.
CA SHRUTI CHAMARIA
4) MEANING OF AUDIT
MEMORANDUM
Audit memorandum is a statement containing all useful information regarding

the business of client. It indicates the method of operation and policy of the
business. The object of preparing the memorandum is to record the general
information of the business which may be useful to him while carrying the
Audit.
If it is a first audit, it will have to prepare thoroughly to cover the various
aspects of the concern. But where the audit was carried out earlier then only
changes need to be noted.
CONTENT OF AUDIT
MEMORANDUM
PLANT AND OFFICE LOCATION.

OWNERSHIP AND CONTROL OF THE ORGANISATION.
SOURCES OF RAW MATERIAL AND PRICE TREND.
NAME OF RESPONSIBLE OFFICERS AND RESPONSIBILITY.
BRIEF RESUME OF NET WORTH OF THE FIRM.
TYPE OF SUBSIDIARY COMPANY.
DIFFERENT POLICY OF THE COMPANY .
CA SHRUTI CHAMARIA
5) MEANING OF AUDIT
FILE
The file in which auditor preserves the Audit Papers is known as AUDIT
FILE. So it is the archive of audit papers which are generated by the auditor
during the audit.
There are basically two main Importance of Audit File-
a) In the subsequent audit of same Client he can use it as reference.
b) He can also use it as proof of defence if any charge of negligence
is levelled against him.
CLASSIFICATION OF AUDIT FILE
AUDIT
FILE
CURRENT
PERMANENT
AUDIT
AUDIT FILE
FILE
MEANING OF PERMANENT AUDIT FILE-

Permanent audit files are the files that use to keep the information that uses by
auditors continuously. That information includes engagement later, client’s
M&A, long term contract or agreement as well as board meeting minute.
CA SHRUTI CHAMARIA
CONTENT OF PERMANENT AUDIT FILE-
New client questionnaire.
The memorandum and articles.
Other legal documents such as prospectuses, leases, sales agreement.
Details of the history of the client’s business.
Board minutes of continuing relevance.
Previous years’ signed accounts, analytical review, and management letters.
Accounting systems notes, previous years’ control questionnaires.
Accounting policies and financial manual.
MEANING OF CURRENT AUDIT FILE-

Current audit files are the files that keep all information related to current
year auditing. Those documents include the current year financial statements,
general ledger, management accounts, and supporting documents.
CONTENT OF CURRENT AUDIT FILE-

Current year adjustments or propose an adjustment.
Significant audit findings.
Significant mater that require partner attention.
Current year audit working papers like risks assessment, audit
sampling, audit analytical review .
Internal control documents.
Analysis of transaction and balance.
Letter of confirmation received from the client.
Evidence that work performed by assistants was supervised.
CA SHRUTI CHAMARIA
6)
MEANING OF AUDIT WORKING PAPER
Audit working papers refer to the documents that is prepare by or use by

auditors as part of their works. Those documents include the summary of the
client’s nature of the business, business process flow, audit program,
documents or information obtained from the client as well as audit testing
documents.
Audit working papers are sometimes referred to audit documents that are very
important part of audit works. These documents are evidence that supports
auditors to make their conclusion on the financial statements.
EXAMPLES OF AUDIT WORKING PAPERS-

Audit documents on client nature of business.
Audit documents of team meeting.
Evidence of the planning process including audit programs and any changes thereto.
Analyses of transactions and balances.
Analyses of significant ratios and trends.
Identified and assessed risks of material misstatements.
OBJECTIVES OF AUDIT WORKING PAPERS

❖ The working papers serve the auditor both as useful audit tool as well as
a permanent record of the audit work performed.
❖ They are useful to the auditor to control the current year’s audit work.
❖ They constitute a reliable guidance for planning the future audit
assignments.
❖ A review of the audit working papers gives an assurance that the audit
work is both accurate and complete.
❖ The auditors arrange the data properly in the working papers. Hence,
the data become more meaningful and useful for the purpose of the,
audit.
❖ The chief auditor is assured that the opinion is supported by the
findings
of their audit staff.
CA SHRUTI CHAMARIA
❖ PROTECTION AND OWNERSHIP OF WORKING PAPER

The working papers are the matters documented by the auditor,
and some states have statutes that assign the auditor as the holder of
the working papers.
Custody of the working papers rests with the auditor and he or
she
is responsible for their safekeeping. Working papers include in the
permanent file are retained indefinitely. Current working papers
should be retained for as long as they are useful to the auditor.
Working papers are to be retained in the safe custody of an
auditor.
The client’s staff or third parties should not have access to
working papers. The documents are to be preserved for sufficient
length of time in order to satisfy the needs of auditor and
professional requirements of record retention. The auditor has to
maintain the confidentiality of the affairs of the client.
AUDIT RISK & INTERNAL CONTROL
SYSTEM
(10 MARKS)
OVERVIEW OF THE CHAPTER: -
A) AUDIT RISK & COMPONENTS OF AUDIT RISK.

