in respect of all shares i e company 2. The amount of cash received by the co} nts made there allotted. ; f the payme! 3, An abstracts of receipts of the company & of i of report out within 7 days ‘por inary expenses of the company li ; An amount or estimate of the prel ‘or discount paid or to be paid on the showing separately any commissi f sha tures. issue or sale of shares or debeni / each underwriting contract, if any, has not been 5. Extent if any, to whi carried out & reasons for that. due on calls from every director & from the manager, 6. Arrears if any, in * . Particulars of any commission or brokerage paid or to be adn cone ion with the issue of sale of shares or dentures to any direct le manager. 8. Auditor's certificate. 12.3 Audit of Branch Account The accounts of the branch office should be audited by company's auditor appointed u/s 139(1) or a person who is qualified for appointment as an auditor of the company. Where a Branch office is situated outside India, the books of that branch shall be audited by the company's auditor or by any person qualified or by an accountant duly qualified to act as the auditor of that branch in accordance with the laws of that country, e Appointment of Branch Auditor: i. The branch auditor may be appointed by the company in its general meeting. i, The general meeting may authorize the board of directors to appoint such persons in consultation with the company's auditor: iil, The branch auditor shall have the same Powers & duties in respect of the audit of accounts of that branch office as the cor ' i i an} respect of the same, wien sorter basi iv. He shall pre by him. Prepare a report on the accounts of the branch office examined vi. 7 i = 5 s E g é a 8 q g & E & Qa E 8 g 4——————~n~ of Auditors [Section 141 of 3037 Disqualification “Company Act 2013) — aircon. Following persons are not qualified FoF the appoiniment a) A Body Corporate. b) An Officer oF Emp! ©) APariner or Employee © of the company: i“ an Officer or Employee of the company. a i js holding any security in the i his partner 16 : cA person who, ort hie rhs Ming company or associate company company or subs ici ing company. or aubsidiary of such holding co : — (Note - Seeurity means ant jstrument which carries von rights.) fete ~ Se S : i sscFéua ©) Apperson who, or his eelative, oF isinded nonce sec aoe may be prescribed (the sum Prose s. ' compa + ybeiiary company or holding comPanY or associate company or subsidiary of such holding company. is relati i has given a guarantee or cho, or his relative, of his partne® a ° aa ag connection with the indebiness of any third person, im ueess of preseribed amount (RS. 1 Jakh) the comPiny or subsidiary company or holding company or associate company OF subsidiary of such holding company. 2) A person or a firm who, whether directly of indirectly, has business Jelationship of such nature as may be presctibed with the company or subsidiary company or holding company or associate company or subsidiary of such holding company. hy A person whose relative is a director or is in the employment of the company as a director or key managerial personnel. i) _Aperson who is in the employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than 20 companies. ) A person who has been convicted by a court of an offence involving fraud & a period of 10 years has not been elapsed from the date of such conviction, 1414): An auditor, who after his appointment becomes subject to any of above disqualifications, shall be deemed to have vacated his office as an auditor. The list of disqualifications makes the positi i iti i . possible. Position of an auditor as independent as 10.4 Appointment of Company Auditor 1 Appointment . DIS Hest auditor{ Section 139(6) of Companies Act AS per section 139(6), frst auditor will be appointment i, The first audi i , seine cae shall Appointed by the board of directors within one te of registration of the company.4, one indeterminable which has arouses 5 Contingent Liabilities: sible liability of pi d from past dealin he conti Contin; ‘y inable amount or inability i: s resent determinab! ntingent liability is a pos: : ingent liabilities- a legat obligation in the future, Following are ( © Legal suits @ Guarantees given © Capital commitment © Investment in partly paid up shares Following procedure should be adopted in yerifying contingent liability- i, Inspect the minute book of the company to, ascertain all contingent liabilities known to the Company. . i, Examine the contracts entered by the company & the likelihood of contingent liability emanating there from. iii, Scrutinize the lawyer's bills to track unreported contingent liability. iv, Examine bank letters in respect of bills discounted & not matured. y. Examine bank letters to ascertain guarantees given. vi. Discuss with various functional officers of the company about possibility of contingent liability. . vii. Obtain a certificate from the management that all known contingent liabilities have been included in the accounts & they have been properly disclosed. The contingent liabilities should be disclosed by way of a footnote to the balance sheet. AS-29 provides guidance in respect of contingent liabilities. 8.4.6 Debentures: 1. Auditor should verify the Trust Deed & examine the securities offered. 