AUDITING B.COM PART 2

 

 

                              Chapter 2 - Types of Auditing

* Kinds of Auditing 
* Final Audit 
* Advantages of Final Audit 
* Disadvantages of Final Audit 
* Continuous Audit 
* Advantages of Continuous Audit 
* Disadvantages of Continuous Audit

Kinds of Auditing
Continuous Auditor Running Audit 
Continuous auditor also known as running audit or detailed audit. In large-scale business it is not possible for the auditor to get the true and fair view about the business in a short time period. So for the purpose of finding the correct information the continuous audit is conducted. Continuous audit is the audit that is conducted throughout the year with the fixed or non-fixed period. 

Interim Audit 
In normal word Interim means half yearly. It is conducted usually between two annual general meetings and only one time, not in intervals. 

Final Audits or Complete Audit or Balance Sheet Audit 
Final audit is also called as the Balance sheet audit or the Periodical Audit. Final audit is started when the books of accounts closed at the end of the year. It is the most satisfactory form of audit from the point of view of an auditor. In this audit there is cent percent checking of the accounts. In case if the business has an effective and proper internal control system. Then the audit sampling is possible.

Kinds of Auditing
Continuous Auditor Running Audit 
Continuous auditor also known as running audit or detailed audit. In large-scale business it is not possible for the auditor to get the true and fair view about the business in a short time period. So for the purpose of finding the correct information the continuous audit is conducted. Continuous audit is the audit that is conducted throughout the year with the fixed or non-fixed period. 

Interim Audit 
In normal word Interim means half yearly. It is conducted usually between two annual general meetings and only one time, not in intervals. 

Final Audits or Complete Audit or Balance Sheet Audit 
Final audit is also called as the Balance sheet audit or the Periodical Audit. Final audit is started when the books of accounts closed at the end of the year. It is the most satisfactory form of audit from the point of view of an auditor. In this audit there is cent percent checking of the accounts. In case if the business has an effective and proper internal control system. Then the audit sampling is possible

Final Audit
Final audit is also called as the "Balance sheet audit" or the "Periodical audit". Final audit is started when the books of accounts closed at the end of the year. It is the most satisfactory form of audit from the point of view of an auditor. In this audit there is cent percent checking of the accounts. In case if the business has an effective and proper internal control system. Then the audit sampling is possible. 

Characteristics
The following are the main essentials or features or characteristics of the final audit. 

In one session an auditor make only one visit.

This type of audit can be conducted on both the large and small type of business.

• It is conducted when the accounting period ended.

• In this audit the auditor can do test checking.

• Auditor report is a prerequisite.

• It is conducted to report to shareholders.

• The audit is completed on a short period.

Advantages of Final Audit
1. Alteration Chances Limited 
In the other types of audit the alteration is possible in the audit. But in the final audit the alteration of any type is not possible after the audit. 

2. Checking of Complete Record 
In the final audit there is complete checking of the books of accounting. He can decide either to check cent percent or by sampling. 

3. Advantage for the Shareholders 
Final audit serves the shareholders by giving them the most reliable financial information for the investment purpose. 

4. Advantage for the Owner 
Sometimes the business is so large that even one owner doesn't know the real position about the business. So final audit throws light on the business position and provides him satisfaction. 

5. Convenient or Suitable 
Final audit is very suitable for the auditor and client staff. It saves both the parties from continuous disturbance. 

6. Saving of Time 
In the continuous audit the work of audit is continuous through out the year. It takes a lot of time. But as compare to it final audit takes a very short time. So, in the final audit the time is saved. 

7. Legal Demand 
Final audit is also helpful in checking either the management has fulfilled the legal requirements or not. The management is bound to fulfill the legal requirement. 

8. Economical 
Final audit is beneficial for the client. It is not a regular burden on him, because it is conducted only once in a year at the end of the accounting period. So, it gives the maximum benefit with minimum cost. 

9. Improves the Efficiency 
In this audit the performance of the staff improves due to finding out the weak points of the employees by the auditor by overcome these weakness the staff can improve his efficiency. 

10. Submission of Report 
About the fairness and correctness of accounts final report is very important for the good will of the company. 

11. Staff Duties 
In final audit there is no clash of duties between the audit and accounting staff. They performed their work accordingly. The accounting staff remains busy throughout the year in his work and the audit staff his work when the accounting staff ends his work. 

12. Convenient for Management 
The benefit of final audit is that it is convenient for management as well as for audit staff. The auditor can start and complete the audit at one session. The queries can be cleared on the same day. 

13. Minimum Time Period 
The time required for final audit is less as compared to continuous audit. The auditors can start and complete many audits. They can raise their income by means of new audit work. 
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14. Planned Work 
The final audit has minimum time. So, the work of audit is completed under planning. An audit programme is maintained which provides the schedule of the working of the audit staff and the principal auditor can control the audit work. 

15. Work Continuity 
In the final audit the work of audit go through without any break and same way the auditor can be satisfied for the doubt, which raise from his work on the same time. 

16. Small Business 
The final audit is useful for small-scale business units. The fee charged by auditor is less as compared to continuous work. The small income of business can afford small audit fee. 

17. No Relations 
The merit of final audit is that it provides no chance to audit staff to develop friendly relation with accounting staff. The accounting staff is not in a position to get undue benefit from audit staff. 

18. Full Information 
The final audit is useful as it provides full information about business matters. The auditor can take decision on the spot for completion of audit work and submission of audit report. 

19. Income of Auditor 
This type of audit is also helpful for the auditor. Because this audit saves the time of the auditor and he can conduct many other audit of other business. 

20. Information of Client 
Final audit serves the shareholder by giving them the most reliable financial information for the investment purpose. 

21. Technical Knowledge 
According to the law all the companies are bound that a qualified and experienced person who must be a chartered accountant can conduct the audit. He is a qualified person and there are no chances of fraud or errors. 

22. Element of Friendship 
In final audit there is a short time for the auditor staff. So, in the auditor staff or accountant staff no friendship or soft corners created because their understanding is up to some limits. So there are no chances of fraud created by the both staffs. 

23. Beneficial for Client's Staff 
As final audit is conducted at the close of the books of Accounts. The client's staff is not distributed as in continuous audit. They can easily complete their work and the records are provided at the proper place. 

24. Protection 
In any business the directors can change the figures according to their interest but the final audit protect the rights of the shareholders by providing them correct information. 

25. Guidance 
The auditor not only provides the true and fair information but also guide the management how can they improve their accounting systems. 

26. Thread of Work 
In the final audit there is no interval in the work of auditor and it is carried on till its completion. So the audit staff cannot loose the thread of the work, which is performed by them. 

27. Moral Check 
In the final audit there is moral check of the person who performed the work. The signatures are specified on that work.

Disadvantages of Final Audit
1. Shortage of Time
The auditor has many clients and their financial year ends on the same date. So it becomes very difficult for the auditor to finish the work in time. It is a disadvantages of final audit.


2. Delay in Report
The decisions of the business are made on the basis of the audit report. But this report is made one or two months late. So there is also delay in the making of important decisions.

3. Complete Checking Not Possible
It is very difficult for the auditor to check the each and every entry made in the books of account. He applies only test to save the time. So many mistakes remain untouched.

4. May Misrepresent
There may be also a chance that audit report may not represent the correctness of accounts because each and every transaction is not checked.

5. No Moral Influence
In this audit there is less pressure on the accounting staff. The audit staff comes once in the year. So the employees are not altering in their work.

6. Late Corrections
In this audit the errors are locate at the end of the accounting period. Some way, the corrections of errors are also late. And the entire producer takes more time.

7. Audit Report
The demerit of final audit is that report is not presented in time. It may be submitted one or two months late. The decisions are to be made on the basis of audited accounts.

8. Planned Frauds
In this type of audit, the management has a whole year to think and decide how to make the frauds. So they commit a planned fraud, which is very difficult to find by the auditor.

9. Previous Year Data
Past data is provided to the auditor for audit in this type of business. The errors and frauds are also previous they have no concern with present or future.

10. Thorough Checking
In the final audit there may not be thorough checking. The auditor may select the sampling. In this way the errors and frauds are not located and the purpose of audit dies.


11. Planning for Future
In the final audit the future planning is not prepared in time because audit work start when the accounting work ends. The audit work is completed late and the projected financial statements are also completed late.

12. Delay in Accounting
For the accounting staff it is not possible to prepare the financial accounts just at the end of the year. Due to audit there is delay in finalizing the accounting matters.

13. Monthly Report
If in a business monthly or quarterly report are required. In this type of business the final audit cannot be conducted.

14. Proper Attention
The auditor cannot pay the proper attention towards the audit because he is bound by the fixed time.

15. Proper Decision
As he is bound by the time period he cannot judge the weakness of the business properly and cannot give the proper decisions to workers.

16. Interim Dividend
The business, which conducts the final audit, it is very difficult for him to declare the interim dividend.


















Continuous Audit
The audit that remains continue throughout the financial year is called continuous audit.

Characteristics of Continuous Audit
* The auditor visits the business regularly. 
* It is conducted in the large business concern. 
* It is conducted through the year. 
* Throughout checking is possible. 
* It is an expensive audit. 
* Audit report is not prerequisite. 
* It is used to cover the deficiencies of the business. 
= Surprise visits are also possible by the auditor. 
* The manager can fix the time. 

Advantages of Continuous Audit

1. Early Location of Errors and Frauds
In the Continuous Audit, the audit visit the clients after a short period. So, he is in a position to check the information completely in detail. It is helpful in checking the errors and frauds easily. If the audit is conducted after the year ended. It is not possible to find the errors or frauds easily.

2. Check on Frauds
In the Continuous Audit the errors are located earlier. So it is also helpful in the early correction of errors and frauds because it is located at the time when it can be corrected earlier.

3. Quick Rectification
Due to Continuous Audit errors are located easily and rectified at an early stage.

4. Special Attention
Before the finalization of accounts an auditor has a sufficient time to pay proper attention to the checking of account and detection of frauds and errors.

5. Guidance to Client
The auditor remains in touch with the business details, so he also indicates about the mistakes and gives valuable suggestions to the client to keep the accounts in proper manner.

6. Useful for Declaration of Dividend
The continuous audit is also helpful for the declaration of the dividend. As the accounts are checked throughout the year, so the audit accounts are ready for the declaration of dividend.

7. Upto Date Accounts
Accounts of the business are kept up to date by the staff because they know that auditor may visit and check the accounts at any time.


8. Chance of Over Looking Reduces
Auditor has a close contact with the details of the accounts and he has also sufficient time to check the records. So the chances of over looking are reduced in this type of audit.


9. Quick Presentation of Accounts

Continuous audit is very useful because accounts are maintained regularly. So as the financial years end final audited accounts are presented before the shareholders.


10. Accounts Completion

Another audit benefit is the early completion of the accounts checking. The results of audit can be found out just at the end of the accounting period.


11. Moral Check

In the continuous audit the auditor make the surprise visit in the business. The clerks are not aware about the visit. So they are alert and efficient in their work. There is less chances of frauds in this type of business.


12. Convenient for Auditors

In this audit, the several visits paid by the auditor to the client's office in enable his work to proceed easily and smoothly. It also increases his confidence in his capacity to do his work efficiently and effectively.


13. Regular Staff

The regular visits performed by the auditor, make the clerks alert to maintain the accounts up to date and accurate for fear that the auditor may land up in the office any time.


14. Sufficient Time

Continuous audit provides sufficient time to the audit staff. The important and ambiguous matters may require more time to draw conclusion. There is ample time for such matters.


15. No Missing Entries

Continuous audit is also helpful in keeping the full record. In the record there is no missing entries.


16. Early Correction of Errors

The continuous audit is helpful for early correction of errors. The auditor can point out


17. Prompt Filing of Returns

The continuous audit is also helpful for the prompt filing of returns. The management can submit audited account to the registrar as soon as the end of the year.


18. Early Meetings

This audit is helpful for the early meeting of the shareholders. The accounts are presented for the distribution of profit.


19. Surprise Visits

The continuous audit provided chances of surprise visit to audit staff. The accounting staff becomes alert due to surprise visit. It is essential for eliminating the chances of error and frauds.


20. Upto Date Record

The continuous audit is useful for keeping the up to date record. Such record is needed by management for borrowing funds, settlement of tax and dealing with labour union.


21. Even Work Load

Due to even workload, the audit staff feels the satisfaction. The books of accounts are maintained as the routine matters. And there is less chances of errors and frauds.


22. Auditor Advice

In the continuous audit the auditor can find the weakness of the business during the year and he can make the suggestion for the improvement of the business.


23. Close and Extensive Check

As the auditor visits the client's office after a month or so, but at regular intervals, a detailed close and exhaustive cheek can be possible. If the audit is to be under taken after the end of the year, such detailed checking will be difficult.


24. Technical Detail

In a continuous audit, the auditor is more in touch with the technical details and business affairs. So, the auditor can help his clients by giving him the valuable suggestions to improve business.


25. Distribution of Work

Continuous audit is also helpful in distribution of load of work on the staff. The work of audit continues the whole year. The audit staff can easily make the audit rogramme according the time required. 
Disadvantages of Continuous Audit

1. Alteration of Figures

The records and figures in the books of accounts, which have already been checked by the auditor, may be altered after the audit is over. A dishonest clerk can do it do defraud the accounts.

2. Expensive
Continuous audit is more expensive as compared to other kinds of audit, because the auditor has to devote more time to this audit.


3. Inconvenience

In this audit, the auditor visits the client's office at regular intervals to check the accounts and records these frequent visits made by the auditor may dislocate the work of his client and cause convenient to him.


4. Mechanical Work

The work of audit becomes too mechanical because it remains continue throughout the year.


5. Queries Problem

If the auditor's two visits interval is long then so many queries remains outstanding.


6. Small Business

Continuous audit is not fit for small business concerns. A small business has few transactions so there is no need of audit for whole one year. The owner as manager can know facts behind books as details audit is burden.


7. Client Work

The demerit of continuous audit is that the work of the client suffers due to clash of duties and the client staff remaining busy for the whole years. When the audit work is started work of accounting staff as books are not spare.


8. Staff Initimacy

The accounting staff and audit staff work side by side for the whole year. Friendship among the employees and auditors may lead to error and frauds. The sympathetic view of audit staff may fail to show true and fair view.


9. Missing Link

In the audit the auditor has to come at regular interval to check the accounts and hence the link between the past and present work cannot be maintained. Consequently the thread of work is very likely to be lost.


10. Low Income

The continuous audit keeps the staff busy for one year. They are not able to start and complete many audits at the same time. The given to one business is much higher as compared to final audit. So it is not suitable for audit staff from financial point of view.


11. Spoon Feeding

Frequent visits by the auditor may induce the client's staff to depend upon him even for minor things.


12. Expensive

A continuous audit is an expensive form of audit in that the more frequent visits by the auditor means the higher fees of auditor.


13. Wastage of Time

This type of audit is not helpful for the auditor because in this time period they cannot conduct any other audit. So this is low-income audit for the auditor.


14. Words of Client

Another disadvantage of the audit is that the works of the client staff suffer due to the work of both positive. The books of the accounts are not free for the other party to do.


15. Type of Business Concern

This is not fir for the small type of business concern. In the small business concern, there are only few transactions. So there is no need for this concern.


16. Mechanical Work

In this type of audit, the auditor has to repeat all the products as bookkeeper does where as audit work by nature should not be under thinking and boring.


17. Extensive Notes Taking

In this type of audit possible alteration after audit can be avoided by taking note on diary regarding audit of internal control. So the continuous audit requires the compilation of bundle of notes.


18. Chances of Collusion

Frequent visits of auditor may establish some unhealthy relationship between the client's staff and auditor's staff. Thus there are chances of moral check. Upon them and there may be collusion between them.

 

 

 

 

                        Chapter 3 - Internal Control

* Internal Audit 
* Internal Control 
* Internal Check 
* Various Types of Internal Control 
* Principles of Internal Control 
* Objects of Internal Control 
* Limitations of Internal Control 
* Principles of Internal Check

Internal Check
Internal check is an arrangement of duties allocated in such a way that the work of one employee is automatically checked by another. These are no separate staff engaged to carry out the system of internal check. It, in fact, represents only the arrangements of duties of the staff in a way. The system of internal check is devised in such a way that the possibilities of errors, frauds and irregularities are minimized. 
Following matters are included in the internal check 
Matters relating to allocation of power.

Division of work.

Methods of recording transactions

Types of Internal Control

1. Organization 
Organization is concerned with placement of workers on their jobs. Authority and responsibility go together. The workers are responsible for their activities. The head of department is responsible for looking after the worker of his own department. 

2. Segregation of Duties 
The segregation of duties is necessary. There are many employees. All aspects of a transaction are not complete by one person. The recording of transaction by many persons can reduce the risk of errors and frauds. The division of duties can improve the working of workers. 

3. Physical 
The physical internal control is desirable to safeguard assets. The access to assets must be limited. The authorized persons can be allowed to examine the assets. The persons may visit the warehouse or they may release the assets through requisition slips. The assets require lockers, iron safe possession of keys and use of passes of warehouse. 

4. Approval 
All transaction in any business requires proper approval of responsible person. The limit for approval may be fixed. The creditor recovery officer can approve credit sales. The foreman can approve overtime wages. Purchase officer can approve the purchase of goods. 