B) INTERNAL CONTROL & ITS OBJECTIVES.
C) INTERNAL CHECK & ITS OBJECTIVES.
D) INTERNAL AUDIT & ITS OBJECTIVES.
E) DIFFERENCE BETWEEN INTERNAL CONTROL & INTERNAL
AUDIT.
F) DIFFERENCE BETWEEN INTERNAL CHECK & INTERNAL
AUDIT.
G) RELATIONSHIP BETWEEN EXTERNAL AUDITOR AND
INTERNAL AUDITOR.
“USUALLY FROM THIS CHAPTER QUESTION FROM DIFFERENCE AREA COMES”

1)
AUDIT RISK & COMPONENTS OF AUDIT RISK
MEANING OF AUDIT
RISK
Audit risk means the risk that the auditor gives an inappropriate audit opinion
when the financial statement are materially misstated. Thus, it is the risk that the
auditor may fail to express an appropriate opinion in an audit assignment.
Audit Risk could be simply understood as follows:
During the audit of a company if the financial statements of that company are
misstated and those misstatements are material in nature, then there will be a
risk that audit opinion given by the auditor regarding audit of that company
would be incorrect. Then that risk will be known as Audit Risk.
From the above, it is clear that –

Audit Risk = INHERENT RISK X CONTROL RISK X DETECTION RISK
a) Inherent risk- As we know that Audit suffers from inherent limitations, so
irrespective of good control system and effective auditing there will always be
some misstatements present in account balances, transactions or financial
statement. For reducing this Risk auditor should understand the entity and
complete the auditing effectively.
b) Control risk- Control Risk is a risk that internal control in an entity would
not be efficient enough to stop from happening, or find and then rectify in an
appropriate time, any material misstatement. So,in a way it can be said that
there exists an inverse relation between Control Risk and Efficiency of Internal
Control of an Entity. When efficiency of internal control of an entity is high
the control risk is low and vice-versa.
c) Detection risk- The risk that the procedures performed by the auditor to
reduce audit risk to an acceptably low level will not detect a misstatement that
exists andthat could be material, either individually or when aggregated with
othermisstatements.
2)
INTERNAL CONTROL & ITS OBJECTIVES
MEANING OF INTERNAL
CONTROL
The internal control may be defined as “the process designed, implemented and
maintained by those charged with governance, management and other
personnel to provide reasonable assurance that financial statements are reliable
and efficient, assets are safeguarded and entity complies with all law and regulations.
OBJECTIVE OF INTERNAL
CONTROL
O SAFEGUARDING OF
ASSETS
b RELIABE DATA
j FS AS PER RULES
e AUTHORISED
c TRANSACTION
t
i
v
3)
INTERNAL CHECK & ITS OBJECTIVES
The checks on -a day to day transactions which operate continuously as

part of the routine system, where the work of one person is checked by
another automatically, the object is the prevention or early detection of
errors or frauds.”
An internal check is a continuous process and part of the daily routine.

It relates to all the transactions that take place every day.
An internal check is achieved by a complimentary allocation of duties

and by independent verification of the work of one person by
another.
OBJECTIVE OF INTERNAL
CHECK
MORAL INFLUENCE OVER

STAFF MEMBERS.
Objectives
PREVENT
MISAPPROPRIATION OF
CAHS AND GOODS
ALLOCATE DUTIES & RESPONSIBILITIES
IN ENTITY.
MINIMISE THE ERRORS,

FRAUDS ETC
PREPARE THE FS WITH EASE .

ADVANTGES OF INTERNAL CHECK
Self-balancing System-
An organization can use self-balancing ledger accounts, which help to make the work
of internal checks easier. Its effectiveness depends on its management.
Job Rotation-
No individual clerk should be allowed to occupy a particular area of operation for

long. Exclusiveness in a position offer a person greater flexibility to attempt
manipulation with the system.
Control-
There is more chance of fraud where there is direct contact between

consumers or the public. So, a manager can keep an eye on those works so
that the internal check system can be more effective.
Division of Work-
No one should be allowed to have the right to perform the work from origin
to end.
For example – A transaction of sale may have to be

split into a display of article by staff, the preparation of
invoice by another, the receipt of cash against the
invoice by a third clerk, the delivery of article against
the proof of receipted invoice by another clerk,
checking of outward movement of an article against
delivery order by a clerk and so on.
4)
INTERNAL AUDIT & ITS OBJECTIVES
MEANING OF INTERNAL
AUDIT
Internal Audit means “An independent

management function, which involves a continuous and critical appraisal of
the functioning of an entity with a view to suggest improvementsthereto and
add value to and strengthen the overall governance mechanism of the entity.
WHO CAN BE APPOINTED AS INTERNAL AUDITOR?