2. Auditor should verify the details of securities offered & could see that the charge, if any is registered with the registrar of companies. 3. Interest is payable on the debentures half yearly in most of the cases. Provision should be made in respect of the interest accrued but not due. 4, Auditor should verify the Memorandum & Article of Association to examine whether the company has borrowing powers.7.4.6 Investments: The auditor is required to satisfy himself as regards the pawers of the enterprises under audit to make investments, by examining the documents such as the "Memorandum of Association" in case of company. Investments may be classified as- @ Marketable securities & @ Long term investments Marketable securities are readily saleable, but long term investments which are held with no likely intention to sell, are not so. All investments should be held in the name of the client. If they are held in the name of his nominee, the letter confirming the arrangement should be examined. Investments should be verified by reference to the schedule of investment. The schedule of investment should give particular as the date of purchase, name of security, cost, market price, date of receipt or accrual of interest or dividend & these should be tallied with the investment register. The object of verification of investments is to ascertain that- i There is a valid evidence of their ownership & custody. ii, They are properly classified in financial statement as current & long term. iii, There is adequate disclosure of any pledging, hypothecation. iv. They are valued on a basis in accordance with legal & professional standards. Here, Current Investment - shown at cost or NRV, whichever is lower. Long Term Investment - shown at cost. Except if there is permanent decline in investment.‘at's consideration that a control be cost effective, rent's lera 2. -Mangy 3, The potential for human errors. “The possibility that the person having higher authority may override a 4. The possibility control. “The possibility of deception of control through collusi or with employees of the entity. ‘The procedure may not work due to changes in conditions. jon with outside parties 7. Manipulation by the management in the preparation of fin statements. 4.6 Methods for the Proper Review & Evaluation of the Adequacy of the Internal Control Auditor can use the following tools to collect information required for the proper review & evaluation of internal control- 1. Narrative Record: a) Itis complete & exhaustive description of the system as found in operation by the auditor. b) Actual testing & observation are necessary before such a record can be developed. [tis suitable for small businesses. c) Butitis difficult to understand the actual system. d) There is weakness or gap in the internal control system cannot be easily identified. 2. Check List: a) This is series of instruction & / or questions which a member of the auditing staff must follow & / or answer. b) Answers to the check list instructions are usually Yes, No or Not Applicable. c) The: auditor should study the complete check list to ascertain existence of internal contro] & evaluate its implementation & efficiency, 3. Internal Control Questionnaire (ICQ): 8) Tmemal Control Questionnaire isa set of questions designed to provide a thorough view of the state of internal control in an organization. b) Itcontents the questions relating to- ~ Purchases & Creditors ~ Sales & Debtors ~ Stocks ~ Cash & Bank Receipts & Payments > Fixed Assets etc.3.7 Audit of Different Ledgers 3.7.1 Bought Ledger: Following are the steps for the audit of bought ledger- a) b) ©) 4d) e) Verification of opening balances: Opening balances of the bought ledger would be verified from audited accounts & schedules. For that purpose auditor has to know whether audit of that enterprise would actually conduct or not. Internal Control System: Auditor has to check the internal control system. He should verify the system & check whether proper allocation of functional responsibilities within the organization. Checking of posting: Next step of audit of bought ledger is the checking of posting into ledger from cash book, purchase register, bills payable book, journal, & other relevant books of accounts. While checking the posting auditor should see that correct amounts are posted on the correct side of proper account. Checking of totals: Auditor should check the totals & casting of each account. Carry forwards & brought forward should be properly checked. Checking of summary balances: Auditor should obtain the summary of balances of the bought ledger. He should see the correct amount is shown against every party. General checking: © Scanning Accounts: The client should be requested to write in the ledger also the bill number for which credit is given. Similarly a reference bill while making the payment should also be made when the party's account is debited. This will enable both the accountant & the auditor to find out-12.7 Cost Audit Section 2338 of companies act deals with cost audit. Cost Auditor is a person who appoint for conducting the cost audit of cost accounting records. The Central Government may, if it considers it necessary, direct that the audit of cost accounts kept by the company shall be conducted by cost accountant. i, The auditor verifies the correctness of cost records of the company. i Cost audit is an audit process for