5. Accounting 
The accounting control is concerned with approval of transactions, accurately processing and correctly recording. The control of total, preparation of trail balance reconciliation's and control accounts is necessary. There is examination of vouchers that every aspect is not over looked so far this type of control is concerned. 

6. Management 
The top-level management can apply certain controls beyond the routine working of business. The management control, include internal audit review of management accounts comparing actual result with budgets, supervisory control and many other review procedure of business functions

Principles of Internal Control

1. Simple Record and Books 
The principal of the internal control is also the simple records such as the record of employees, plant register list of shareholders etc are kept in usual simple manner books should be kept up to date and at regular internals these should be balanced. He different persons should make handling of cash transactions. For instance the cashier should not be allowed to record the cash in the accounts book. He should have no concern with written ledgers. 

2. Independent Checking 
Another person should independently and automatically check work performed by one person. 

3. Principle Relating to Staff 
It is also the part of the internal control. The employees are placed on the business according to their ability. The employees are bound for the duties for which they are assigned. Duties of each staff member should be clear and there should be no confusion and doubt in this regard. In case of any staff member absence duties arrangements should be made in advance. 

4. Changing 
It is also an important principle that no one should handle the transaction from beginning to end, because in this situation there is a chance of fraud. Generally most of the frauds are committed due to this reason. 

5. Proper Supervision 
It is also a principal of the internal control. All the senior officers have a right to supervise the activities of their juniors. It is necessary for the benefit of the business. 

6. Clear Rules 
All those rules relating to cash stock receipts and issuance of goods should be very clear and well defined. It should be also checked that the employees should follow their rules properly. 

7. Instructions in Writing 
All the instructions should be in written form according to the best internal control system. 

8. Qualified and Competent Staff 
For the better internal control system the qualified staff is necessary. And it should also necessary that the stuff is placed at a proper place. 

9. Double System of Accounting 
For the internal control the double accounting system is very helpful. No doubt, it is an expensive system but it helps a lot for the internal control. 

10. Incentive for Honest Worker 
Honest and hardworking person must be encouraged. He should be given some reward in the shape of promotion and cash. This principle is also very effective in improving the internal control. 

11. Use of Machines 
It is also the principal of the internal control how to use the machines. He has to check either the proper machines have been installed and if it does so the work can be completed in time. 

12. Performance of Duties Record 
For the best internal control it is necessary that the performance of all the employees must be recorded. 
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13. Record of Goods and Assets 
All the companies assets and property record should be maintained properly. There should be also the security measures for the property. 

14. Surety Bonds 
To protect the company from fraud and to make the internal control more effective surety bonds can be taken from the employees. 

15. Division of Duties 
Division of duties is a part of internal control. The employees can be placed on jobs according to their abilities. The duties are assigned to which they are accountable. 

16. Rotation of Duties 
Rotation of duties is a principle of internal control. An employee must be from one seat another. It is necessary for increasing the efficiency and avoiding the chances of errors and fraud. 

17. Division of Work 
Division of work is a principle of internal control. The total amount of work is determined. It is divided among the department's branches and sections. It has become possible due to specialization and division of labour. 

18. Subsidiary Record 
Subsidiary record is a principle of internal control. The detail every account is maintained. Stock of goods may consist of many items. As a whole it is called stock account or stock control account and every group of items can be stated in subsidiary record. 

19. Confirmation From Outsiders 
The confirmation from outsiders from outsiders is a principle of internal control. The letters may be written to debtors to confirm their accounts balances. There may be positive or negative approach in collecting information from sundry debtors. 

20. Checking Physical Existence 
The auditor can check the physical existence. He can see the asset in the possession of a responsible officer. He can touch, court and check the items at business premise. 

21. Dependent Work 
Dependent work is a principle of internal control. One person cannot be allowed to do every aspects of a transaction. The work depends upon many persons. Every person is dependent upon others to perform his duties. 

22. Supervision 
Supervision is a principle of internal control. The officer, foreman or supervision has the right to look after activities of junior workers. The supervisory control is essential to make the business effective. 

23. Internal Audit 
Internal audit is a part of internal control. The management can ask expert employees to examine the accounts of the business. It helps the concern to check and frauds. The progress of the entity is disclosed through it. 

24. Fidelity Bond 

It is an agreement between the issuance of company and the employee. In case of loss the insurance company can pay compensation for loss of cash or goods. The cashier can get insurance from the insurance company. 

25. Control Accounts 
Control accounts are proposed to check the accuracy of the accounting books and other record. The total debtors accounts and total creditors accounts or sales ledger adjustments and purchase ledger adjustments accounts are prepared.

Objects of Internal Control in Detail

1. Assets Protection 
The assets are the backbone of any business. These assets are in the custody of some specific officers of the business. The internal control system checks the valuation and protect the assets of the business. 

2. Accurate Record 
The main object of the internal control is to maintain all records and transactions of the business according to the generally accepted accounting principal. 

3. Follow Policies 
The purpose of internal control is follow policies of management. The policies are guidelines for obtaining the business objectives. All employees try their best to follow the rules of the game. 

4. Prevention of Error 
The purpose of internal control is to prevent errors. There may be unintentional mistake due to overwork or carelessness. There is normal load work with every person. Others check the work of one person. 

5. Prevention of Frauds 
The purpose of internal control is to prevent fraud. It is an intentional misrepresentation of financial information by one or more individuals among management, employees or their parties. 

6. Best Use of Resources 
The purpose of internal control is the best use of resources. There is a need of optimum combination of resources for maximizing profits. Internal control can point out weakness, which can be removed. 

7. Nature of Audit Test 
The purpose of internal control is to determine nature and extent of audit test. When there is effective internal control there will be few audit test other wise there is need of through checking. 

8. Reliable Record 
The purpose of audit is to maintain reliable accounting record. The equal distribution of work among the employees provides complete and reliable record, as it is free from error and fraud. 

9. Reduces Work Load 
The purpose of internal control is the reduction of workload. The effective internal control can be useful for auditors. They can check few items and remaining items will be treated as checking by the auditor. 

10. Location of Errors 
The purpose of internal control is the location of errors. There are many types of error, which may be found in the accounting record. The internal control procedures are useful to locate the error in accounting. 

11. Detection of Fraud 
Detection of fraud is the purpose of internal control. The compliance procedure and substantive procedures can be applied to detect the fraud. Basically it is a management responsibility. 

12. Record of Business 
Internal control system is also required for the maintainers of the reliable accounting record. Due to the internal control the records are without the errors and frauds. 

13. Record of Expenditures 
Same way the internal control system keeps the records of all the expenditure of the business and there are fewer chances of errors and frauds. 

14. Recording of Transaction 
Due to the internal control system all the transactions are recorded properly in the correct account in the proper period. 

15. Actual Comparison 
The assets and the other records, which are recorded, can be easily compared with the actual existed information. 

16. Preparation of Statement 
Another object of the internal control is to ensure about the preparation of the financial statement at the proper time as the balance sheet or profit and loss. 

17. Management Objectives 
The objectives of the system of internal control are to ensure the achieving of the other important management control.

Limitations of Internal Control
1. Cost
The management thinks that cost of a control procedures must not be in excess of potential loss due to error or frauds.
2. Transactions
The internal control tends to be directed a anticipated types of transactions and not at unusual transactions.
3. Error
There is possibility of human error due to carelessness distraction, mistake of judgement or the misunderstanding of instructions.
4. Circumstances
There may be collusion with parties outside the entity employees of the entity. Due to such collusion there is possibility of circumvention of control.
5. Responsibility
There is chance that a person responsible for exercising control could abuse that responsibility, for example, a member of management overriding a control.
6. Conditions
There is possibility that procedure may become inadequate due to changes in conditional and compliance with procedure may deteriorate.



Principles of Internal Check

1. Sufficient Staff

The principle of internal check is sufficient staff. The employees can be appointed according to the workload. The management can determine the amount of work, which is distributes among the departments. The persons are hired to perform their duties. The overloading can creates trouble for management.


2. Division of Work

Division of work is a principle of internal check. The management can determine the total amount of work. The whole work is divided among departments. The heads of such department are responsible for completion of work according to timetable.


3. Co-Ordination

Coordination is a principle of internal check. All departmental managers are bound to coordinates with other in order to achieve organization objectives. When there is fault in one department, the work of other department suffers. The objectives cannot be achieved. Internal check determines the degree of coordination among the managers.


4. Rotation of Duties

Rotation of duties is a principle of internal check. The workers feel bore by doing the same work from year to year. There is a need of rotation of duties. It is in the interest of concern as well as employees. The efficiency is improved due to changes is duties.


5. Recreation Leave

The recreation leave is a principle of internal check. The employee can check recreation leave. It is necessary for mental health. He can commit fraud as the new employee in his place can disclosed teh matter. The internal check system can work in the interest of business. The weakness is of one person is disclosed due to leave.


6. Responsibility

The responsibility is a principle of internal check. The employee can enjoy recreation leave. It is necessary for mental health. He can enjoy recreation leave. It is necessary for mental health. He cannot commit fraud as the new employee in his place can disclose the matter. There internal check system can work in the interest of business. The weakness in of one person is disclosed due to leave.


7. Automatic Machines

The principles of internal check is that machines must be used to do accounting work if permissible. The machines can do a lot work without delay. The changes of fraud and error are reduced to a minimum. The working of machines improves efficiency of accounting staff.


8. Checking

The principle of internal check is to check the work of other employees. Many persons perform the work. The officers can put his signatures to verify the work done by his subordinate. In this way one work passes many hands. The changes of error and fraud are minimized due to checking and counter checking.


9. Simple

The principle of internal check is simples in working the employees can understand the working of internal check system. A person can work under the supervision of other employees. The line of authority moves from top to bottom level. All workers can understand their duties in the organization.


10. Documents Classification

The classification of documents is the principles of internal check. The business documents are prepared, collected, recorded and placed in proper files. The index is prepared to compile the data. The filing system is useful to place the latter. In case of need the documents are traced at once.


11. Dependent Work

Dependent work is a principle of internal check. The work of one employee is dependent upon others. One work passes in the hand of two or three persons till it is complete. Another person checks the passes done by one person. No person is all in all to start and complete the transactions.


12. Harmony

The principles of internal check are harmony among the employees and departments. The understanding is essential for business goals. The management is to achieve other social and national objectives. The harmony is basis for successful internal check.

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Chapter 4 - Vouching

* Vouching 

* Principles of Vouching 

* Techniques of Vouching 

* Objectives of Vouching 

* Procedures of Vouching

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Introduction

It means to test the truth of items appearing in the books of original entry. It is an important part of an auditor's duty to certify as correct the transactions recorded in the looks of accounts. The Accountant of a business is responsible for passing entries in the books of prime entry. The question arises how and on what basis such entries have been passed. The auditor's primary duty is to check these entries and only then certify the accounts as correct and free from any error or fraud.


Definition

A careful examination of all original evidence such as invoice receipt of correspondence minutes, contracts etc.

Vouching is very useful in proving the accuracy of the entries in the books of accounts. It also indicates about that transaction, which is omitted from the books of account.


Importance

Vouching is called the essence of auditing. So audit is not possible without vouching. The object of vouching is to find out the accuracy of the entries appearing in the books of accounts and detect that no entry has been omitted from the books of account. 















Principles of Vouching

1. Arranged Voucher

In the books of accounts the vouchers are based an entry. A voucher is helpful to support any transaction, which may be cash memo fill, voucher, ticket or others.


2. Checking of Date

The voucher date can also be checked; it must be related to the current year. The date of the last or future year must not be adopted.


3. Checking of Authority

The vouchers are considers correct only when the proper authority signs on them. For the approval of the dealing the owner or the management must put the signatures for the approval of dealing if the vouchers are without the signatures of the proper authority. They are not considers the true.


4. Cutting or Change

There should be no changes in the vouchers. Any person for making the fraud can change the time, date, amount and name of concern. So, these changes cannot be acceptable till the approval authority has made the signature.


5. Compare the Words and Figures

The auditor should satisfy himself amount written on the vouchers, it figures and words are same or not.


6. Transaction Must Relate to Business

For the correctness of the vouchers it is necessary that it relate with the business. Concern, the vouchers must be in the name of the business and also the manager. If it does not the vouchers are not acceptable and doubtful.


7. Case of Personal Vouchers

The auditor should not accept the voucher in personal name. There is a chance than an officer of the company has purchased any item in his personal capacity.


8. Checking of Account Head

Auditor must be satisfied about the head of account in which cash is deposited and drawn. He should examine the documentary evidence in these regards.


9. Revenue Stamps

For the stamps, the stamps act 1899 is applicable while fixing the revenue stamps. The stamps are required according to the valuation of the amount or cash memo. There is no need of vouchers if amount is less than twenty rupees.


10. Case of Cancelled Voucher

The auditor should not accept the cancelled vouchers because it has already served the purpose of payment. There will be a danger of double payments, if it is accepted.


11. Important Notes

For finding the correct decision, the auditor can also take help from the working papers of the previous year and others paper or note related to business and available with the management.


12. Minutes Book

When the meeting of shareholders is held. All the resolutions and decisions of the directors and shareholders are recorded in the minute's book. This minutes book must be examine by the auditor. He has to check that these decisions have been implemented in the books of accounts or not.


13. By Laws

In case of company the article of association and memorandum are basically the rules and regulations. But on the other hand in the societies and clubs the by laws are used to determine the powers of management. The auditor goes through these rules and regulations to find the true and fair view.


14. Agreements

The auditor must examine all the related papers of the business such as the agreement, correspondence and others. The basic information can be received to the auditor by such papers.


15. Deed of Mortgage

Some times, you are the sale or purchase of any assets, the management can enter into the agreement is prepare in this case. If the agreement is prepare in this case. If the agreement is made for a loan against the immovable property then the mortgage deed is signed. It is compulsory for the auditor to study the content of the deed.

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Techniques of Vouching

1. Correct Accounts

The auditor can check the accounts debited and credited are correct in all respects. The rules of debit and credit can be followed for dividing the transactions into accounts.


2. Agreements

The auditor must examine the agreements, correspondence and other papers relating to business activities. Such agreement provides basic information to the auditor. He can vouch the transactions based on such agreements.


3. By-Laws

The memorandum and articles of association are rules and regulations in case to company. The by-laws of societies and clubs and used to determine management power. The auditor has the right to go through these rules and regulation.


4. Mortgage Deeds

The management may enter into agreement with any party for the purpose and sale of assets. The deed or agreement is prepared. In case of loan against immoavable property mortgage deed is signed. The content of deed must be situated.


5. Minutes Book

The auditor should examine the minute's book. The resolution and decision of directors and shareholder are recorded there. He can see that such decision have been implemented in the books of accounts. 















Objectives of Vouching

1. Proper Evidence

The purpose vouching is to note that proper evidence is available for every entry. The signatures, initials and rubber stamp are evidence that document has been authorized and checked.


2. Proper Authority

The purpose of vouching is to note that there is proper authority behind every transaction. In the absence of any signature of manager the transaction are not acceptable at all.


3. Right Period

The purpose of vouching is to check that date of the vouchers relate to accounting period. The adjustments in books are made on the basis of current year record of transactions.


4. Correct Amount

The purpose of vouching is to check that correct amounts have been recorded in the entry. The vouching is useful to record only correct amounts in the books of accounts.


5. Capitals and Revenue Analysis

The purpose of vouching is to examine the analysis of transaction into capital and revenue. The expense relating to one year is treated as revenue other wise it is called capital.


6. Purchase for Business

The purpose of vouching is to check that purchase relate to the nature of business. The private purchase cannot be recorded as business due to vouching.


7. Arithmetical Accuracy

The purpose of vouching is to see the arithmetical accuracy of books of accounts. The auditor to confirm that books are accurate can check the total subtotals, casting and posting.


8. Postings

The postings of total from journal to the ledger can be voucher by the auditor. He can see through vouchers that posting are complete and correct.


9. No Error

The purpose of total vouching is to check that there are no errors in the books of accounts. The errors are the result of carelessness or over work. But audit staff is not over loaded so they can locate error.


10. No Fraud

The purpose of vouching is to examine that no fraudulent payments are made. The fraud can be committed due to matching of minds of employees and customer. The auditor can vouch the entries top disclosed such frauds.


11. Castings

The purpose of vouching is to check castings or loads. The auditor can calculate all total by himself. He can compare the totals with books to maintain accuracy.


12. Cast at Bank

The purpose of vouching is to determine true cash at bank. He can vouch receipt and payments. The result is that he can check whether cashbook is correct or not.


13. Cash Balance

The purpose of vouching is to check that cash in hand figures are facts. The cash can be counted. He can compare it with cashbook. He can apply test checking to determine accuracy.


14. Reporting

The purpose of vouching is to form an opinion for the purpose of reporting. In case of true and fair view there is good report. In the absence of such result there may be qualified report. 












Procedures of Vouching

1. Reading Out

The vouching is a task of the auditor. The junior audit can read out the contents of the vouchers. He can inform the senior auditor about the data name of organization, number of voucher and amount of vouchers.


2. Comparison

The senior can head the contents called out by junior auditor. He tally each and every item stated in the voucher with entries in the books of accounts. Thus comparison is a part of vouching procedure.