Chartered accountant or a Costaccountant (whether engaged in practice or
not), or such other professional as may be decided by the Board. The internal
auditor may or may not be an employee of the company. (V. IMP)
OBJECTIVE OF INTERNAL AUDIT
PROPER
O CONTROL
b REVIEW OF
BUSINESS
j
DETECTION OF
e FRAUD
c CHECK ON
t ERROR
i ASSET
PROTECTION
v
e
s
PROPER CONTROL- Keep the control over the activities of
Entity. Management needs assurance for financial statement
and efficiency of firm and Internal Audit gives both.
REVIEW OF BUSINESS- Internal audit point out the mistakes,
weak and strong points of entity. This allow reviewing the
business instead of waiting till year end.
DETECTION OF FRAUD- Interna audit is round check on
employees so instances of fraud gets exposed easily.
CHECK ON ERROR- In internal audit mistakes are spotted
and corrected immediately.
5) DIFFERENCE BETWEEN INTERNAL AUDIT &

CONTROL
6)
DIFFERENCE BETWEEN INTERNAL AUDIT &
CHECK
7) DIFFERENCE BETWEEN
INTERNAL & EXTERNAL
AUDITOR
8)
RELATIONSHIP BETWEEN STATUTORY AND

INTERNAL

Audit

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Chapter -1

CONCEPT, NEED AND PURPOSE OF AUDIT

MEANING AND DEFINITION OF AUDITING

Analysis of the Definition

DEFINTION BASED ON A NARROWER CONCEPT:

Montgomery defined auditing as ‘a systematic examination of the books and records of a

2. To form an opinion on the financial statements, the auditor should be reasonably

Features/objectives of Independent Financial Audit:

I. Systematic and independent examination: Modern audit involves a systematic and

V. Collective and evaluation of evidence: In order to examine the proportions, the

Discuss the advantages of Auditing.

(iii)Verification of Books: Another advantage of audit is the verification of the books of

(viii)Ensures Compliance with Legal Requirements: Audited statements are necessary to

4. DIFFERENCE BETWEEN ACCOUNTANCY & AUDITING:

Basis Accountancy Auditing

5. Accounting is a necessity while auditing is a luxury for a business

(a) The remuneration paid to the auditor is an unnecessary waste of funds.

(a) Accounting data needs to be verified as to their reliability and accuracy.

6. Difference between Statutory Audit (External Audit) and Internal Audit:

Point External Audit Internal Audit

Objectives It is meant for management as It is meant for management. It

Basis of Difference Auditing Investigation

2. Objective Investigation is done for some

3. Compulsion It is compulsory in case of Joint It is not compulsory

Auditing is done at the end of Investigation can be done over a

Audit is conducted on behalf Investigation is conducted on

8. Report Auditor has to give a report The Investigator gives a report

An investigation need not be

Generally audited books of

What is standard audit?

Importance of Standard Audit:

DETECTION OF FRAUD & ERRORS:

THE AUDITOR CAN SUSPECT FRAUD UNDER THE FOLLOWING

(i) When vouchers, invoices, cheques, contracts are missing etc.

(iv) When there is greater fluctuation in G.P. and N.P. ratios.

(vii) When the explanation given by the client is not satisfactory.

(viii) When there is an overwriting of some figures.

(ix) When there is a contradiction in the explanation given by different parties.

PROCEDURE TO BE FOLLOWED TO DETECT ERRORS:

Following procedures may be adopted by the auditor to detect the errors.

(ii) Check the posting into respective ledger accounts

(iii) Check the total of the subsidiary books.

(iv) Verify all the castings and the carry forwards.

(vii) Verify the total of the trial balance.

(i) Examine all aspects of the finance.

10. Accountancy begins where book-keeping ends & accountancy ends

Accountancy: Accountancy begins where book-keeping ends." It means that an accountant

An accountant is supposed to be an expert in the accounting procedures as he has to

(i) Preparation of Trading & Profit & loss account.

Checking the work done by the accountant.

1ST Auditor Subsequent Auditor

Govt CO. Non Govt Co. Non

1. By CAG 1. By BOD By CAG At AGM

of F.Y) auditor shall be

(Within 60 days) 1st Auditor & Auditor appointed at 1st AGM

Both are different

GOVT CO. NON GOVT CO.

All Listed Companies.

All pvt. Company having PSC of ≥ 50 crores.

Sec140:- Removal of Auditor

Before expiry Retirement of By Tribunal

1.Pass board resolution 1. Give special notice 1. On application of