verification of the cost of manufacture or production of any article on the basis of accounts relating to utilization of material, labour & other items of cost as maintained by the enterprise in cost records. iii The person to be appointed as cost auditor of a company is required - © = To be a cost accountant within the meaning of Cost & Works Accountants act, 1959 & @ To hold a certificate of practice issued by ICWAL. iv. The cost auditor may be an individual or a firm of cost accountants. v. The cost auditor shall have the same powers & duties in relation to the audit conducted by him as the cost auditor. vi. Cost auditor shall make his report in uiplicate to Central Government in the prescribed form. A copy of report shall be forwarded by him to the company. @ Cost Audit Report: Cost auditor shall make his report to Central Government in the prescribed form. A copy of report shall be forwarded by him to the company. i. The cost auditor must forward the Cost audit report to the Central Government & to the company within 180 days of the closing of the year to which the audit relates, ii, Cost audit report must be given in prescribed form. ii, The cost auditor must further report on the adequacy of cost accounting records maintained by company to confirm that they give a truc & fair view of the cost of production, processing, manufacturing or mining activities, as the case may be. iv. Additional information may be included in the annexure in the report. ¥. The company shall within 30 days from the date of the receipt of the copy of report furnished the Central Government with full information & explanation on every reservation or qualification contained in such report. Vi, The Central Goverment may seek further information from the company if itso needs after consideration of the report & information & explanation given by the company, vii, The Central Government may direct the Company concemed to circulate to its members along with the notice of annual general meeting to bt held for the first time after submitting of the relevant cost audit Teport the whole or part if the report as it may specify, it should be noted that cost9.7 ii, iii, ix. Provision for proposed di gS Dividend ‘According to section 205(1), dividend can be declared or paid by in! year only out of- the company for any financial y fe / It's profit for that year, at after providing for depreciation as per section205 Q). (Out of money provided by a central or state government fos payment of dividend pursuant to the guarantee given by the government. Transfer to reserves - According to section 205 (2A) dividends shall be paid after the company has transferred to reserves of the company of such a % of its profits for that year not exceeding 10%. Payment of dividend- Following rules have been framed- Dividend once declared becomes the liability of the company & should. be paid within 30 days of the date of declaration. In case dividend have not been paid or claimed within 30 days, the company should within 7 Gays from the expiry of 30 days, transferred such amount to separate bank account titled as "Unpaid Dividend Account” No dividend shall be paid except in cash. Dividend should be paid to the registered holder of the shares. lend- Schedule VI to the Companies Act, 1956 requires proposed dividend to be shown under "Current liabilities & provisions”. Such event take place after the balance sheet date but reflects the financial position as on the date should be included in financial statements. Setting off of brought forward debit balance in profit & loss account- Inarriving at the divisible profits the provision of section 205 (2) should be kept in view. Accordingly amount of loss or depreciation (contained in debit balanee of profit & loss account) whichever is less should be set off against current revenue profits before declaration of dividends, 9.7.1 Interim dividend: AGMs i Dividend includes any interim dividend. Dividend declared between two called as interim dividend. The board may, from time to time, pay such interim dividends as may appear to it to be justified by the profits of the company. Interim dividend can be declared by the Board of Directors if Article of Association authorizes to do so. It is the sign of performance of the company. Appropriate provision for depreciation should be made for the whole year ‘computed in accordance with the section 205 of the companies actThere are three stages- i. Application stages In this stage application far shares are received along with application money. ii, Allotment stage: Allotment of shares takes place allotment letters is issued & allotment money is received. iii, Call stage: In this stage calls are made on shares & the amount due is received. 