3. Ticking

The senior auditor can use various ticks or symbols to clear the items checked. The ticks may be an abbreviation of words. Such ticks or symbols may differ from auditor to auditor because these are code words.


4. Stamping

The senior auditor instead of signature or initials he can use stamps for checking the vouchers can use the rubber stamps. The rubber stamp may have the wording checking and cancelled on it.


5. Signatures

The senior auditor can vouch the entries with the help of vouchers. He can put his signature or initials on every voucher for safety measures. The signed vouchers cannot be presented again for another entry.


6. Query

The voucher may be missing. The entries may be doubtful due to over writing and erasing. The audit staff can make the word "Q" against such entry. This entry is recorded in working papers.


7. Management

The audit staff can be giving sometime to the management for clearing the objections. The doubtful entries are handed over in written form. The management can examine the record in detail.


8. Reply

The management may reply after one or two days about the doubtful entries. The auditor can examine the reply of the managers. The auditor can judge whether the reply is right or wrong.


9. Clearance

The audit staff can clear the query for which proper answer is made available. The auditor may not be satisfied with the answer of objections. He can inform the management about this query.


10. No Satisfactory

The auditor may reject the unsatisfactory reply. He has skill, training and experience. He can use all available means to test the truth. He can note down poor clarification in working papers.


11. Objections

The objection stated in the working papers can be discussed with the management at the end of audit. He can form an opinion on the basis of such objections. He can submit his report either clear or qualified.

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Chapter 5 - Auditor's Liabilities

* Liabilities of an Auditor 


Liabilities of an Auditor
(A) Civil Liabilities

Civil liabilities arise when there are dispute between two parties for a loss caused to one due to the act of another. In this case, the auditor is called upon to pay damages as decided by the court. These may be of the following types


1. Liability of Negligence

Negligence means acting carelessly or failing to perform a duty enjoyed upon a person. An auditor is expected to perform his duties as an agent of the shareholders by exercising care and diligence in the implementation of statutory requirements for the maintenance and presentation of the financial statement. Auditor must be kept himself up to date with the information if he commits some negligence the purpose of audit is failed.


2. Liability of Liable

In the report the auditor may criticize any person. If it is based on the fact there is no liability of the auditor. On the other hand the auditor is liable in order to avoid this liability the auditor should take care that the report is based on facts and is prepare with good intention.


3. Liability of the Third Party

The auditor is expert in finding out the errors and frauds and is aware how to check the books of accounts. Many third parties as the shareholders, investors, tax authorities, creditors and government rely upon his reports. So if he makes any type of error or fraud, he is liable to pay the damages.


4. Misstatement in Prospectus

According to section 59 The civil liability of an auditor arises due to misstatement in prospectus. Where a prospectus invites person to subscribe for shares or debentures of a company, the auditor shall be liable to pay compensation to every person who subscribe for a purchase any shares or debentures on the faith of the prospectus for any loss or damage be may reason of any untrue statements.


5. Breach of Contract

If the auditor fails to fulfill the term of the contract the civil liability arises of an audited. In case if he omits the all or some conditions of contract, if he cannot make the secrecy, if fails to provide the true and fair view to the owner, he is liable to pay to the owner if sustain any finacial loss.


(B) Criminal Liabilities

Since for certain purpose of the companies Act, and auditor is deemed to be an officer of the company, he is a liable for such. Act of omission or commission constituting offence under the Act.


6. Misstatement in Prospectus (Sec-63)

Here a prospectus containing any untrue or misstatement is issued with the consent of auditor who shall be punished the with imprisonment which may extend up to two years or with fine which may extend up to Rs. 5,000/- or both.


7. Requirements of Reports (Sec-225)

Here the auditor does not confirm to the requirement of reports as per sec-229 he shall be punished with fine, which may extend up to Rs. 1,000.


8. Assistant to Investigate (Sec-240).

Auditor has statutory duty to assist any investigator appointed by the central Government in collecting any information of the company otherwise he shall be punished with imprisonment which may extend up to six month or with a fine up to Rs. 2,000/- or both for continuous default Rs. 200/- per day may also be charged.


9. Assistance to Prospectus (Sec-242)

On the basis of report of an inspector control Government may prosecute any officer. Auditor is to assist in such prosecution otherwise he is to be punished for contempt of court.


10. Return Books, Papers Property etc. (Sec-477)

At the time of winding up of a company, court may ask the auditor to return any property books or papers of the company otherwise he can be arrested.


11. Public Examination (Sec-478)

On the report of official liquidation, the audition of the companies to the publicly examined. Notes of such examination shall be used as evidence in any civil or criminal proceeding against the auditor.

12. Falsification of Books of Accounts (Sec-539)

Where the auditor is guilty of destruction, multilation, alteration, falsification of any books papers securities, he shall be imprisoned which may extend up to 7 years and shall also be liable to fine.


13. Prosecution of Auditor (Sec-545)

Where auditor is found be guilty of any criminal offence by the liquidator of the company, he shall be prosecuted.


14. False Statement In Any Return

Where the auditor makes any false statements in any material respect in any return report, certification, balance sheet etc, he shall be imprisoned which may extend up to 2 year and shall also be liable to fine.


15. Disqualified Auditor (Sec-254(6))

The company ordinance has clearly stated the persons who are not qualified as auditor, but if an unqualified auditor may act as auditor of the company. He is liable to fine up to Rs. 5,000/- rupees.


16. Non-Compliance (Sec-260)

In case when the auditor makes any report or signed against the legal requirement and the report may be not true the auditor is liable to fine for Rupees 2,000/- if it is willful fault.


17. Auditor Report

If the auditor make the report with the extent to profit himself and the third party for any loss for a material consideration it is a criminal liablity. He may be punished for six months and fine upto 2,000/- rupees.


18. Assist Inspector (Sec-268)

The auditor has to give all the necessary assistance in connection with investigation to the inspector. Some times the auditor may fail to give it. In this case he shall be punishable up to one year and fixed up to ten thousand rupees.


19. Auditor Account (Sec-384(4))

The auditor is liable to submit his report after or within he two months at the end of the period to which account relates. If he fails there is a fine up to rupees 5,000/-


20. False Evidence (Sec-419)

If any person provides false evidence he is punishable up to two years and liable for fine also. The evidence may be affidavit oath or some affirmation etc.


21. Winding (Sec-420)

The criminal liability of company officers including auditor may be composed may year before or during liquidation of company of criminal offences like concealing or removing property, concealing or falsifying document and papers. The liquidation can go to the court of law for proving the breach of duty.


22. False Statement (Sec-492)

Whoever makes a statement false or incorrect or omits any material fact shall be punishable with imprisonment for a term, which may extend to three year and shall be liable to a fine not exceeding twenty thousand rupees.


23. Pakistan Penal Code (Sec-197)

Whoever makes a statement false or incorrect or omits any material fact shall be punishable with imprisonment for a term, which may extend to three year and shall be liable to a fine not exceeding twenty thousand rupees.


24. Professional Misconduct

If the auditor fails to follow the rules of their own profession he is liable for the criminal liability. For this default the council can with draw the certificate of practice. The council can also go to the court of law for prosecuting the concerned auditor. The auditor can suffer the jail or fine or both.


(C) Other Liabilities

25. Honorary Audit

The auditor on the honorary basis may also accept an audit work. After the completion of the audit work he is bound to submit his report.


26. Joint Audit

When the two auditors carried out the work of audit it is called as the joint audit. It is possible by the two independent auditors under the agreement. Sometimes, a business concern may have two or more than two business places in different cities or countries conduct the audit by one auditor. So this audit is conduct the responsibilities lies on the head of every auditor who had done the work of audit. It is also stated in the audit report.

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Chapter 6 - Audit Working & Audit Note Book * Definition of Audit Note Book * Advantages of Audit Note Book * Definition of Test Checking * Essentials of Test Checking * Advantages of Test Checking * Disadvantages of Test Checking * Routine Checking * Essentials of Routine Checking * Advantages of Routine Checking * Disadvantages of Routine Checking

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Definition 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.


Importance

Justice William throws light on the importance of audit notebook in the following words,


The audit notebook that contained detailed information proved to be very helpful to the auditor in every critical moment.

For preparing the audit report it is very useful for that auditor.

In case of negligence charge against the auditor, but note book good evidence can be presented. It may be also used for future guidance and reference. It also enables to auditor to know that what work his assistant at each audit has done. 










Advantages of Audit Note Book

1. Audit Report

The audit notebook is helpful to prepare 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 value can be examined through audit work. When a person completes his work in time. Time period auditor can appreciate him. If there is pending work after the expiry of time period, he can be held responsible for it. The audit staff must be honest in his work.


3. Helpful For Memory

The audit notebook is help to keep things fresh in memory. The auditor can read the book on daily basis. He can note the weakness on fingertips. The auditor can retain the data in his memory for a longer period of time. He can ask the management to clear the doubtful points before preparing audit report.


4. Reference

The audit notebook is useful for reference. In future it can provide information to the audit staff. The past data gives an insight into business matters. The auditor can note the changes. He can form an opinion about the changes in the nature and size of the business.


5. New Auditor

The audit notebook is useful for new auditor. They can see the weakness of previous years. The old weak points may not be repeated this year.


6. Court Cases

The audit notebook is helpful to defend an auditor in court cases. The people can go to court of law in order to fix liability for negligence of duty. The audit notebook is a written proof of work performed by an auditor

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Definition of Test Checking

According to Professor Meigs, 
"Test Checking means to select or examine a representative sample from a large number of similar items." 
It is clear that test checking is sample checking. The whole data must cannot be examined. The audit staffs can statistical technique to check the facts and figures. A certain percentage of transaction can be selected for through examination. The remaining transactions are supposed as checked.

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Essentials of Test Checking

1. Sample 
The sample items selected from whole data must be representative. The selection can be made by any method. The entire data must be presented in the form of sample. 

2. Last Month 
The last month of the accounting year is most important. The items appearing in the last month must be given maximum importance at the time of selecting the sample. 

3. First Month 
The first month of accounting year provides essentials information. The transactions recorded in the first month must be assigned high weight age in order to select the sample. 

4. Surprise Testing 
The auditors include the element of surprise in selection of test. The accounting staff must be unaware of test checking so that he should not make arrangement for test checking. 

5. Checking Method 
The auditor can change his method of selecting the sample. At one time he can one use alternate method. The selection method must be charged in time to time. 

6. Every Type of Transaction 
The auditor must select every type of transaction in test checking. There is a need to include each type of dealing in the sample. 

7. Every Employee 
The auditor can select the work of every employee. The test checking can be used to examine the work of all employees in the organization. 

8. Through Out The Year 
The test checking can be applied to all items appearing in the books through out the year. The recurring items are most suitable for test checking. 

9. Cash Book 
The cash book entries must not be used for test checking. There is a need of cent percent checking of all cash items appearing in cashbook. The control over cash is essential for efficient business working.

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Advantages of Test Checking

1. Time Saving 
The benefit of test checking is available in the shape of time saving. A simple of items is checked and remaining items are treated as checked. In this way there is saving in time. 

2. Less Labour 
The test checking is useful for saving in labour. A lot of work requires many clerks for completing the audit. But test checking is used to test few items so there is less labour work. 

3. Accurate Books 
The test checking is useful to note the accuracy of accounting books and other record. There is a demand of error free books. The test checking is a step in the right direction to prove accuracy. 

4. Staff Efficiency 
The efficiency of accounting staff improves due to test checking. The weakness of employee is reported to management. The employees try to improve their work by overcoming their deficiencies. 

5. Timely Report 
The benefit of test checking is that timely report can be submitted to the management. The large number of figures can be checked in short period of time so there is no delay. 

6. Many Audits 
Test Checking is useful to complete many audits in one year. It saves sufficient time, which can be used to check the books of new clients. The auditor is able to raise more income. 

7. Special Attention 
The auditor can pay special attention to important matters. Test Checking reduces the labour work on the part of audit staff. There is sufficient time period to settle the important matters.

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Disadvantages of Test Checking

1. Errors 
The demerit of test checking is that errors are not disclosed by it. In the presence of error true and fair view is not possible. No doubt the location of errors is the duty of management but it effects the audit work. 

2. Frauds 
The demerit of test checking is that planned frauds may not be disclosed. The fraud discovers is the responsibility of management. The audited accounts cannot show true and fair view when fraud exists in books. 

3. Responsibility 
The demerit of test checking is that auditor cannot shift his responsibility of management. The errors of fraud can be discovered through cent percent checking. So auditor is responsible for test checking. 

4. Report 
The auditor report may fail to disclose true and fair view of business matters. After test the auditor signs checking the auditor report. The auditor is responsible for audit report based on test checking

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Routine Checking

The auditors check the arithmetic accuracy of journals and ledgers. It is called routine checking. The purpose is detected the error and fraud of simples nature. The audit staff can check the balance appearing in journal and ledgers. The sub-total and total are examined. The differences are calculated. These balance are transfered from one page to another. The amounts carries forward should be the same. The checking is useful for determine the accuracy of the books of accounts. The accounting staff cannot chance the figures after routine checking. The ledger posting is also tested by means of routine checking. The errors may be locked and frauds may be disclosed by it. The auditor is able to give his opinion about the fairness of the financial statements. The auditor can fix the responsibility of the accounting staff for negligence of duty

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Essentials of Routine Checking

1. Sub-Cast 
Sub-Cast is a part of routine checking. Sub-total is possible in accounts matters. The sub-cast must be correct. 

2. Casts 
Cast is part of routing checking. Total in journal and ledger accounts should be examined for accurate results. 

3. Carry Forward 
Carry forward is a part of routing checking. The balance of one page can be transfered to the next page. 

4. Posting 
Posting is a part of routing checking. The entries are posted in to the ledger accounts. Posting must be properly examined. 

5. Balancing 
Balancing is a part of routing checking. Taking the difference of debit and credit in the accounts is called balancing. 

6. Carry Down 
The amounts in an account can be transferred to next page. The carry down is a part of routing checking. 

7. Transfer 
Transfer is part of routing checking. The amount is one accounts can be transferred to another account

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Advantages of Routine Checking

1. Accuracy

The benefit of routine checking is that there is accuracy of accounting books and records. The sub-total, casts and carry forward posting, balancing and transfer are stated as correct.


2. Frauds

Routine checking is useful to checking fraud in the books of accounts. The responsibility lies on the head of management for location of fraud. The management can use this tool to meet its duty.


3. Positive Verification

Routine checking helps to verify positive made in the ledger. The correct posting can provide true and fair view of financial statements. The management can verify posting through it.


4. No Change in Figures

Routine checking is useful to eliminate the alternation of figures. The management can meet its obligation with the help of routine checking. The employees cannot alter figures.


5. Final Checking

The benefit of routine checking is that final checking work is reduced. The final checking become early as major work has already been completed through routine checking. 









Disadvantages of Routine Checking

1. No Care

The work of routine checking is given to junior employee. They do not consider it as important matter. Therefore the expected result cannot be produced for audit purpose.


2. Fraud

The demerit of routine checking is that planned frauds are not disclosed. The responsibility of fraud lies on head of management. The audited accounts may fail to provide true and fair view.


3. Error

The demerit of routine checking is that errors of principle are not disclosed. The responsibility or error can be placed on the head of management. The audited accounts may fail to provide true and fair view.


4. Monotony

The work is routine checking is boring and time consuming. The clerks go on checking the totals and sub-totals and balances. It does not improve the performance of employee rather it bring monotary.

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Chapter 7 - Verification

* Verification 

* Advantages of Verification 

* Objects of Verification 

* Techniques of Verification 



Verification

It means to prove the fact and confirmation about the both sides of the balance sheet as the assets and liabilities. The auditor not only checks the accuracy of the accounts in the arithmetic way but also check the existence of the actual items and their actual possession.

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Advantages of Verification

1. Use of Assets 
The merit of the verification is to check that management had used the assets of the business properly. Through verification the auditor can find out if the management has misused the assets. By the verification the efficiency of the business is improve because it is used properly for the business purpose only. 

2. True and Fair View 
By the verification the auditor can show the facts of the business. For the report the auditor has to depend upon the verification technique as well as on the other techniques. 

3. Protection of Lenders 
For the lender also it is beneficial, because the auditor has to check the ownership, existence and the possession and valuation of the business assets. So the tender can rely upon this report. 

4. Risk for Creditors 
As the auditor accounts provide the true and fair view about the affair of business so it is also the protection for the creditors. The creditors are those who provide the goods and services to the business. And for them the risk of loss is eliminated. 

5. Location of Assets 
Through the verification the correct view about the assets of the business can be find out. The auditor can visit the assets personally. He can cheek that the assets are not stolen or destroyed. So the auditor beings the fair view about the assets. 

6. Performance of Management 
The verification is also very useful for the owners, because by the verification the auditor can check the performance of the management. So the management can improve the efficiency of his work. 

7. Loan Arranged 
The verification is also helpful for the protection of the life of the business. Through verification the assets are physically examined and these assets are used to take the loan from the financial institution, which save the life of the business. 

8. Manipulation of Accounts 
The verification is also very useful to check that there is no manipulation of accounts and the figure are not altered. It is the moral check on the management, which shows the true position of the business. 