93.1 Auditor's duties regarding audit of share capital: Auditor should examine the minute book to verify the approval. ii. He should check the application & allotment book to see the appropriate journal entry is duly passed. ili, He should check the copies of letter of allotment & letter of regret with entries in application & allotment book. iv. He should examine the resolution passed by the board. v. He should compare the schedules of calls in arrcars with application & allotment book & see that amount has been correctly calculated. vi. In case of underwriting, auditor should examine the contract with underwriters & ascertain that the terms thereof have been complied in full. vii, In case of shares issued at premium, auditor should examine the prospectus & article of association of the company to see whether they permit the issue of shares at premium, viii, He should sce that whether company has complied with legal provision. ix. He should also see compliance with SEBI guidelines. In case of premium he should see section 78 compliance, x. Incase of shares issued at discount, auditor should see that conditions in section 79 are complied with, & also verify the sanction obtained from central government. x4, In case of shares issued at discount, auditor should examine the prospectus & article of association of the company to see whether they permit the issue of shares at discount. xii, Auditor should verify the amount of calls in arrears from the share register. xiii. He should obtain a statement from the management enlisting the details of calls received in advance & whether such amount is transferred to a separate account. 9.3.2 Shares underwritten placed for commission: i, Many times, the whole or a part of the issue of capital is underwritten. The underwriters agree to take up the unsubscribed capital in the event when the capital is not fully subscribed. ‘The auditor should refer to the underwriting contract to verify the number of shares if any, which the underwriter were obliged to take up & payment made by them in respect thereof. 9.3.3 Shares issued at premium: __ Section 78 of Companies Act, 1956, deals with the issue of shares at a Premium. A sum equal to the aggregate amount or value of premium received on——_—————- ses Company case of company ‘The following points deserve special consider audit- 1. Object of audit: , w eierpor The object of company audit is to examine the ae 7 oS or The state ot whether or not the financial statement shows a true . Tor the financial year company at the end of financial year, ended on that date. & the profit & los 2. Internal control: | The management is responsible for devising suitable internal contol i safeguarding the assets of the company. However, before placing the an i internal control system of the company, it would be necessary to Oe jew of its compliance & substantive test procedure to evaluate it from the point of vil deficiencies. 3. True & fair: ‘The financial statement should show a true & fair view of state of the company & the results of operation of the company during the year. a. Materiality: ; Materiality is a subjective concept. The materiality should be judged in relation to profit shown by the profit & loss account. What is material in one circumstance may not be material in other circumstance it depends upon the professional judgment of the auditor to decide about the materiality of a particular item. 4, Comparative study: Auditor should compare the figures of the current year with the previous year figures. This helps in locating major deviations & he should ascertain reasons for the same. 9.3 Share Capital Audit The principle objectives of audit of share capital are as follows that- a, Issues of shares are properly authorized & that there is no over issue beyond the limits as prescribed in the memorandum. b. The cash & other assets acquired through issue of shares have indeed been received, properly classified, valued & correctly recorded in the books of accounts. c. The distribution of dividends & retention of profits in form of reserves & provisions are properly authorized. 4. Provisions relating to rights & privileges of shareholders, creditors, etc. are duly complied with ©. Generally accepted accounting principles are followed in the preparation of financial statement: conformity with legal provisions.7.2__ Verification of Assets Verification of assets is an important audit process: by convention its scope has been limited to inspection of assets, where it is practicable & collection of information about them in an examination of documentary & other evidence so as toconfirm that: a. The assets were in existence on the balance sheet date. b. ‘The assets have been acquired for the purpose of the business & under proper authority. c. The right of ownership of the assets belongs to the undertaking. d. They were free from any lien or charge not, disclosed in the balance sheet. €. They have been correctly valued having regard to their physical condition. f. Their values are correctly disclosed in the balance sheet. Verification of assets is primarily the responsibility of the management since the proprictor of the entity. The auditors function in these circumstances is limited only to an appraisal of the evidence, their inspection & reporting on matters affecting their valuation. 7.3 General Consideration for Valuation & Verification of Assets ‘The general principles in valuation & verification of fixed assets that an auditor should follow are 1. Existence: To confirm that the assets were in existence on the date of the balance sheet by- i. Physical inspection ii, Comparison of assets register with general ledger balances iii. Obtaining confirmation from custodian of asset. 2. Authority: To ascertain that the assets have been acquired for the purposes of businéss & they are under proper authority. 3. Ownership: To confirm that the rights of ownership of assets belonged to the client in respect of assets appearing in the balance sheet. The fact of joint ownership must be disclosed. 4. Charge: To ascertain that no unauthorized charge has been created against any asset & all the charges are duly registered & disclosed. In case of charge, a centficate should be obtained from the bank showing the nature of charge.510 Internal Control Internal Controls are to be an integral part of any organization's financial and business policies and procedures. Internal controls consist of all the measures taken by the organization for the purpose of; @ Protecting its resources against waste, fraud, and inefficiency; @ Ensuring accuracy and reliability in accounting and operating data; © Securing compliance with the policies of the organization; e Evaluating the level of performance in all organizational units of the organization. Internal controls are simply good business practices. The system of internal control has been defined as- "The plan of organization and all the methods & procedures adopted by the management of an entity to assist in achieving management's objective of ensuring, as far as practicable, i. Orderly & efficient conduct of the business ii, Adherence to management policies iii. Safeguarding of assets iv. Prevention & detection of frauds & errors vy. Ensuring accuracy & completeneS of the accounting records vi. Timely preparation of reliable finance information" Usually the control is entirely centralized with the owner & there is no significant delegation of duties. However as the business grows in size, it soon reaches a stage where the owner can no longer keep himself intimately informed about the detailed operations of his business in such a case internal control becomes very important. The reliability of business operations can be judged by the effectiveness of internal control. The Internal Auditor role is to examine the adequacy and effectiveness of the intemal controls and make recommendations where control i improvements are needed. Since Internal Auditing is to remain independent, the Internal Auditor does not have the primary responsibility for establishing or maintaining internal controls. However, the effectiveness of the internal controls are enhanced. through the reviews. performed and recommendations made by Internal Auditin 2. .10.1 Elements of internal control: Internal control systems operate at different levels of effectiveness. Following are some elements of the internal control system-pes of Fraud i lent application of cash. version of fraud i Tent application of another's property by ‘Misappropriation means wrongful ¢ Embezzlement means any fraudul PF any person to whom it has been entrusted. itted by- Misappropriation or embezzlement may be committed Dy © Non recording of cash sales. @ Making false entries in account of customers. © Showing payments against purchases never made. © Non recording of credit notes for purchase return. © Non recording of cash received against unusual sales. Misappropriation of goods: Tt may be committed by recording wrong purchases. Fraud by way of misappropriation of goods is easier to commit in case of goods which though high priced & not bulky. Fraud of such nature can be detected by- © Proper maintenance of accounts as to purchases & sales. © Regular stocktaking. . © Strict check on incoming & outgoing goods. Fraudulent manipulation of accounts: Such fraud is caused when a person © Make or causes a false entry in the business records. © Altered, crased, removed or destroyed a true entry from records. © Prevents the making of a true entry or causes the omission there of. Generally, fraud by manipulation of accounts is committed by person holding _high positions in the business, Teeming & lading: Itis the one of the type of fraud that is committed in connection with the receipt of cash. It means using the funds of the company for personal purpose ‘without any authority. If this type of fraud not prevented in time, it may lead to bigger fraud. This can be prevented by- , @ The transactions are in cheques, © The work of collecting cash, cashbook & of issuing recei of all these activities. } depositing into bank, recording the same in pts shall be allocated that no one person in charge¥. Auditor should discuss with his audit team about the susceptibility ofthe entity's Financial statements & design audit procedure accordingly. vi misstatement resulting from fraud, the auditor should-considered whether fraud risk factors are present that indicate the possibility of fraud, Make enquiries of the management to obtain information about its understanding & assessment of likelihood of fraud occurring within the emity. 6.6_- Events which increases the risk of fraud or Error SA 240 on fraud & errors lists the following events which may increase the risk of fraud & error- i. Weakness in design of internal control system & non-compliance with laid down control procedures. i. Doubts about the integrity or competence of the management, iii, Unusual pressures within the entity. ix. Unusual transactions such as transactions with related parties, excessive payment for certain services. v. Problems in obtaining sufficient & appropriate audit evidence. 