9. Embezzlement 
The merit of the verification is also that there is no embezzlement. The management cannot misuse the stocks or cash or any other asset and cannot use them for their personal use. So, the fair view of the statement can disclose. 

10. Recording of Assets 
The assets are recorded in a proper way and manners. For the writing of all the information of the sale, purchase and depreciation and other records. The GAAP (general accounting accepted principals) are used. The auditor has to check that the rules are followed. 

11. Valuation of Assets 
The verification is also helpful for the valuation of the assets properly. The assets may be fixed or floating. So the valuations of these are also made in different ways. The auditor can check the valuation of the assets through the accounting principals. 

12. Stability of Business 
Another benefit of the verification is that it is also helpful in the disclosure of the true position of the assets and liabilities. In the balance sheet the fictitious assets and liabilities are usually recorded. The business is considered stable when the real assets are in excess over the real liabilities. On the other hand it is not stable. So the verification discloses the facts. 

13. Liabilities Valuation 
The verification is also helpful for the owner by the verification they can come to know about the business. Which must be valued under the accounting rules. 

14. Proper Disclosure 
It is also useful for the public. The true valuation and the position of the assets and liabilities are disclosed and the public can come to know the proper position of the business. 

15. Business Resources 
There are many powers, which have a vital role in the running of the business as the man, machine material and also money. In fact it is the deriving forces of the business. So, the reasonable rate of return puts on them. In this way also the verification is helpful to determine the true value of profit.

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Objects of Verification

The object of verification of assets is the satisfaction by the auditor as to its existence, proper disclosure, proper valuation and correct ownership on the balance sheet. The following are the main objects of the verification. 

1. Certify the Ownership 
The object of verification is to certify the ownership. The document deeds, vouchers and agreements etc can obtain the real ownership. 

2. Position of Assets 
The audit by the verification of the assets in the business the assets may be mortgaged or pledged for borrowing money. The auditor has to check that the same has been written in the balance sheet in the proper way. 

3. Existence of Assets 
The object of the verification is to ascertain the existence of the assets. The existence of assets is stated in the proper but there may be the assets be sold, stolen or destroyed. In this case the auditor has to check the assets physically. 

4. Detect Fraud 
Another purpose of verification is to find out the frauds if conducted. In come cases the assets may be stole or misused. The auditor can verify the real position of assets. The responsibilities of fraud are to be the management. 

5. Verify Possesssion 
The purpose of verification is to check the possession of the assets. The assets should be safeguarded the assets of the business is used for the business only. The possessions of the assets are in the management. 

6. True and Fair View 
Another object of the verification is to determine the true and fair view about the business financial statements. After the verification it is confirmed that the financial statements are according to the requirements and is fact. 

7. Depreciation Plans 
Another purpose of the verification is the examination of the depreciation of assets of the business. The auditor has to check that the proper state the depreciation is charge on the assets according to the accounting principal. As the life of each assets is different, so the depreciation is charged as per rule. 

8. Valuation of Assets 
The object of the verification is also to check the assets valuation. Which does the management value. The auditor has to fine that the valuation is true and according to the accounting principal. 

9. Valuation of Liabilities 
The management determines the valuations of the liability. The object of verification is to check that the valuation is the true and according to the accounting principals. 

10. Evaluation Methods 
The object of the verification is to the check the methods of evaluation. To evaluate the recorded items the compliance and substantive test are applied. According to the business requirements the auditor can rely upon anyone method from above. 

11. Recording Methods 
The object of the verification is to determine the method of recording of the both sides of the balance sheet as the assets and liabilities. The auditor has check that all types of assets recorded separately and the depreciation is deducted and the value of asset is charged according to the rule. 

12. Internal Control 
To evaluate the internal control is also the object of the verification. The business management is efficient if the internal control is effective. And if the internal control is not effective the assets cannot be used properly. 

13. Arithmetic Accuracy 
Another object of the verification is to note down the arithmetical accuracy of the balance sheet. All the recording of the transactions, their posting of totals, sub-totals, addition and depreciation must required the calculation. The auditor has to require the accuracy of the figure work. 

14. Treatment of Items 
The object of the verification is to check that the different items have been treated correctly as the treatment of the taxes and discount etc. 

15. Current Period 
The object of verification is to check that the transactions of the business are related to the current year for which the audit work is being done.

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Techniques of Verification

In the process verification following techniques are used 

1. Physical Existence of Assets 
Verification techniques of an asset are to check the physical existence of the asset. The auditor can count, measure and also the inspect of the various assets. 

2. Proper Disclosure 
It is also the techniques of the verification that the auditor has satisfied himself that the management has disclosed all the assets and the liabilities as required by law. 

3. Ownership of Assets 
Another technique of the verification is to determine the ownership of business. The assets must be held in the name of the business. 

4. Assets in Possession 
In the technique of the verification the auditor has to check the possession of the assets, which are in the custody of the management. It is in the possession of the cashier and the stock in trade is in the fold of the store officer. The auditor has to check the custody of different employees. 

5. Proper Valuation of Assets 
The technique is also to check the valuation of an asset. The assets may be fixed or circulating. The auditor can check the valuation of assets, which are determined by the management. In this case the arithmetical accuracy can be examined. 

6. Valuation of Liabilities 
Auditors should also satisfy themselves about the liabilities that these are properly valued, which are shown on the balance sheet, overstated or understated liabilities do not give a true picture about the financial position. 

7. Correct Valuation 
Auditor should pay special attention to this point, because profit and loss account also depends upon the accuracy of valuation of assets and liabilities. Valuation main object is that balance sheet should show a true and correct view about the financial position of a client firm. 

8. Purchase By Proper Authority 
Another technique of the verification is that The Auditor satisfied himself that there is a proper authorization for any acquisition or disposal or any other form of movement for the assets and liabilities which is stated in the articles and memorandum of association. 

9. Business Motive 
Keeping in mind the business motive, the auditor has to be satisfied himself that all the assets, which are purchased are for the business motive only and not for the use of personal requirements. 

10. Charge Free 
The technique of verification is the examination of charge on assets. In case of lend the loan the assets are transfered in the name of the lender the auditor has to check that the assets are free.

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Chapter 8 - Divisible Profit

* Divisible Profit 

* Concept of Profit 

* Principles of Divisible Profit 

* Importance of Correct Profit 

* Secret Reserves 

* How Secret Reserves is Created 

* Advantages of Secret Reserves

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Introduction of Divisible Profit

Those profits are term as the divisible profit, which is legally distributed to the shareholders of a company as dividend.


Factors of Divisible Profit

The following are the main factors, which influence the divisible profit.


1. Capital Profit

The divisible profit ca be paid, if there is some capital profit or gain.


2. Capital Loss

If some part of the capital is lost or there is capital loss the dividend can be paid out of the current profits without making any provisions for any capital loss.


3. Depreciation

The depreciation is charged before the distribution of the divisible profit


4. Transfers of Reserves

Under company ordinance 1984,

Before declaring dividends the directors have powers to make such reserves as they may think proper. 












Concept of Profit

Like the term "value" in economics accountants have used the word. "Profit" for many years without assigning a definite meaning to it. This state affairs has given rise to much informed criticism of accountants and their work added to this is the difficulty caused by the divergence that exists in the concept of the profit between the economist and an accountant for the purpose of settlement of claims of parties to their shares in the profit of a business. 










Principles of Divisible Profit

1. Articles of Association

The articles of associations are the rules of the company for managing the business activities. The articles prescribe the rules for divisible profit. The directors are entitled to distribute the profits under the rules. The cannot exceed the prescribed limits.


2. Companies Ordinance

The companies ordinance 1984 states the rules and regulation for distribution of the profits to the shareholders. The dividend can be paid out of revenue profit. The directors must follow the rules of companies for distributing profits. They cannot violate the law.


3. Accountancy Principle

The accountancy principles must be followed for calculating the divisible profits. The going concern, consistency, conservation matching concepts is applied. These principles must be applied other wise the reliable result cannot be expected from the accounting books and records.


4. Legal Decision

The legal decision must be kept in mind which calculating the divisible profits. The court cases relating to auditing must be followed if applicable to the conditions of business. The auditor must know the decision announced by the courts from time to time.


5. Capital Maintenance

The principles of capital maintenance must be applied. The capital cannot be used to pay dividend. The revenue profits can be utilized for payments of dividend. The capital account must remain intact. It is illegal it the directors pay dividend out of capital during any year.


6. Shareholders Approval

The divisible profits can be used to pay as dividend after approval of shareholders. The annual general meeting is called and the shareholders approve rate recommended by directors. The rate of dividend proposed cannot be increased at all.


7. Capital Profit

The capital profit can be used to pay dividend under certain conditions. The capital profit should be realized. All the assets should be revalued and even then there is surplus. The articles of association allow the distribution of capital profit as dividend. The depreciation on the revalued assets has been recorded in the books of accounts.


8. Directors Proposal

The directors have the right to propose the rate of dividend under certain conditions. The capital profit should be realized. All the assets should be revalued and even then there is surplus. The articles of association allow the distribution of capital profit as dividend. The depreciation on the revalued assets has been recorded in the books of accounts.


9. Capital Loss

The dividend can be paid out of revenue profits even there is capital loss. There is no need to adjust old capital loss before payment of dividends. The current year revenue profit can used to pay dividend. The capital profit must be used to eliminate capital loss finest and then surplus can be used to pay dividend.


10. Depreciation

The dividend can be paid out revenue profits. The depreciation on fixed assets must be charge to profit and loss before declaring revenue profits. In case of manufacturing company it is compulsory to charge depreciation before declaration of profit or dividend.


11. Past Losses

The company may sustain a loss in one year. It can earn profit in the next year. The company may adjust loss of previous year. The remaining profit of current year can be pay dividends. In 1918, Ammonia Soda Co. V Chamberlain case the court decided that under the articles of association the directors can pay dividend out of current year profit with out adjustment past losses.


12. Transfer to Reserve

The dividend can be paid of revenue profit remaining after transfer to reserves. The articles of association empower the directors to create at a certain rate. In case of banks and financial institutions it is obligatory to set up statutory reserves.


13. Secret Reserves

Management creates the secret reserves by various techniques. The financial institutions need such reserves to develop the confidence of customers and owners. The reserves can be created and used to pay dividend if allowed under the articles. The misuse of such reserves must not be allowed.


14. Undistributed Profit

The directors for declaring dividend can use undistributed profit or profit and loss appropriation balance. It is revenue of the previous years. It is a right of the directors to used such profit for payment of dividend at the end of the year.


15. Profit Prior to Incorporation

The profit prior to incorporation is a capital profit. It cannot be used for payment of dividend. It is a profit earned before the registration of the company. It can be used to write off capital loss or issue of bonus share by the company management.


16. Asset Revaluation

The management can revalue the assets. The surplus on revaluation of assets can be started on liability side of balance sheet. It can be used after realization. The assets may be sold and profit may be realized.


17. Solvency of Company

The solvency of the business is very important than payment of dividend. The management must determine cash needs of the company. If cash is surplus than business requirements then dividend then can be paid is cash. In cash of storage of funds dividend should not be paid in cash.


18. Creditors Protection

It is a principle of divisible profits that dividend must be paid out of revenue profits. The correct calculation is essential for all who depend upon business. The overstatement can disturb one section of investors while understatement can upset another group

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Importance of Correct Profit

1. True Disclosure

The accounting principle requires true disclosure of profit. The purpose of audit is also same. The auditor can form and opinion of the financial statement when true disclosure is there. The true disclosure may lead to show correct profits.


2. Consistency

The importance of correct profit is felt to settle the dispute among various sections of society. The owners need high profits. The debentures holders demand low profits. The principle of consistency can solve the problem by declaring true and correct profit instead of high or low profits for the year.


3. Follow Law

The calculation of correct profit is essential for the business. The calculation of profit depends upon law. When the law is followed there is true profit available for the shareholders. The memorandum, articles of association and companies ordinance must be followed to arrive at correct profit.


4. Protect Creditors

The calculation of true profit is necessary for protection of creditors. The true profit does not reduce the value of assets. The creditors can collect their amount of loan and interest in goods and services.


5. Correct Valuation

The fair value of assets and liabilities is recorded. The correct valuation is desirable for other parties who want to buy such business. The admission of new partner is possible. The amalgamation and merger can take place on the basis of correct valuation of business concern.


6. Stable Share Prices

The benefit of correct profit is available in the shape of stable prices. The investigators in shares can depend on the policies of the company. The management can attract large funds for expansion of business activities. The auditors must try to calculate true profit every year.


7. Manager Remuneration

The benefit of correct profit is available in the shape of true remuneration of management. The manager's commission may be based on profits. The correct profit can pay correct commission to the managers. They can review their progress through their remuneration received.


8. No Undue Favour

The correct profit is useful for all sections of society. There is conflicting interest of shareholders manager, creditors, lenders, investigators and debenture holders. The correct profit favours all parties according to their interest in business.


9. No Dividend Out of Anticipated Profit

The anticipated profit cannot be used for dividends. The profit means profit realized. The unrealized profits are excluded for calculation of correct profit. The shareholders can be allowed dividends out of true realized profits only.











Secret Reserves

A secret reserve is a reserve that is created but not started in the balance sheet. There are various ways secret reserves. The banks, insurance companies and other financial institutions want to win public confidence for their successful working. These business concerns can create secret reserves. It is a technique to show poor financial position to rivals and in case of need such reserves are available to meet crisis. There are merits and demerits of such reserves. The auditor can examine the existence of such a situation. The amount may not be high. The director's intention may be good. The auditor may not disclose such reserves in the audit report. When the amount is high and directors misuse such reserves the auditor must inform the shareholders through his report. 













How Secret Reserves is Created

1. Under Valuation of Fixed Assets

The management can create secret reserves by under valuation of fixed assets. In fact the value of fixed assets is much higher but it started at less value. The reserves of the same amount are created. There reserves do not appear in balance sheet.


2. Eliminating Fixed Assets

The management may decide to eliminate any fixed asset. In preparing balance sheet such assets are not stated. The value fixed assets can be used to create secret reserve of the same amount. As the reserves are secret there is no need to show it.


3. Under Valuation of Current Assets

The current assets may be recorded in balance sheet at less value. In this way under valuation of current assets helps the management to conceal profits and reserves from liabilities. The management can be such reserves in times of financial needs.


4. Excess Provision For Bad Debts

The excess provision for bad debts means decrease in the value of debtors below the real value. Stating excess provision for bad and doubtful debts creates the secret reserves. It is only possible when management is selling goods on credit.


5. Charging Capital Expenditure to Revenue

The management can play trick for creating secret reserves. The capital expenditure can be treated as revenue. The profits will be understated. The secret reserves are created to meet the demand of the business management.


6. Overstating Liabilities

The management can over state the value of any liability. This action leads to creation of secret reserves. The profit and reserves are reduced by equal amount.


7. Grouping Dissimilar Items

The different items appearing on liability side may be grouped. The creditors, reserves and provisions may be stated under the heading Sunday creditors and other credit balance.


8. Contingent Liabilities

The management can show contingent liability as actual liability in order to create secret reserves. In fact contingent liability is stated as footnote. But its inclusion in balance sheet met the objective of the management.


9. Including Fictitious Liabilities

The management can show fictitious liabilities as actual liabilities. In this way the reserves and profits can be eliminated for the same amount. The secret reserves are creating in order to obtain certain objectives.


10. Showing Good Will At Nominal Value

The goods will have high value. It may state at nominal value. The secret reserve is created equal to the difference between actual value and nominal value. The directors can create secret in order to meet business objectives.

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Advantages of Secret Reserves

1. Increase Working Capital

The purpose of creating secret reserves may be increasing working capital. The shortage of working capital may be lead to failure of business. But use of secret reserves help to improve the financial strength in order to make the business successful.


2. Dividend Equalization

It is a benefit of secret reserve that dividend can be paid at equal rate. When there is sufficient profit there is no need to use secret reserve. In case of low profit or loss the secret reserves can be used to pay dividend. Thus fluctuating profit cannot affect dividend rate.


3. Face Competition

The benefit of secret reserves is available to the management. It can face competition in the market. In order to eliminate or shrink the size other business concern it can become loss leader. The use of secret reserves is helpful to remain in market for long period.


4. Keep Rivals Away

The benefit of secret reserves is that management can keep rival away. The financial position does not look attractive. The new entrants are discouraged. They decide not to enter the field.


5. Meet Financial Exists

The benefit of secret reserves is that management can meet financial crisis in case of emergency. The loan facility may not be available but such reserves are useful for meeting crisis.


6. Win Public Confidence

The management is in a position to win the public confidence. The equal rate of dividend provides confidence to the shareholders. The general public is happy over the reserves.


7. Low Profit Years

The management can use secret reserves in low profit years. Due to poor business activities there may be no profit. Such reserves helps the management to follow the same policies of dividend.

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Chapter 9 - Audit Standards

* Audit Standards 

* International Auditing Standards 

* Principles of Auditing 

* Auditing Standards and Auditing Procedures 

* Audit Techniques 

* Functions of Audit

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Audit Standards

A standard is quality of work, which can be used to measure the performance of auditors. The audit staff can follow the stated principle and practice in the conduct of an audit. The business world is ever changing. In order to meet the business needs the professional accountants are busy in improving the rule of business audit. The audit standard applied in the early period is not acceptable at present. The introduction of computer in accounting separation of management from ownership, the establishment of big companies has increased the responsibilities of auditors. The association of professional accountants has framed rules for the guidance of their members. The International Federation of Accountants issues international auditing guidelines. The Chartered Accountants have also framed rules at national level. Anyhow with the passage of time further improvements will be made to meet the new challenges of auditing work.