6.7 Inherent limitation of an Audit in relation to . Frauds & Errors i. Management role: Primarily it is the responsibility of management to design & implement the suitable system of internal control to- ©@ Safeguard the assets & © Prevent frauds & defalcations. ii, Auditor's role: . During the audit auditor should- Bear in mind the possibility of existence of fraud or other irregularities. Devise procedures & use techniques to ensure discovery of all frauds & errors. @ Extent his audit procedure to confirm his suspicion on the probable existence of any fraud or error. Objective of an audi ‘An auditor is not intended & cannot be relied to disclose all defalcations & other irregularities. However, the auditor does not guarantee that once he has signed the report on the accounts no fraud exists.6.2 Frauds According to SA 240 “The fraud refers to intentional misrepresentations regarding financial information by one or more individuals among management, employees or third parties." Fraud may involve: a, Manipulation, falsification or. alteration of records or documents, b. Misappropriation of assets ion of transactions from records. ©. Suppression or omis 4. Recording of transaction without substance. &. Misapplication of the accounting policies knowingly. Fraud may be classified as- i. Misappropriation or embezzlement of cash ii. Teeming & lading iii, Misappropriation of goods iv. Forgery of vouchers ¥. Services rendered but not accounted for vi, Manipulation & falsification of accounts vii. Window dressing 6.3 Errors “The term error refers to unintentional mistake in financial information.” Error includes: a. Mathematical or clerical mistake in the records. b. Oversight or misinterpretation of facts. c. Misapplication of accounting policies unknowingly, Fraud may be perpetrated by manipulation of accounts, Errors on the other hand, may creep in accounts due to omission or clerical errors on the part of employees. Errors may classified as- i, Errors of omission ii, Errors of commission iii, Errors of principle iv. Errors of duplication y. Compensating errors48.2 Objectives of Internal Audi a) Evaluation of accou ing & administrative systems & control Internal audit is concerned with ensuring effective & efficient system of accounting control, standard cost control & other administrative controls, h) Safeguarding of business assets: Iascertains the accuracy, the integrity & the reliability of the financial & other records. It assures the top management that the accounts & the financial statements show a true view. c) Compliance with established policies & procedures: Ivis concerned with reporting to the management as to compliance with predetermined policies, procedures & standards of performance d) Reliability of management data: It assures the top management that the accounts & financial statements show true & fair financial position. e) Prevention & detection of fraud: It facilitates the prevention & detection of fraud & errors. ) Making special investigation: Ittakes up special investigation at the special request of the management. 8) Review of Internal Control System: It reviews the operation of the overall internal control system & non compliance to the notice of the appropriate level of management. h) Suggesting improvements: If the internal auditor finds any inadequacy & weakness in the working of internal control in any area, he makes appropriate recommendations to the management for the improvement of the system. 4.9 Role of Internal Auditor 1) Internal Auditor appointed by the management generally directors. 2) The scope of work is determined by management. 3) Internal auditor is responsible to the management. 4) The scope of work of an internal auditor may extend even beyond the financial accounting & may include cost investigation, inquiries relating to losses & wastages, production audit, performaance audit ete. 5) He has to submit the audit report to the management. 6) Format of report is not prescribed.d) Reliability of books of accounts: If an enterprise is operming an effective system of internal check, its books of accounts & other records ate relied upon by interested parties, Even the statutory auditor confines his examination 10 selective test checking, thus avoiding the need to undertake a detailed examination of cach & every transaction, c) Early detection of errors & frauds: Work performed by each individual checked by another individu errors & fraud committed by an employee is likely to be disc one by another. ) Early preparation of final accounts: Accounting data emanating under an effective system of internal check can safely be used to prepare final accounts of the business in time. 4.8 Internal Audit Many large organizations have system of internal audit within the organization as an internal part of the internal control. They have a separate audit department. The scope & furiction of this department vary considerably from organization to organization. Internal audit is the review of the various operations of the company & of its records by staff specially appointed for the purpose. This review may be periodical or may be even continuous. The Institute of Internal auditors defines internal audit a "Internal auditing is an independent appraisal activity within an organization for the review of the accounting, financial & other operations as a basis for protective & constructive services to the management. It is a type of control which functions by measuring & evaluating the effectiveness of the other type of control. It deals primarily with accounting & financial matters but it may also properly deal with matters of an operating nature, Internal Audit is an integral part of internal control. It should be understood that internal control is not merely internal check or internal audit; it is a system of control as a whole. 