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International Auditing Standards (ISA)

1. Objectives and Scope of the Audit of Financial Statement 
This standard state that objective of audit is to express an opinion. The management is responsible is responsible for preparing financial statement. The scope of audit is determined by an audit in according with the requirements of legislation regulation or relevant professional bodies. 

2. Audit Engagement Letters 
This standard relates to audit engagement letter, which is written by an auditor to his client for acceptance of the appointment. This letter confirms the objectives and scope of audit. This standard also states the possible contents of audit engagement letter. An example of audit engagement letter is also given at the end of it. 

3. Basic Principle Governing An Audit 
This standard describes the basic principle, which govern auditor's responsibilities. The auditor is bound to follow their principle during audit work. These principles include integrity, objectivity, independence, confidentiality skills and competence, work performed by others, documentation planning, audit evidence, accounting system and internal control, audit conclusion reporting. 

4. Planning 
This standard deals with the planning of audit work. Work auditor planning must be helpful to complete an audit work in an efficiency and timely manner. The plans should include accounting system, policies and internal control procedure, degree of reliance on internal control, the nature timing and extent of audit procedures to be performed and coordination of audit work. 

5. Using the Work of an Other Auditor 
This standard states procedures for using the work of other independent auditors with respect to the financial statements of one or more divisions, branches, subsidiaries or associated companies included in financial statements of one or more divisions, branches, subsidiaries or associated companies included in financial statements of an entity. This guideline also applies where the principle auditor report on other financial information. 

6. Studies and Evaluation of Accounting System 
The standard deals with accounting system and internal control. The management is responsible for proper accounting system and related internal control. The auditor require assurance system is reasonable and all accounting information has been recorded internal control contributes to the assurance. 

7. Control of the Qualities of Audit Work 
The high standard of audit profession requires high quality of audit work. The guideline states the individual audit and general quality control. There is relationship between these two. The general control facilitates control over individual audit. The delegation of work to assistants is stated. In order to control quality of work assistance is given to audit firm. 

8. Audit Evidence 
The audit evidence standard deals with information collected by the auditor. He can form an opinion about financial statements. The nature and sources of audit evidence are described. The methods used are stated. He can state whether it is sufficient and appropriate. 

9. Documentation 
The audit standard deals with documents. Guidance is provided about the contents and form of working papers. The example of working is also stated. The auditor can know how to prepare working papers. The ownership and custody of working paper remains with auditor. 
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10. Using the Work of Internal Auditor 
Business employees who have skill and experience conduct the internal audit work. The internal auditor can check whether internal control is proper and effective. The independent auditor can use the work of internal auditor. The procedure for assessment of internal auditor work is stated in this standard. 

11. Frauds and Error 
This standard states the definition of fraud and errors. The responsibility of fraud and error is linked with management. The plan of the auditor must be effective to trace frauds and errors. When the auditor smells fraud and errors the procedures have been suggested. The condition and events are stated when risk of fraud and error increases. 

12. Analytical Review 
This standard provides detail of the nature of analytical review procedure. The purpose, timing and extent of reliance to be placed is stated in it. The auditor can check the unusual fluctuations. 

13. Auditor's Report on Financial Statements 
The guideline deals with the form and content of auditor report relating to independent audit of financial statement of a business concern. The wording for clean and qualified opinion is suggested. The examples state the unqualified, qualified, adverse and disclaimer of opinion. 

14. Other Information in Documents 
The guideline provides guidance as to the auditor's consideration of other information on which he has no obligation to report. When an auditor has an obligation to report specially on other information, his responsibilities are determined by the nature of his engagement. The other information may be financial or non-financial. It may include report of management on operations, financial summaries employment data. Planned capital expenditure, financial ratios name of officers and directors. 

15. Auditing in an EDP Environment 
The guideline deals with the auditing through computers. The skill and competence needed by the auditor is stated. He is responsible for delegating the work to assistants. he is not free from liability where he uses the work of others. 

16. Computer Assisted Audit Techniques 
The guidelines provides information to audit for using computer assisted techniques especially software and test data. The instances are stated when such techniques are to be used. The application in small business is also possible. 

17. Related Parties 
The standard deals with audit evidence to be collected from relating parties. The transactions can take place with debtors and creditors. The auditors can guidance to see whether management has properly disclosed the related party relation ship and transactions with such parties. 

18. Using the Work of an Expert 
The guideline provides guidance to the auditor for using the work of an expert engaged by the client or auditor. The examples of cases are stated when an auditor may depend upon experts. Guidance is also providing relating to expert's skills, competence and objectivity. The way of evaluation of work of expert is stated. 

19. Audit Sampling 
The auditing guideline states the factors when an auditor can design and select and audit sample. The evaluation of audit procedures is stated. The statistical and non-statistical sampling methods are provided. The elementary guidance is provided about sampling risk, stratification selection methods and projection of errors. 

20. Date of Auditor's Report 
The guidelines states guidance on date of auditor's report. The events may occur after balance sheet date. The facts may be discovered after the issue of financial statements. The auditor can take steps to identify subsequent events. The auditor can issue revised report about the audited financial statements after their revised by management. 

21. Going Concern 
The financial statement are prepare under the accounting assumption as going concern. When such assumption does not seem good the entity is unable to realize assets at recorded costs. The guideline provides example when going concern assumption should be questioned. The collection of audit evidence, following audit procedure and reporting about going concern is stated. 

22. Materiality and Audit Risk 
The auditing guideline states the concept of materiality and risk and their relationship. The auditor can use these concepts in planning and conducting audit and evaluating the result of his procedures. The definition of materiality and audit risk is given. The components of audit risk are explained. The interrelationship is also stated. 

23. Special Purpose Reports 
The guideline state the issue of report other then issued in routing matters. The report may be issued on compulsive basis other than accepted standards, specified accounts or any item of financial statements, compliance with agreement and summarized financial statements. The examples are given at the end of it. 

24. Audit of Accounting Estimates 
The auditing guideline provides guidance to auditors on the audit procedures that should be performed in order to obtain reasonable assurance as to the appropriateness of the accounting estimates contained in financial information. An accounting estimate is an approximation of the amount of an item in the absence of a precise means of management.

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Principles of Auditing

1. Integrity 
Integrity is a principle of auditing. The auditor is straightforward, honest and sincere in his approach. He must be fair towards his work. The auditors are known for their discretion and tactfulness. The loyalty toward his work and profession must be beyond doubt. 

2. Objectivity 
Objectivity is a principle of auditing. The auditor maintains an impartial attitude. He cannot allow prejudice or bias to avoid the purpose of audit. He can protect the right of shareholders through this principle. 

3. Independence 
Independence is a principle of audit. The auditor maintains an impartial attitude. He should be an appear to be free of any interest. No doubt he receive fee from his client even then independence is essential. His personal views must not be included in his report. 

4. Confidentiality 
Confidentiality is a principle of auditing. The auditors can maintain secrecy of information acquired in the course of his work. He can not disclosed any information to a third party without specific authority. He can provide facts and figures to other under legal or professional duty. 

5. Skill 
Skill is a principle of auditing. The auditors must acquire skill of doing audit work. He must get training from his principle. The experience of all audit steps must be obtained. It is a stage of learning by doing. This skill will help him when becomes independent auditor. 

6. Competence 
Competence is a principle of auditing. There is a need of best training in the field of audit. The competent person has the right to sign the report. The practical knowledge and training with expert firm of auditors can make the trainee as competent. 

7. Work Performed By Others 
Work performed by other is a principle of auditing. The auditor can rely on the work of other auditors. The sole duty lies on the head of principle auditor who is depending upon of others. The information is available for reliance on others. 

8. Planning 
Planning is a principle of auditing. The auditing should plan his work in an efficient manner. The audit planning includes accounting system, internal control procedure and degree of reliance on internal control. The nature timing and extent of audit procedures to be performed are part of planning. 

9. Documentation 
Documentation is principles of auditing. The auditor can document matters, which are important in providing evidence that the audit was carried out in according with the basis principles. The working papers are prepared at the time of audit. The auditor as proof of audit work can keep these papers. 

10. Audit Evidence 
Audit evidence is a principle of auditing. The auditor can collect audit evidence through working papers. He can frame an opinion based on the audit evidence. The principle states the nature and sources of audit evidence. The methods to be used are also stated. 

11. Accounting System 
According system is a principle of auditing. It is a series of tasks in an entity by which transaction are processed for maintaining financial record. This system should recognize, calculate, clarify, post summarized and report transactions. 

12. Internal Control 
Internal control is a principle of auditing. Internal control means all measures used with in an organization to assure management that the organization is operating in accordance with planes and policies of management. 

13. Audit Conclusion 
A conclusion is a principle of auditing. The auditing can draw conclusion based on the evidence obtained from the books and records. He can note that accounting policies have been followed, financial information relates to legal requirements, the financial statement show the affairs of business, the disclosure has been made as required. 

14. Reporting 
Reporting is a principle of auditing. The auditing can report on the matters relating to business functions. A report may be short or detailed. It may be conditional or unconditional. There may be disclaimer or adverse opinion relating to business activities. 

15. Disclosure 
Disclosure is a principle of auditing. The facts and figures are disclosed for general information. The auditor can note that financial information has been presented in full all disclosure formalities are complete. The auditor must provide full information to the shareholders. 

16. Capitals Or Revenue 
The capital or revenue is a principle of auditing. According to the nature of business the accounting staff can record the item as capital or revenue. The wrong allocation cannot provide true information. The auditor must know the real position of each item in order to report the matter. 

17. Compliance with Legal Formalities 
The follow up of legal formalities is an auditing principle. The rules and regulation must be applied in order to protect the rights of interested parties. The business activities can run on lines through compliance with law. 

18. Consistency 
The consistency is an auditing principle. The accountant has the right to select the rate of depreciation, provision for bad debts and valuation of stock. He must follow these rates for the year to come. The changes are not acceptable at all.

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Auditing Standards and Auditing Procedures

Auditing Standards

An auditing standard is a measurement of performance set up by professional authority and consent. A standard is a measuring device of applied procedures resulting in general acceptability of the result of the performance.


Audit Procedures

Auditing procedures are acts to be performed during the course of an examination. By applying perfect technique, procedure lead to proof of accuracy of the accounts and financial statements. Audit procedures constitute the course of acting available in determining the validity of standards and principles. In every audit, there must be review and observation, inspection and count, evidence, proof, accuracy of proof and reconciliation.

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Audit Techniques

1. Inspection 
Inspection is concerned with review or examination of records, documents or tangible assets. The auditors can check many documents in order to examine the business transactions. Vouchers support every entry. Inspection of record is made note recording, authority and validity of data. The auditors commonly use this technique. 

2. Observation 
Observation means looking at an operation or procedure being performed by others in order to determine the manner of its performance. The auditor can observe the physical stock taking by management. He can that accounting principles are applied in preparing accounting recorded. The audit staff commonly uses observation. 

3. Inquiry 
Inquiry means obtaining relevant information either written or oral from resource persons within or outside the enterprise through formal or informal manner. The auditor can collect data from management through representation letter. He can inquire from debtors, creditors, bankers and other experts in the field to form an opinion. 

4. Confirmation 
Confirmation is a reasonable to an inquiry to prove certain data recorded in the books of business concern. The auditor can ask the management to inform the debtors for confirmation of their accounts balance. The auditor can collect information from debtors to ensure the accuracy of data. He can write letters to bank for supply of account balance kept by the bank. 

5. Computation 
Computation is concerned with checking the arithmetical accuracy of accounting records or doing independent calculations. An auditor may follow the accounting procedure to check the accuracy of data. The journal entry, position and balancing accounts can be compared with the vouchers to test the reliability of data. 

6. Sampling 
Sampling is concerned with selecting few items from whole accounting information. Audit sampling is the application of a compliance or substantive procedure to less than 100 percent of the items within an account balance or class of transactions to enable the auditor to obtain and evaluate evidence of some characteristics of the balance or class and to from or assist informing a conclusion concerning that characteristics. 

7. Compliance Test 
Compliance tests are designed to obtain reasonable assurance that those internal controls on which audit reliance is being placed are in affect. In obtaining audit evidence auditor is concerned with existence of internal control, effectiveness and continuity of internal control. 

8. Substantive Test 
Substantive test are designed to obtain evidence as to the completeness accuracy and validity of the data procedure by accounting system. They are of two types 

• test of details of transaction and balance

• analysis of significant ratio and trends including the resulting investing of unusual fluctuation and items.

9. Analytical Review 
The analytical review consists of studying significant ratios and trends and investigation unusual fluctuations and items. The application of analytical review procedures is based on the expectation that relationship among data exists and continues in the absence of known conditions to the contrary. 

10. Computer Assisted Audit 
Computer assisted audit techniques include audit software test packs embedded audit facilities, system software data analysis, application programme, examination, teaching, flow charting and mapping. These techniques show how the computer has various uses in accounting. 

11. Reliance on Auditors 
Reliance on auditors is an audit technique. The independent auditor can rely on internal auditors or other auditors for completing the work of his own audit. 

12. Reliance on Experts 
Reliance on experts is an audit technique. The auditor is no expert in every field. Basically he knows accounting and audit work. He is not an engineer, architect, lawyer and valuers. He has relied on auditors for seeking their expert opinion about business matters.

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Functions of Audit

1. Accounting System 
The function of audit is to study accounting system. It can be stated as a series of tacks in an entity by which transaction ahere processed as a means of maintaining financial records. Such a system should recognize, calculate, clarify post summarize and report transactions. The auditor should understand the accounting system in operation in order to determine the nature timing and extent of other audit procedures. 

2. Internal Control 
Internal control is a function of auditing. Internal control is a process, which determine that management policies are carried out and accounting principles are followed. This functions helps to safeguards assets, location and prevention of errors and frauds. Moreover the management is able to prepare reliable financial statements in time. When the auditor notes that he can rely on internal control, the audit procedure may be less extensive. The effectiveness of internal control is to be determined by an auditor. 

3. Vouching 
Vouching is the function of auditing. An auditor can inspect the document, which support and prove the business transactions. The data amount and other details are checked. All entries in books of accounts are made on the basis of relevant vouchers. This function is essential to determine the accuracy of accounting records. 

4. Arithmetical Accuracy 
I is a function of auditing to check the arithmetic accuracy of account books and books and other papers. The audit staff verifies the figures. The errors and fraud are discovered. The management can take steps to rectify the mistakes. The responsibility of fraud can be fixed. This function helps the auditors to show true and fair view of accounting statements. 

5. Capitals and Revenue 
It is a function of auditing to make different between capital and revenue items. The revenue items are compared to determine income. The capital items are compared to note the financial position of any business. The income and expense relating to many years can be divided into current and coming years. 

6. Verification As Assets 
The verification of assets is a function of auditing. Verification is concerned with determination of value, ownership, possession and any charge on the assets of any business. The auditor can check the existence of asset. The documents and books can show the purchase price. If any loan is taken on security of an asset, such information can be collected. It is duty of an auditor to verify these assets. 

7. Verification of Liabilities 
The verification of liabilities is a function of auditing. The auditor can verify the liabilities from the books of accounts. The auditors must receive a certificate from management that all liabilities are included in the balance sheet. The auditors can write letters to creditors for verification of liabilities. 

8. Valuation of Assets 
The valuation of assets is a function of auditing. The auditors can apply accounting conventions and principles to examine and test the values of assets. The management calculates the value to assets. The auditor must critically check the assigned values. He can get help from technical personnel. 

9. Valuation of Liabilities 
The valuation of liabilities is a function of auditing. The value of liabilities is stated in the balance sheet. The management can examine the value on the basis of dealing made. The auditor can examine the value of liabilities from books of accounts and other papers. The auditor can confirm the value from outside sources. Independent experts should determine the value of contingent. 

10. Legal Requirements 
The functions of auditing are to follow the legal requirements. There are various laws like companies ordinance 1984. Income tax ordinance 1979 and stock exchange rules 1971. It is the duty of auditor to check that financial statement are prepared under the legal requirements. The auditor can note this point in the report that management has followed the legal formalities. 

11. Reporting 
The reporting is a function of auditing. It is the duty of auditor to submit his opinion in writing. The report may be clean or conditional. An auditor is an independent person. If he is satisfied about true and fair view, he can present clean report in case of some weakness he can give qualified report.

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Chapter 10 - Audit of Various Organization

* Textile Mill 

* Sugar Mill

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Textile Mill

Auditor should give special attention to the following points while auditing the Textile Mill.


Textile mills is a concern where cloth is knit with the help of thread.


In any Textile Mill the cotton is the basic material. Trend is prepared from cotton. Then the thread is rolled on cones. These are used in knitting the clothes. In a textile mill there are many departments as spinning department, dying department, printing department and etc.


Books of Accounts

The following are the main books, which are used to textile mills.

* Sales Books 

* Sales Return Book 

* Petty Cash Book 

* Salary Books 

* Stock Register 

* Purchase Book 

* Purchase Return Book 

* Journey Day Book etc 

Special Points

The following are the special points, which are used to audit in the textile mills.


1. Internal Control

The auditor can examine the internal control of the mills. If internal control is effective the auditor can easily complete his work of accounted. In case of unaffected control. There is difficulty in the completion of work of an auditor.


2. Raw Material

The auditor can examine in different ways, the all material that is purchased and consumed. The auditor can check the ledger of the material to verify that the figures are fact or not.


3. Fixed Assets

The auditor can also ask the management for the fixed assets. The date is different for purchase the assets. The purchase and sale of the assets is also possible. The auditor has to find out the actual value of the assets.


4. Expense of Purchase

The expenses, which are related to the purchases are added in he material cost. So, the auditor has to check that either these expense are related with the purchase or the nature of the business or not.


5. Closing Stock

The auditor during his audit has an authority to ask for the closing certificates so that the actual value of the closing stock can be find out. He can also physically, examine the store or the place where the stock is kept.


6. Written Down Stock

The auditor has to check also that the stock is in its full reality and the damaged material is also recorded at its minimum sale price.


7. Cash

The auditor should also check the cash in hand and in office. The cashier is responsible for the shortage of cash balance.


8. Depreciation

The auditor has to check that the depreciation is correctly charged. The depreciation is charged on the fixed assets for the prescribe rate. The principle of consistency must also be followed.


9. Prepaid Expense

The auditor has also be noted that the expense which are paid in advance are properly recorded in the books of accounts. The current year expense are actual expense but remaining will be treated as the assets in the balance sheet.


10. Outstanding Expense

The auditor can also check the outstanding expense. He can also check that the management has treated the outstanding expense properly and according to the rules and regulations.


11. Balance in Bank

The auditor can also check the balance in bank. He can get the statement from the bank. The bank reconciliation statement can also be prepared to find errors and frauds.


12. Valuation of Assets

The auditor can also check that the assets are to be valued as per law. The management usually fixes the valuation. If assets, which are circulating and price of fixed assets are their cost price. The auditor in this way can judge that either the management has determine the cost value accordingly by or not.


13. Plant and Machinery

The auditor can also receive the schedule of plant and machinery. The auditor has to check that either the plant or machinery is in safe hands and used for the business purpose only. The auditor has also to check the purchase and sale procedure of the plant and machinery.


14. Verification

The auditor has an authority to check the goods personally to verify that the goods which exits in the balance sheet are also present in the store. Moreover he can also verify the assets personally.


15. Vouching

The auditor can also vouch the transaction relating to the receipt and payment of the cash. The term vouching is usually concern with the comparison of the entries with the vouching.


16. Cotton Purchase

The auditor should take the proper care in checking the inward documents. He should examine the purchase quality and price and also that the purchases are according to the need.


17. Sales

The auditor should also take care about the sale. The sale may be of the thread yarn, or also fabrics. If the goods are exporting, the auditor should also take care for it.


18. Sales Tax

The auditor has to check also that the company has correctly recorded the amount of sale tax and that the sale tax is paid properly.


19. Export Quota

The textile mills are provided the allocated export quota. The auditor has to check that the company has operated within the export limits or not.


20. Financial Charges

In our country, the textile mills are usually, provided the borrowing facilities from the bank. The auditor has to check that either the interest or mark up etc is paid or classified properly or not.


21. Provision for Tax

The auditor should also take care about provision of tax. He can take help from the tax advisor of the company.


22. Foreign Exchange Earning

The auditor has to check the utilization of foreign exchange earning for business will be acquired into any possible misuse will be prepared to the qualified.


23. Excise Duty

The payment was properly made and any aversion to be qualified production schedule prepared in an explanatory manner.


24. Sale of Scrap

The auditor should see that the sale of the scrap is properly maintained or not.


25. Wages and Salaries

The auditor has also to check that the wages or salaries are properly paid to the workers or not and verify them.

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Sugar Mill

The auditor should keep in mind the following points while auditing the accounts of a sugar mill or company. 


Books of Accounts

The following are the main books of accounts, which are used in the industries. 

• Day Book

• Sales Book

• Journal Ledger

• Purchase Book

• Sales Return

• Purchase Return

• Cash Book

• Petty Cash

• Stock Register

• Form Register

Special Points

1. Internal Control 
The auditor has to check the internal control system of the mill. If the internal control system is properly maintained the auditor can easily fulfil his work. On the other hand he has to work greatly. 

2. Purchases 
The auditor has to check the purchases, which are made by the management. The sugarcane is the main product, which is purchased for the industry. There is need to be checked the auditor all the detail about the purchase to know the nature of the purchases 

3. Cash Balance 
The auditor can also examine the cash balance in the office and can also note the usage of petty cash book. 

4. Sales 
The auditor can also examine the sales of the mills from the sales ledgers. Usually the main item of sales is the sugar but the molasses candies chipboard and also the mills management sells the wine. 

5. Vouching 
The auditor can verify the entries with the actual vouching. This is done to check the accuracy of the accounts. 

6. Loans 
The auditor has to check also either the management of sugar mill has provided loan to the sugarcane suppliers. And if so then the loan either is adjusted against the payment to cultivators. The auditor has also an authority to check the vouchers for loan. 

7. Depreciation 
The auditor can also vouch the depreciation on the fixed assets. Their rates and also the way of calculating the depreciation. The depreciation is charged the same rate from year to year. 

8. Carriages of Railway 
The auditor can also examine the expense, which are to paid or still payable to the railway company. 

9. Farming 
Sometimes, the sugar mills may have their own agriculture farms. In this case the auditor can check and verify the income and expense of that farms. 

10. Prepaid Expense 
The auditor has to check also the expense, which is paid in advance by the management. The auditor has to verify that either these expenses are paid accordingly or not. 

11. Unpaid Expense 
The auditor has to check also if there are some unpaid expenses. The auditor should be pointed out that the adjusted entries are made and the amount can be verified from the financial statement. 

12. Accrued Income 
The auditor has to see if there is some accrued income. He can vouch the income statement and balance sheet for this purpose. 

13. Unearned Income 
The auditor can also point out the income, which is not earn still. For this purpose he can check the financial statements. The account books are also helpful for this purpose. 

14. Costing 
The auditor can also check the totals, sub totals, cost and carry forward of the balances. It is done to check that the figures are fact and according to the documents. 

15. Research and Developments 
Some sugar mills have better development and research on the seeds and plantation of the sugarcane. The scientist discovers new types of the seeds and also the better varieties of sugar cane. The auditor checks and verifies that expense and their adjustment. 

16. Sales of By Product 
The molasses is the main by product of the sugar cane. The auditor can check and verify the sale and its treatment in the accounts. 

17. Seasonal Workers 
A sugar mill operates on seasonal basis. Only in the seasonal period workers are employed. The auditor can check the record for attendance etc. 

18. Fair Price Shop 
In usually the sugar mills have the fair shops. In these shops the sugar is sold at the subsides rate. The auditor checks the sale of the year and stock at the end of the year. 

19. Excise Duty 
First of all it will be checked where these sales were understand. The auditor can evasion of excise duty on the part of the management is discovered. 

20. Exports 
The auditor can point out if there are some exports. He can be judged them by the valid letter of credit.

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Chapter 11 - Audit Programmes and Procedures

* Audit Programme 

* Kinds of Audit Programme 

* Contents of Audit Programme 

* Advantages of Audit Programme 

* Disadvantages of Audit Programme

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Definition

Audit programme is a list of work to be done by an auditor. The time period is started for completing the work. The duties are assigned to audit staff. The procedure that will help to verify each time of financial statements. The duplication of work is avoided and an pace of audit work. The auditor is able to have control over the audit staff and their work. The cost of audit remains in line with the audit fee. The auditor can handle audit of many concerns at the same time. Every aspect of financial activities require audit program. The combination of all such programs is considered as master audit programme. The auditor can make changes from time to time in order to meet the requirements of nature and size of business. 










Kinds of Audit Programme

1. Standard Audit Programme

This type of audit programme is preprinted and suitable for all purposes. It saves time and gives added assurance that no important procedure will be overlooked while in the opinion of some others, this type of audit programme is too much mechanical. Due to complexities in the business conditions system of accounting and internal control system, it is not possible to follow a standard audit programme.


2. Modified Standard Audit Programme

These type of audit programme contain the usual audit procedures, common to most business and provide space for other specific procedures applicable to the business under examination. This modification of the audit steps and the insertion of the steps that are peculiar to the audit in questions, make the audit programme a modified standard audit programme.


3. Tailor-Made Audit Programme

This is individually written programme prepared specially for each audit. It is known as tailor made because a tailor cuts the cloth according to the body of every person. The auditor should take care of such a programme so that no important steps is overlooked or missed. It lists the procedures to be followed on any specific engagement indication any departure from normal practices and specifying the extent of the test of transaction

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Contents of Audit Programme

1. Name 
The audit programme contains the name of client. The auditor can write the name of business. There is a need of complete address of the concern in case of public limited company. 

2. Objects 
The audit programme contains the objects of the business enterprise. There are various objects of any business unit. A small business has few objects while large companies have many objects. 

3. Date 
The audit programme contains the date of start of an audit. The auditor can consult the client before fixing the audit date. It must be convenient to the management. The audit programme can show the details of audit work date wise. 

4. Duration 
The audit programme contains the time limit of starting and completing the work. The duration of audit period may be one month. The size of audit work becomes the basis of duration. 

5. Accounting System 
The audit programme contains information about accounting system. The auditor can examine the accounting system and procedure in operation. The understanding of accounting system helps to develop the audit programme. 

6. Internal Check 
The audit programme contains the effectiveness of internal check system. The effective internal check is helpful for auditors. He can apply test checking due to proper internal check system. If the system is not good it increases the duties of audit staff. 

7. Old Reports 
The audit programme keeps the contents of old audit report. The auditor can pay attention to old reports. The weakness reported in previous reports must not be repeated in present accounting records. It is the duty of the audit staff to note the performance of management. 

8. Checking Books 
The audit programme contains the details of checking accounting books. The number of books kept is stated in the programme. The books are distributed among audit clerks so that whole data may be examined.

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Advantages of Audit Programme

1. Supervision of Work 
The editor can judge the efficiency of his audit team with the held of an audit program. He is in a position to know the progress of the work. He can see at any time that what part of the work has been completed and what remains to be done. 

2. Division / Distribution of Audit Work 
The division of audit works is very useful for the audit staff for maintaining the difference of works among senior or junior clerks according to their ability and skill so that the work is divided to get better results. 

3. Systematic and Uniformity of Work 
Audit program helps in setting all the things in advance. So the systematic and uniformity of work is necessary to achieved the desire. 

4. Basic Instrument of Training 
Audit program is infact a training instruments for the audit staff and also very useful for the new auditors. It provides training and guidance to him. So, it is rightly called the basic instrument for training for the staff at the right time of need. 

5. Fixation of Responsibility 
Audit programmes fixed the responsibilities of the staff. If any error or fraud remains undetected the responsibility of negligence will fall on that particular assistant who has performed that job and no one can blame on each other. 

6. Several Audit May be Controlled 
The auditor controls the audit of various companies at the same time. In the absence of audit program he cannot supervise them effectively. 

7. Easy Transfer 
The principle auditor can transfer to any other person easily. If one assistant is unable to continue the work given to him it can be given to another person. Audit program guides him that what is done and what is remaining. 

8. Final Review 
Before signing the report, Final Review is made and for this purpose also auditing program is very useful and any deficiency or missing in steps can be identified and completed. 

9. Useful For Future 
The audit programme is very useful in the future. On completion of an audit. It serves the purpose of audit record that may be useful for future reference. In case of auditor is appointed for the same concern in any future time the auditor can use the same audit programmes with some changes. 

10. Progress of Audit Work 
Audit programme is useful to note the progress of work. Audit programme is a timetable, which can show the work done on any particular date. The pace of work is going on with the passage of time. The adjustment can be made if there is more work and less time and vice versa. In this way work can be completed in time. 

11. Supervision of Audit Staff 
Audit programme is beneficial for auditor. He can supervise the activities of audit staff. He can use the audit programme as basic of supervision. Every part of audit work can be complete as per schedule. He can control the activities of audit staff through observation and direction when the audit work can be complete in time. 

12. Audit Staff Needed 
Audit programme is helpful to determine the number of persons needed to do the work. The staff requirement is essential for every auditor. The shortage of staff means slow progress. The exact number of senior and junior audit clerk can be determined. In this way an auditor is able to handle the audit work properly. 

13. Same Work 
The benefit of audit programme is that new instructions are not issued due to change in staff. The nature of work remains the same. The audit clerks can know their job just by reading the written programme. The time is saved due to written instructions. 

14. Time Table 
The benefit of audit programme is that work is complete with in stated time period, the saving of time means saving of labour. The saving of time means saving can control the cost of audit due to fixed time. He can arrange audit work of other business concerns. 

15. Responsibility for Poor Work 
The benefit of audit programme is that auditor can fix responsibility for negligence. Audit programme is a timetable of whole audit work to be done by auditors. Every staff member is given some sort of duty to do the audit work. The staff is responsible for completing of work. The performance is noted and responsibility if fixed poor work. 

16. Guide To Audit Assistants 
The merit of audit programme is that it serves as a guide to audit assistants. The junior audit staff can start and complete the audit work with the help of audit programme. There is no need to repeat the instructions every time. Moreover it serves as a guide for future. The new audit programme can be developed can be developed on the basis of old work. 

17. Dealing with New Clients 
The merit of audit programme is that it helps to deal with client. The spare time of audit staff can be used for doing with new clients. The whole year time can be divided. The auditor can audit the accounts if various concerns under audit programme. 

18. Proof for Audit Work Done 
The merit of audit programme is that auditor can use it as proof for work done. In court of law the auditor can avoid liability for negligence. Audit programme is a permanent record of an audit process. The audit programme shows the work performed date-wise. In this way he cannot be held responsible for carelessness.

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Disadvantages of Audit Programme

1. Not Comprehensive 
Auditors may have covered the whole fie but I cannot be said with certainty that all the necessary work has been done. 

2. Rigidness 
Audit program looses its flexibility. While each business have a separate problems. So audit program cannot be laid down for each type of business. 

3. No Initiative 
It kills the initiative of capable persons. The assistant cannot suggest any improvement in the plan. 

4. Too Mechanical 
Such audit program is too mechanical that it ignores many other aspects like internal control. 

5. Large Concerns / Not Suitable for Small Concerns 
Audit programme is helpful in large business concerns. It has been proved that audit program is not suitable for small business concerns. 

6. New Problems Over Looked 
In the audit programme there is no chances to accept the changes with the passage of time new problems arise that may be over looked. 

7. Changes 
The drawback of audit programme is that changes in it are not acceptable. The nature of activities of concern may change. There is a need to adjust the changes in the programme. A master programme cannot be drafted. 

8. Revision 
The demerit of audit programme is that there is no revision in it. The business changes from year to year. The working may expand or contract. The audit programme requires adjusting itself to the changing circumstances. 

9. Types 
The demerit of audit programme is that is not suitable for all types of business concerns. A small business may have few books of accounts. It is not necessary to prepare audit programming for small concerns. 

10. Staff 
The accounting staff can know the working of audit. The auditor applies various methods for checking the accounting books. Having knowledge of auditing the accounting staff can devise means to record the transaction. In this way they can avoid their responsibility. 

11. Negligence 
The demerit of audit programme is that it provides protection to inefficient audit assistant. The junior auditors can protect themselves due to weakness of audit programme. The clerks feel responsibility for the duties stated in the programme. 

12. Errors 
The drawback of audit programme is that it may fail to located error. The errors of principles cannot be detected, as the double entry is complete in such case. No doubt the location of errors and fraud is the responsibility of management. But owner depends upon auditors to protect their rights.

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Chapter 12 - Internal Audit & Internal Check

* Internal Audit 

* Objectives of Internal Audit 

* Essentials of Internal Audit 

* Functions of Internal Audit 

* Advantages of Internal Audit 

* Limitations of Internal Audit

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Internal Audit

Internal audit is an evaluation and analysis of the business operation conducted by the internal audit staff. (who are employee of the business). It is the part of over all system of internal control established in an organization.


Internal audit is the independent appraisal of activity with in an organization for the review of accounting, financial and other business practices as protective and constructive arms of management. It is a type of control which functions by measuring and evaluating the effectiveness of other type of controls.


Professor Walter B. Meigs define internal audit


Internal auditing consist of a continuous, critical review of financial and operating activities by a staff of auditors functioning as full time salaried employees. 

















Objectives of Internal Control

1. Proper Control

The purpose of internal control is to keep proper control over business activities. When there is proper control there is maximum efficiency. The internal control can determine the degree of control over work.


2. Accounting System

The purpose of internal audit is to evaluate the accounting system. It is concerned with checking proper authority for transactions like purchase, retirement and disposal of fixed assets. The voucher can be compared with entries on order to determine that figures are facts.


3. Help Management

The purpose of internal audit is to help the management. Internal auditor can point out the weaknesses. The internal audit can be used as a tool to correct the situation. The management functions can be performed properly.


4. Working Review

The purpose of internal audit is to review the working of business. The working of current year can be reviewed in detail just the successful area of working. There is a need to locate the weak points. The corrective measures can be taken for proper working.