4.8.1 Basic Principles of Establishing Internal Auditing: i. Internal audit should have an independent status in the organization, ii. Internal audit should be free from executive functions. Internal audit may help in formulating executive decisions but it. does not take part in formulating the decisions. ili, It must have unambiguous & clear understanding of the objectives. iv. E can investigate any phase of the activitics of the organization at any ime.Subsequently misappropriating the payment made against the credit in the suppliers account, b. Suppressing amount equiv credit nore issued by 2 supplier & misappropriating an lent there to oul of the payinent made to him. ¢. Crediting an amount due 10 a supplier not in his account but under a fictitious name & misappropriating the amount paid against the credit balance, 2. In the Sales Ledger / Debtors Ledger: a. Fraud through Teeming & Lading method b. Adjusting a unauthorized credit on fictitious rebate, discount in the account with a view to reduce the balance. ¢. Writing off the amount receivable from acustomer’s bad debt account & misappropriating an amount equivalent to credi. 3. In the Nominal Ledge: a. Allocating an item of income or expenditure wrongly. b. Understating or overstating the value of stocks, amount of prepaid expenses or liabilities. c. Capital expenditure charged as revenue expenditure or vice- versa, 3.9 Key Concepts Vouching is the process of checking documentary evidence that the transactions are properly recorded & accounted for. A voucher is documentary evidence in support of any transaction in books of accounts. Primary voucher: All written evidences in original are primary vouchers, Secondary voucher: Copies of original vouchers are called collateral ledger is also cailed as ‘Nominal Ledger’ or ‘Impersonal Ledger’. It contains all the balances which are ultimately included in profit & loss account & balance sheet 3.10 Summary Vouching means inspection by an auditor of documentary evidence supporting & substantiating transactions. The main aim of vouching is to inspect all receipts & payments are properly accounted for & no fraudulent transactions are recorded. A voucher is documentary evidence in support of any transaction in books of accounts. There are two types Vouchers i.e. Primary voucher and Secondary voucher. Voucher must be dated & serially numbered, Voucher should be passed by responsible officer. Auditor should checked opening and closing balances, totals, trial balance, subsidiary books etc. while doing the audit of ledgers. Specific consideration should be given while auditing Bought ledger, Sales ledger, Nominal ledger.ee Vouching means ins; supporting & sub checking document: & accounted for, ection by an auditor of documentary evidence stantiating transactions. Vouching is the process of ‘ary evidence that the transactions are properly recorded ‘The main aim of vouching accounted for & no fraudulent tran: audit procedure to obtain evidenc the help of youching auditor com is to inspect all receipts & payments are properly sactions are recorded, Vouching is a substantive € as to completencss, accuracy & validity. With i to know the genuineness of the transactions. The duty of auditor is to see substantial accuracy of vouchers & then make report thereon, Vouching is also the basis for assets & liabilities. Auditor should be careful while vouching the transactions & entries in the books of accounts Ieis the backbone of auditing process. Thus, vouching may be considered as the essence of auditing. --3.3__ Purpose of Vouching ‘The purpose of vouching is to determine that- © — Classification: Transactions have been classified & disclose in accordance with accounting policies. Accurate amount: Accurate amount has been recorded. Pertains to entity: Transactions are pertains to entity that took place during the relevant period. @ Actual occurred: Transactions which have actually occurred have been recorded. © Proper Accounts: Transactions is recorded in proper account to proper period. 3.4 Objectives of Vouching Following are the objectives of vouching- @ = To see that transactions & entries are properly recorded in the books of accounts. © — Tosce that entries & transactions are properly authenticated by reasonable person. . © To sce that transactions have been properly classified & disclosed in accordance with the accounting policies. @ = To sce that no fraudulent transactions are recorded in books of accounts. © To see that all entries & transactions are supported by proper evidence. 3.5 Voucher A voucher is documentary evidence in support of any transaction in books of accounts. Voucher can originate within the organization or outside the organization2) Rigidity: Additional procedures or techniques may be called forby the special circumstances. 3) False sense of security: Audit members may feel that everything is taken care by the audit programme. They may fail to apply their mind in circumstances that arise during the course of work, 4) Lack of Initiative: Independent judgment and initiative of the staff may be restricted. It may frustrate talented and efficient audit staff, 5) Lack of Suitability: Procedures may be undertaken which may be inappropriate to the circumstances of the client's business. How will you overcome from disadvantages of Audit Programme? 