5. Asset Protection

The purpose of internal audit is to protect the assets. The proper record of assets must be there. Internal auditor can examine the valuation, verification and possession. The purchase and sale of assets must be made under properly authority.


6. Internal Check

The purpose of internal audit is to evaluate the internal check system. There is division of duties among the emp is to loyees. When all staff member are working properly it means there is effective internal check system. The work of an auditor is reduced. He can apply test checks to complete audit duty.


7. Fair Statements

The purpose of internal audit is to detect the error in the accounting records. The work of internal audit can help the management to see that accounting record is in order.


8. Check Error

The purpose of internal audit is to detect the errors in the accounting records. The work of internal auditor goes side by side there fore there are minimum chances of errors. The accounting staff can rectify mistake to prepare accounts at the end of year in order to help the external auditor.


9. Detect Fraud

The purpose of internal audit is to detect frauds in the books of accounting. As the work of accounting staff is over the internal audit is started. Accounting staff remains alert because there is no time gap between recording and checking. Thus detection of fraud is possible with it.


10. Determine Liability

The purpose of internal audit is to determine liabilities of employees. The duties are divided among the staff. It is easy to note the negligence on the part of employees. The internal audit can pin point the person responsible for carelessness.


11. Help in Independent Audit

The purpose of internal audit is to help an independent audit. The external auditor can rely on internal auditor and there is no need of cent percent checking. In this way there is saving of time and money due to internal audit.


12. Performance Appraisal

The purpose of internal audit is to check the performance appraisal. The management must achieve the targets fixed in budgets and plans. The internal audit is a tool to evaluate the working of each management function.


13. Provide Suggestions

The purpose of internal audit is to provide suggestions for improvement of business activities. The internal audit staff can suggest the ways and means to remove the difficulties. Anyhow the audit cannot compel the management to implement suggestions.


14. New Ideas

The purpose of internal audit is to seek new ideas relating to procedures, marketing, financing and other business matters. The internal audit staff can provide new ideas about various business matters. The viable ideas can be put in to practice for the benefit of business.


15. Use of Resources

The purpose of internal audit is to determine the proper use of resources. The misuse of resources can increase the cost of doing the business. The proper use of resources means there is efficiency on the part of management.


16. Accounting Policies

The purpose of internal audit is to examine the accounting policies. The understanding of accounting system and procedure is helpful to device the effective audit plans procedures. The internal auditor may find any weakness in the internal control. He can comment on the accounting policies.


17. Special Investigation

The purpose of internal audit may be to conduct special investigation about any business matter. Internal audit can be used as a tool to note the effectiveness of management function.

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Essentials of Internal Audit

1. Planning

Planning is an essential feature of internal audit. The auditor can plan to check the accounts system. The plan may relate to accounting functions like purchase, sales, income, expenses and shares. The planning includes degree of risk and extent of audit. It also states the nature of audit work.


2. Controlling

Controlling is an essential feature of internal audit. The auditor examine the operation of accounting system. He can control audit work through audit programme. The whole work is distributed among audit staff.


3. Recording

Recording is an essential feature of internal audit. The auditor can record the facts and figures in order to express his views in the business activities. The auditor notebook and audit working papers are used to record the information.


4. Independence

Independence is essential element of internal audit. An employee of the company does the work of internal audit. Management must not influence him. He must be free in developing audit programme, audit investigation and audit reporting.


5. Staffing

Staffing is an essential part of internal audit. The trained staff is needed to conduct internal audit. The reasonable number of persons can perform the work of examination. The inadequate and untrained staff cannot serve the purpose of checking efficiency of managers.


6. Training

The internal audit staff must be trained. In order to achieve better results there is a need of training in audit work. Proper arrangements should be made to provide training to internal audit staff.


7. Relationship

The internal audit staff must have friendly relations with management, external audit staff and consultants. There is a need of complete harmony among various groups of people.


8. Evidence

Evidence is essential part of internal audit. The evidence must be reliable, relevant and sufficient. The business documents are sources of entries in accounting books and records. The reliable can be seen through signature of manager. The relevant documents show the name of concern.


9. Due Care

Due care is an essential part of internal audit. The auditor must use skill, care and judgement. He should have technical knowledge, honesty and integrity.


10. Reporting

Reporting is an essential part of internal audit. The auditor can inform the management through audit report. It may be long or short report. The finding of the auditor is put before the management. There is a need to act upon the advice of the internal auditor for better result. 












Functions of Internal Audit

The function of internal audit is concerned with analysis of internal check. The internal auditor can look in to the duties of each employee. All employees are provided jobs on the basis of their abilities.


2. Application of legal Requirements

The function of internal audit is the examining of the application of legal requirements. The accounts are prepared under certain legal framework. The Company's Ordinance 1984, the Stock Exchange and Security Rules 1971, the Banking Companies Ordinance 1962, The Insurance Act 1938. The Modaraba Ordinance 1980 and similar other laws are followed for preparing finance statement.


3. Verification of Accuracy

Verification of accuracy is a function of internal audit. The accuracy of accounting books and records can be verified with the help of auditing techniques. The audit techniques include inspection, observation, inquiry, confirmation, computation and review. An auditor can check the accuracy through these techniques.


4. Confirmation of Liability

Confirmation of liability is a function of internal audit. The internal auditor can determine the work done by every person. The careless or negligence on the part of worker is noted. The concerned person is given a chance to explain his position. If the reason is not justified, the liability is confirmed.


5. Examination of Assets Protection

The function of internal audit is to examine the assets protection. The proper record is to be maintained. The possession must be in the hands of senior officer. The assets are used for business only. There is proper purchase and disposal of these assets. The internal auditor can check that assets are protected.


6. Detection of Fraud

Detection of fraud is a function of internal audit. The work of accounting and auditing go side by side. When accounting work is over it is checking by audit staff. There is not time gap so fraud is detection at an early date. The plan of fraud requires time to think. When time is not allowed it is detected on the spot.


7. Ascertain Proper Authority

The function of internal audit is to ascertain the proper authority. The shareholders, partners and single owners have full authority. They can delegate such authority to managers. The signature of owners or managers must be noted on every voucher in order to ascertain that transaction is proper.


8. Detection of Errors

The function of internal audit is to detect errors in the accounting records. The audit staff can check the records in detail. There is not time limit. There is possibility of disclosed of error due to cent percent checking. The corrections can be made as early as possible to reflect the true and fair view.


9. Make Investigation

The function of internal audit is to make investigation. It is an inquiry in to business activities by specially assigned staff. The facts and figures are collected; analyzed and true position is put before the management. The grey area can be spot lighted by an auditor in the interest of business.


10. Performance Appraisal

The function of internal audit is to note the performance of business employees and management. The standard are fixed and performance is compared with standards. The management can feel satisfaction if the performance is at standard.


11. Give Suggestion

The function of internal audit is to give suggestion for business problems. These suggestions are not costly. In the long run there may be large number of benefits from such ideas. The management has the right to accept or reject the ideas.


12. Reporting

Reporting is a function of internal audit. The auditor can find out the weaknesses of various functions. The report is submitted to the management. There is a need to go through the report. The weakness and proposal can be examined in detail. 























Advantages of Internal Audit

1. Proper Accounting System

The benefit of internal audit is that proper accounting system is introduced. Accounting system is a chain of activities in an entity by which transactions are processed for maintaining financial record. There is a need of orderly devices to achieve desirable results.


2. Better Management

The benefit of internal audit is that there is better management of business concern. The auditor can point out the weak areas of management. The goals of business can be achieved if there is proper internal control, internal check and internal audit. It should be noted that management could rely on internal audit for best results.


3. Progressive Review

The internal audit is beneficial to review progress of a business concern. The figures of previous years are compared with this year. Moreover the performance result of similar companies can be compared to determine the progress made by the entity. The management can review progress through internal audit.


4. Effective Control

The internal audit is helpful to have effective control over business activities. Control is a management function, which related to supervision and direction of on going activities. The manager concerned can remove the difficulties for smooth working internal audit alerts the management for effective control.


5. Assets Protection

The assets protection is possible through internal audit. The management can use the assets for the benefit of business only. The assets cannot be used for private purposes. The embezzlement of cash, misappropriation of stock and misuse of other assets is not possible as the internal auditor keeps close watch over assets.


6. Division of Work

The internal audit is helpful to apply division of labour. The division of labour is necessary to watch the activities of all employees including management. The auditor can suggest the way and means improve the performance of business.


7. No Error

The internal audit is used to protect accounting records from errors. The accounting and auditing go side by side when accounting work is over there is start of audit. There is not time gap. In such situation the accounting staff is not in a position to commit any error.


8. Fixing Responsibility

Internal audit is used to fix the responsibility of people having poor performance. The management establishes the performance standards. The internal auditor can evaluate the result of all persons. The people can be help responsible for below standard work and action can be taken against them.


9. Helps External Auditing

The work performed by internal auditor can be helped for external auditor. The auditor procedure of internal and external audit is almost the same. The auditor can go through the internal audit report at the time of starting audit work. Anyhow external auditor is responsible for external audit.


10. No Fraud

The internal audit is beneficial to detect frauds in the books of accounts and other records. The auditor provides no time tag lag to continue any fraud. The work of accounting staff is examined on daily basis. The accounting staff has no time to plan any type of fraud.


11. Performance Improves

Internal auditor is helpful to improve the performance of the organization. The achievements of previous year are the basis of preparing budget for the next years. The projected income statement and balance are drawn up. An attempt is made to get the positive result. Thus internal audit improves performance of business and employees.


12. Proper Use of Resources

Internal audit is used to check the proper use of resources. The misuse of resources can increase the cost of organization. The optimum use of resources can be determined to control the cost of output. In this way internal audit is a tool to use the resources in the best internal of the business.


13. Investigation

Internal audit is help to investigate in to the business matters. In case of doubt internal auditor can be asked to examine the facts and figures to confirm or clear any doubt. The internal auditor can investigate the matter in any manner. Such investigation can be made at the request of management or owners.


14. Suggestions

Internal auditor is used to suggest the ways and means for improving the business performance. The management can rely on the internal auditor. The workable ideas of the internal auditor can be put into practice. 

















Limitations of Internal Audit

1. Incompetent Staff

The limitation of internal audit is that audit staff may be incompetent. The purposes of internal audit fails to help the management. There may be lack of experience and training on the part of internal audit staff.


2. Staff Shortage

The limitation of internal audit is staff shortage. There may be need of reasonable audit staff to examine the record. The shortage of staff is a hurdle to get benefit of internal audit.


3. Time Lag

The limitations of internal audit starts when true is time lag between recording and checking of entries. The accounting and internal audit must go side by side with minimum time gap.


4. Executive Function

The limitation of internal audit is that the internal audit may be linked with executive function. In this case he cannot examine the accounting books and other records. He cannot find out his own weakness. It will be wastage of time and money to conduct internal audit.


5. Error

The limitation of internal audit is that there may be error in the books of accounts. It depends upon the expertise of internal audit staff. If audit staff is competent there is less chance of error. In case of poor audit staff there is no guarantee that audited accounts are free from errors.


6. Responsibility

The limitation of internal audit is that management may not feel their responsibility in completing the audit formalities. The audit staff may responsibility in completing the audit formalities. The audit staff may give suggestion for proper working of business. The top-level management may not pay attention to suggestions. In this way the audit work cannot help the business.


7. Duties

The limitation of audit is that there may not proper division of duties. In this case the internal auditor is unable to fix the responsibility for negligence of duties. The management must be aware about division of duties. The audit work can point out the weakness of business employee, otherwise whole arrangement goes wasted.

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Chapter 13 - Auditor

* Qualification of an Auditor 

* Appointment of an Auditor 

* Removal of an Auditor 

* Rights Or Power of an Auditor 

* Qualities of a Professional Auditor

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Qualification of an Auditor (Section 226 (1) and (2)

Following persons are qualified to be appointed as auditor of a company. 

1. Practicing Chartered Accounts (Sec 226 (1)J) 
A person shall not be qualified for appointment as auditor of a company unless he is a chartered accountant within the meaning of the chartered accountant act 1949. 
A chartered accountant means a person who is the member of the institute of chartered accountant of Pakistan. He will be Deemed to be in practice. When individually or in partnership with other chartered accountants in practice he for consideration received or to be received. 
Practice of Accountancy 
He engages himself in the practice of accountancy. 
Verification 
He offers to perform or performs the services involving the auditing or verifications of the financial transactions, books of accounts or records or the preparation, verification or certification of financial accounting and related statement or holds himself out to the public as an accountant. 
Professional Services 
He renders the professional services or assistance in or about matters of principal or detail relating to accounting procedure to the recording, presentation or certification of financial facts or data. 
Renders the Services 
Renders the services as, in the opinion of the council are or may be renders by a chartered accountant in practice. 

2. Certified Auditor (Sec 226 (2)) 
A part from practicing chartered accountants, a person holding a certificate under the restricted auditor's certificate rules, 1965 is also qualified to be appointed as auditor of a company. Such certified auditors are subject to the rules framed in this behalf by the central Government. 
The object of the provisions as to qualified is to ensure that only persons of proven worth and standing and under the discipline of a statutory body, are appointed as auditor. 


Disqualification {Sec 226 (3)(4)(5)}

The following person cannot become the auditor of the company according section 254. 

• A body corporate

• An officer or employee of the company

• A person who is the employment of an officer or employee of the company.

• A person who is indebted to the company for an amount exceeding Rs. 1000 or who has given any guarantee of any third person to the company for an amount exceeding Rs. 1000.

• The spouse of a director of the company.

• A person who was a director other officer or employee of the company at any time during the preceding three years.

• A person who is a partner of a director, officer or employee of a company

According to Section 226(4) a person shall not be qualified for appointment as auditor of any body corporate. Further if the auditor already holds the appointment as auditor in the specified number of companies as per Section {Section 224(1-13)}, he will be disqualified for further appointment as auditor in any other company.

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Appointment

Section 252 throws light upon the appointment of an auditor: 

Appointment of First Auditor By Directors 
First Auditor 
The co-operative law authority can appoint the first auditor of a company if the company in the general meeting does not appoint the first auditor within 120 days of the date of incorporation of a company. 
Casual Vacancy 
The board of directors is empowered to fill any casual vacancy in the office of an auditor except one, which is caused by prior resignation. 

Appointment By Shareholders 
In case the board of directors fails to appoint the auditor, the company can appoint the first auditor within 120 days of the date incorporation of the company.

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Removal of an Auditor

According to Section 224(3)of the Companies Act, any auditor may be removed from the office before the expiry of his term but it can be done only by the company in it general meeting and with the previous approval of the control Government. 
The auditor may be removed in the following cases. 

1. Removal of First Auditor 
The first auditor can be removed by the members in the general meeting of the company. It is immaterial whether the auditor has completed his term of appointment or not. Another person can be appointed in place of first auditor in the general meeting. Notice of nomination of such other person to be appointed, as auditor must be given at least 14 days prior to the general meeting. 

2. Removal of Other Auditor 
Other than the member in the general meeting of the company prior approval of the central Government to remove can remove the first auditor the auditor must be obtained in that behalf.

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Rights Or Power of an Auditor

Following are the important rights of the auditor 

Access To Books 
According to Section 227(1) the auditor of a company has a right of access, at all items to the books and accounts and voucher of the company, whether kept at the head office of the right of access to books etc is an absolute right and is not subject to any restriction exception or qualification. This means that the auditor can examine the books vouchers etc at any time during normal working hours. 

Right of Inspection 
It is a right of the auditor that he can inspect the record of the company at any time. He can visit without any notice and verify the cash or any document. 

Right of Information 
According to Section 227(1) the auditor has the right to obtain any information and explanation from the officers or directors of the company as he may think necessary for the performance of his duties as an auditor. If any information or explanation is refused on the ground that it is not necessary for the performance of his duties as auditor. He may report to the members accordingly. 

Access to Branches 
According to Section 228(2) the auditor has aright to visit the branch office of the company if any, if a duly qualified auditor has not audited the accounts of company branch and if he deems it necessary to do so for the performance of his duties as auditor. 

Receiving Notices 
According to Section 231 a company auditor has a right to receive all notices and other communications relating to any general meeting of the company, which any member of the company is either to have sent to him. 

Right of Attending the Meeting 
According to Section 231 the auditor has a right to attend any general meeting and to be heard there at any part of the business, which concerns him as auditor, however, the right to attend a general meeting and to speak there at in not mandatory. 

Report to Member 
According to Section 227(2) the auditor has a right to make a report to the members on the account examined by him and to state whether the said account give the information required by the companies act in the manner which is required. 

Sign Audit Report 
According to Section 229, the auditor has a right to sign the auditor's report or authenticate any other document of the company. 

Seek Legal and Technical Advice 
The auditor has a right to seek opinions of experts in different fields whenever he feels it necessary as he is not expert in all the areas. 

Receive Remuneration 
According to Section 224(8) the auditor has a right to receive remuneration for auditing the accounts of the company after he has completed the work of audit even if he is dismissed in the middle he has a right to get full remuneration of the year. 

Speak 
The auditor has a right that he can speak in the annual general meeting for the explanation of some matters, which are related, with the accounts of business. 

Present in Meeting 
For the safeguard of his right the auditor has a right to remain present in the meetings of the company. Sometimes the business accounts may not be presented before the shareholders for the approval. In this time the auditor can protect himself. 

Opinion 
The auditor has also a right to consult the experts for some matters. In order to clear the doubt he may get the help of the technical services. So the auditor has also a right of seek the opinion. 

Correction 
The auditor has also a right of correction. He can make correction in the written or spoken matters. Even that he can make a revised statement if he founds any written mistake in it. 

Representation 
The auditor has also a right to defend himself if he is asked to leave the office in the meeting. So he can make the representation in meeting. He has a right to remain in business for the full tenure. 

Important Note 
It is clear that the right of an auditor cannot be limited either by the articles of association or by the resolution of the members

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Essential Qualities of an Auditor

Following are the essential qualities of an auditor:


1. Professionally Competent

It is the basic quality of an auditor. He must have a complete and thorough knowledge of the accountancy. To understand the accounting details he can apply his knowledge and skill. It is only possible if he has a sound background in accountancy and he is professionally competent.


2. Honest

This is the personal quality of an auditor. He should have the high moral standard. It is his duty to report on the fact basis. The auditor must be honest and sincere with his profession. He is responsible not to sign any paper which is no correct under his observation.


3. Up to Date Knowledge

An auditor's knowledge of auditing must be up to date. He must know the techniques of auditing. He must have the knowledge of other subjects relating auditing.


4. Knowledge of Business/Mercantile Law

It is the professional quality of an auditor to aware of the mercantile law, he has a complete knowledge of Contract Act, Sales of Good Act, Agency, Negotiable instruments Act, Partnership Act etc.


5. Knowledge of Taxation Law

It is also a professional quality of an auditor. He is aware of income tax ordinance 1979, sales tax and excise act and wealth tax etc this is helpful in checking the correct return of income etc.


6. Intelligent

It is also important quality of an auditor that he should be intelligent.


7. Qualification

For a professional auditor it is necessary that he should be charted accountant. According the company's ordinance 1984 it is essential qualification for auditor.


8. Tactful

It is also the personal quality of an auditor. Technical information is required to comment and criticize the policies of management. In case of missing can collect it from the client.


9. Maintain Secrecy

It is another basis personal quality of an auditor. In the business world there is a keen competition and if the auditor does not care of the secrecy of the business, then the client of the auditor has to face a lot of difficulties. So, the auditor must maintain the cent percent secrecy among the clients.


10. Patience

It is also the personal quality of auditor when any document is received by him he cannot make hurry to sign it or express or implied promise to provide the proof later on. In spite of it he personality check the records to know the true views.


11. Critical Attitude

The attitude of an auditor must be positive. By this quality he can get the desirable results due to favourable thinking. If he is confused about some matters he can go into the details to clear it.


12. Bold and Courageous

Auditor should be bold and courageous person. Any authority should not influence him. He should possess the courage to face the difference of opinion between him and client on any issue.


13. Courteous

It is an important quality, which the auditor should possess. His attitude towards the staff of client should be very humble and polite. He should also stress on his own staff to be courteous with the client.


14. Budget Preparation

The auditor has a quality of preparing the budget. According to the facts and figures of the Previous year, the estimates are established for the next year. The auditor can check that these budgets are according to their facts and corrects.

Personal Qualities

15. Independence

Independence is the personal quality of an auditor. This quality is desirable for independent opinion on business activities. He cannot be influence directly or indirectly by other people. An auditor must be independent at the time of programming investigation and reporting. He cannot change his programme due to management interference.


16. Vigilance

This is also the quality of an auditor. By this quality the auditor can discover the errors arid frauds. The auditor can also watch and check that if accounting staff has made any fraud or error. Because he has to be alert minded so that he cannot avoid errors and work well.


17. Judgement

An auditor must have the qualities of judgement. Judgement is involved in selecting depreciation, provision for bad debts, inventory valuation. The auditor can apply professional knowledge; experience and ethics to make decisions, which have no, prescribe areas.


18. Common Sense

An auditor must have common sense. He can make difference between essential and non-essential information. An item, which can influence the decision of other people, is considered as material. The auditor can use common sense to declare it as important rather then application of principles.


19. Prudence

Prudence is the personal quality of an auditor he can be asked to give advise on financial matters. He can be allowed to suggest improvement in accounting methods and techniques. There is a need to use prudence for guiding the businessman when he is asked to do so.


20. Practical

An auditor must have practical training. He can seek training in the field of finance, management and business organization. An audit staff is able to pass through a comprehensive training. This practical training is part of this professional life.


21. Self Control

An auditor must have qualities of self-control. The balance work shows regular progress on the part of audit. There is no over work or less work every day. A discipline is created in every work. The quality of audit work is improved due to discipline.


22. Initiative

An auditor must have the quality of initiative. He can start and complete an audit work without any help. The auditor must have experience, qualification and courage to complete the auditor work. He has courage to deal with audit work even in difficult situations.


23. Leadership

An auditor must have leadership. He is the working under his leadership. He must have communication ability. He can motivate and control the audit staff. As a team leader he can guide the auditor through practical-demonstration.


24. General Knowledge

It is also a professional quality of an auditor. He is aware of the economic and political conditions. He is also aware of the latest knowledge, which affects the business concern.


25. Electronic Data Processing

The auditor should also aware of the use of computer in the business for getting the information. He is must also trained in handling the data through the computers

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Chapter 16 - Audit Evidence

* Meaning of Audit Evidence 

* Importance of Audit Evidence 

* Objectives of Audit Evidence 

* Procedure of Audit Evidence 

* Key Points for Collecting Evidences

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Meaning of Audit Evidence

Any document, piece of information, voucher written or oral statement of any procedure which assists an auditor in forming his opinion in regard to the accuracy of data under audit. 

The role of the auditor is that of an independent professional critic who investigates, analyses and evaluates the information underlying the statement as a means of reaching a conclusion as to their fairness. Before and auditor can express an opinion on financial statements, he must have sufficient evidence that 

• The items in the financial statements are supported by the balances in the ledger accounts.

• The balances in the ledger account summarize correctly the numerous debit and credit entries.

• These debit and credit entries in the accounts represent proper accounting interpretation of all the transaction entered into be the business.

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Importance of Audit Evidence

While accepting the appointment, an auditor accepts to discharge certain legal obligations and responsibilities. In discharging his responsibility, the auditor should convince himself, in the first instance, that the accounts, he is reporting upon, are correct and the financial transaction recorded are duly supported by the documentary evidence. If he is not satisfied with the accuracy of the accounts or the authenticity of evidence, there is no point in certifying the accounts as correct. The examination of evidence is therefore necessary, so that strength would be based for independent, impartial and expressed opinion of the auditor. On auditor's opinion, the Directors, Shareholders and other initiative action.

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Objectives of Audit Evidence

The objects of verifying evidence are 

• To ensure that the errors, if any, in the data would be discovered by verifying the evidences.

• To facilitate the completion of audit programme scheduled and undertaken.

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Procedure of Audit Evidence

The following procedure is generally followed for the verification of evidences 

• Verification of accounts of account balances shown in the financial statements or the accounting reports

• To ensure that the procedure installed for control purposes is properly followed

Looking at the evidence for the balance amount shown in the ledger, the auditor has to work backwards in order to ensure that all those transactions responsible to give rise to that balance is also duly supported with evidences. 
The auditor should also carefully ensure that procedures being followed by the organization are effective and do not have any room for leakages. In the area where the financial involvement is heavy, the auditor should carefully review internal control procedures and the implementation of procedures designed and installed for an effective control of function.

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Key Points for Collecting Evidences

1. Physical existence of the assets 
2. Authoritative documents 
3. Statement by third parties 
4. Calculation by the auditor 
5. Satisfactory Internal Control 
6. Subsidiary or detailed records 
7. Subsequent action of the company 
8. Formal statement by company's officers 
9. Interrelationship with in the data examined.

Read more: Audit Evidence http://www.friendsmania.net/forum/b-com-part-2-auditing-notes/28437.htm#ixzz34LeZcx2j

 

Chapter 14 - Investigation

* Meaning of Investigation 

* Kinds of Investigation 

* Objects of Investigation 








Meaning of Investigation

Investigation implies an inquiry into the accounts and records of a business concern. It is an examination of accounts and records of an undertaking with some special purpose in view. The main purpose of such inquiry is to ascertain the true financial position of the business concern or its normal profit earning capacity or the extent of fraud, if any or to inquire about the suspected mismanagement etc. So, the investigation is a sort of special audit with a particular job in view.

Read more: Investigation - Meanings, Kings, Objects, Types of INvestigation http://www.friendsmania.net/forum/b-com-part-2-auditing-notes/28434.htm#ixzz34UmagYsE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chapter 15 - Auditor's Report

* Audit Report 

* Essentials of Audit Report 

* Qualified Report 

* Auditor's Duties 


Audit Report

Auditor's report is the expert's opinion expressed by the auditor as to the fairness of financial statements. 
The audit report is the end product of every audit. It is the medium through which an auditor expresses his opinion on the financial statements. Audit report is an important part of audit process since it summarize the results of the examination work conducted by the auditor. The report shows the scope of the work done and the responsibility assumed by the auditor regarding the fairness or otherwise of hte financial statements. The auditor draws appropriate conclusions by examining the various statements and accounts, which he conveys through the audit report. It is a formal communication by the auditor to the shareholders throwing light on the state of affairs of the company. Audit report is addressed to the members of the company and is considered at the Annual General meeting of the company. Audit reports should be so drafted that they remain simple and intelligible to a common man. The audit report should be explicit so as to provide greater information and protection to the interest of shareholders and others.

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Essentials of Audit Report

1. Title 
An auditor report must have appropriate title, such as "Auditor's Report". It is helpful for the reader to identify the auditor's report. It is easy to distinguish it from other reports. The management can issue any report about the business performance. The title o the report is essential. 
2. Addressee 
The addressee may be shareholder or board of director of a company. The auditor can audit financial statements of any business unit as per agreement. The report should be appropriately addressed as required by engagement letter and legal requirements. The report is usually addresses to the shareholders or the board of directors. 

3. Identification 
The audit report should identify the financial statement that have audited. The financial statement may include trading profit and loss accounts, balance sheet and statement of changes in financial position and sources and application of frauds statement. The report should include the name of the entity. Moreover the data and period covered by the financial statement are also stated in it. 

4. Reference to Auditing Standards 
The audit report should indicate the auditing standard or practice followed in conducting the audit. The international auditing guidelines need assurance that the audit has been conducted as per set standards. 

5. Opinion 
The auditor's report should clearly state the auditor's opinion on the presentation in the financial statement of the entity's financial position and the result of its operations. The statement give a true and fair view is an auditor's opinion. This opinion is usually based on national standard or international accounting standards. 

6. Signature 
The audit report should be signed in the name of the audit firm, the personal name of the auditor or both as appropriate. 

7. Auditor's Address 
The address of auditor is stated in the audit report. The name of city is stated in the report for information of the readers. 

8. Date of Report 
The report should be dated. It informs the reader that the auditor considered the effect on the financial statements and in his report of events or transactions about which he become aware the occurred up to that date

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Qualified Report

A qualified opinion is given when the auditor fells the he cannot issue an unqualified opinion. The effect of disagreement or limitation on scope is not so material as to require an advance opinion or a disclaimer of opinion. A qualified opinion should be expressed as being except to the effects of the matter to which the qualification relates. 

1. No Proper Books 
A qualified repeat is issued when proper books of accounts have not kept by the business concern. The law estates the number of books to be maintained by the companies by the companies. The failure to keep necessary books of accounts induces the auditor to mention the fact in the reports. 

2. Informal Statement 
The law states the formal for financial statement. The fourth schedule and fifth are given in the companies ordinance 1984. The companies must prepare their statement according to schedule otherwise the auditor can mention weakness in the report. 

3. Disagreement Between Books and Statements 
The financial statement figures must tally with figures recorded in journal and ledgers. The different in figures is not acceptable as it may lead to receive the shareholders. The auditor can qualified his report that figures of books and statement are different. 

4. Inconsistent Accounting Policies 
The accounting policies must remain the same from year to year. The changes in depreciation rate valuation of stock and provision for bad debts can disturb the financial statements. The auditor can state the inconsistency in accounting policies toward by the management. 

5. Ultra Vires Payments 
The management can misuse the power of doing the business. They may not followed articles of association or companies ordinance 1984. The payment of dividend out of capital is an example. The auditor must report to the shareholders about the misuse of powers. 

6. Expenditure Incurred 
The expenditure incurred during the year must be to the purpose of business of company. The expenses incurred objective may be state by the auditor in the report. The management is responsible to these wrong payments. 

7. Business Conducted 
The business conducted investment made and the expenditure incurred during the year may not meet the requirement of memorandum of association, articles of association and the companies ordinance. The auditor can inform the owners about the violation of law. 

8. Scope Limitations 
The management may have valued closing stock prior to date of appointment of auditors. There is a scope limitation as auditor was absence at the time of stock valuatio. The auditor can qualify his report as to the valuation of stack talking. 

9. In Appropriate Accounting Method 
The auditor may note that depreciation has not been charged on building. The depreciated on plant and machinery may be recorded at fewer rates. The difference in actual and recorded expenses may be stated in the report. 

10. Inadequate disclosure 
The management may have entered in to an agreement for issue of debentures for plant and expansion. The agreement may restrict the right to pay dividend to shareholders for next years. The auditor can disclose such agreement to the owners of the company. 

11. Departure from Accounting Practice 
The qualified report is issued when an auditor is not satisfied with the management policies. The company may not record the provision for loss on long-term contract. The disagreement with management can be recorded as adverse opinion in the report for the information. 

12. Breakdown of Accounting System 
The auditor can issue the qualified report when he is unable to form an opinion about the financial statements. There may be fire at computer center business office. The figures may be estimated so auditor can disclaim his opinion. 

13. Failure To Prove Case Sales 
The auditor can check the internal control system. The company may be dealing on cash basis. All sales may be in terms of cash. The poor internal control system may create hurdle to verify cash sales. The auditor can submit qualified report with out opinion. 

14. Contingency 
The auditor may qualify his report where there is contingency (tax dispute court case) which is significant to affect the financial statement of the company. The auditor has the right to report the matter to the shareholders. The items must be stated in the footnote as well as audit report. 

15. No Zakat Deduction 
The Zakat may be deductible at sources under the Zakat and usher ordinance 1980. The auditor may examine the relevant law. He can not the weakness of the management for deduction of Zakat. This weakness may be present in the audit report. 

16. Incomplete Information 
The auditor may not obtain complete and full information and explanation for the purpose of audit. The facts can be presented to the owners that he is unable to collect necessary information. He can submit qualified report in order to draw attention. He can submit qualified report in order to draw attention of owners. 

17. No Access to Books 
The auditor may be refused to have access to the books of accounts and other relevant record. In this case the auditor is unable to collect true information necessary for the purpose of audit. The qualified report can be presented to the shareholder due to non-availability of all or any book.

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Auditor's Duties in Respect of Statutory Report

1. Statutory Report 
The report, which is submitted by the directors in the first general meeting of the shareholders is called statutory report. The auditors should duly verify it. The auditor will take following important steps before certifying the statutory report. 

2. Study of Legal Documents 
The company Memorandum and Articles as also the prospectus should be carefully studied and notes should be made of items affecting terms of share capital issue, minimum subscription, brokerage on shares or underwriting commission, acquisition of assets and liabilities from vendors, mode of satisfaction of purchase consideration etc. 

3. Checking of Shares 
A complete and exhaustive audit should be made of share capital and debentures issue, including checking of entries in the Register of members and he Register of Debenture holders. 

4. Checking of Cash in Hand and Cash at Bank 
In order to ascertain the correct balance of cash in hand and in bank, it would be necessary to include in the checking the revenue receipts and payments also. 

5. Verify the Capital Receipts and Payments 
A through vouching and checking of the cash book transactions for the purpose of verifying the capital receipts and payments will be necessary. 

6. Checking of Commission 
Auditor should check all types of commission paid or unpaid with the issue or sale of debentures to any one. 

7. Verify the Borrowing Power 
It should be seen that the limit, if any placed on the borrowing powers of the company is not exceeded. 

8. Verify the Minimum Subscription 
The auditor should ascertain that the requirements of the law as to minimum subscription have been duly complied with. 

9. Checking of Bio Data 
Auditor should also verify the names, addresses and descriptions of the directors manages agents and auditors. 

10. Verify the Arrears 
Auditor should verify the arrears due on calls from directors, managers and agents etc. 

11. Scrutiny 
Auditor should examine very carefully all the items, which are included in the preliminary expenses account. 

12. Checking of Minutes 
Director's minutes will have to be referred to in order to see that the allotment of shares and debentures is properly done and that all capital expenditure and loans borrowed are duly sanctioned. 

13. Examine the Passbook 
Auditor should examine the bank passbook and verify the receipts and payment with it. 

14. Specimen of Auditor's Certificate 
If the undersigned being the auditor of the company, hereby certify that so much of the report are relates to the shares allotted by the company and the cash received in respect of such shares and receipts and the payments of the company is correct.

Read more: Auditor's Report http://www.friendsmania.net/forum/b-com-part-2-auditing-notes/28436.htm#ixzz34LexOH8V