1, Suitability: Audit programme should be suitable to the nature of entity, scale of operations & volume of transactions & the efficacy of internal controls, 2, Review of the internal controls: Internal controls should be reviewed and evaluated to obtain knowledge of changes in the controls and systems and procedures, 3. Changed business operations: The Auditor should obtain information about new systems to carry on the old business. The audit programme should be recast or modified to suit the changed business operations and practices. 4. Participative approach: The Auditor should encourage his audit assistants to keep an open mind and make suggestions for amending the programmes. 5. Flexibility: The audit programme should not become stereotyped. There should be revision from time to time according to circumstances even though no matcrial change has taken place in the client's business operations and the business practice. It means audit programme should be flexible according to situation. 6. Minimum Requirement: It should be impressed upon the audit assistants that the programme provides for the minimum tests that should be carried out and they should undertake tests and surprise checks, considered appropriate, even though not provided in the programme 1.8 Audit working papers The audit working paper constitutes the link between the auditor's report and the client's records.SA 230 on “Documentation” refers to working papers Prepared or obtained by the auditor and retained by him in connection with the Performance of his audit. Working papers should record audit plans. The working, Papers should provide for- a. Means of controlling current audit work. b. Supervision and review of the audit work. ¢. Evidence of audit work performed to support the auditor's opinion. ~ Working papers should also prove the evidence of work performed in case of charge of negligence brought against the auditors.3. Right to visit branch offices & access to branch account: Where the ace person other than the company's auditor, the company's auditar is entitled to visit the branches, if he deemed it necessary 10 do so for the performance of his duties us an auditor However, the auditor does not have right (o visit foreign branches of a banking company & it will be adequate if he is allowed access to such copies of extracts from the books or accounts of the branch as have been sent to the principal 4. Right to receive notice & attend general mecting: The auditor has the right of receiving all the notices & other communications relating to any general meeting of a company which any member of the company is entitled to have. He is entitled to attend any general meeting & to be heard at any general meeting which he attend on any part of the business which concerns im as an auditor. However, the auditor has no obligation to attend such meetings. Also, this, right docs not extend to board meeting. 5. Right to make representa ‘The retiring auditor is entitled to reccive a copy of the special notice intending to remove him or proposing to appoint any other person as auditor. The retiring auditor has a right to make his representation in writing & request that the same is circulated among the members. In case the same could not be circulated, the auditor may require that the representation shall be read out at the general meeting. 6 Right to report to members: The auditor has right as well as duty to make a report to the members on the accounts examined by him & to state whether in his opinion & to the best of his information & explanation given to him. Auditor has to state whether the financial statements give a true & fair view of the state of affairs of the business of the company. 7. Right to sign audit report: The auditor has right as well as duty to sign the audit report & the balance sheet & the profit & loss account including all the documents attached or annexed therewith. Right of seeking opinion of an expert: Inrespect of any special technical matters, the auditor is entitled to consult & take the opinion of an expert, He is also entitled to take legal advice so as to discharge his duties efficiently. 9. Right to receive remuneration: ‘The auditor has an inherent tight to receive remunerations for auditing the accounts of the company, though such rights accrue only after he has completed the work.1.2 Rights & Powers of an Auditor [Sec. 143] 1. Right of access to Books of account & Vouchers (Sec. 143(1)]: The auditor has a right to access, at all times the books of accounts & vouchers of the company, whether kept at head office or elsewhere. It is an absolute right & is not subject to any restriction, exception or qualification. The term book includes all types of books such as financial statutory or ical books. The right of access at all times implies that an auditor can inspect the books, accounts & vouchers of the company during the normal business hours of the audit. 2. Right to obtain information & explanation [Sec. 143(1)]: An auditor of the company is entitled to required from the officers, of the company such information & explanation as he may think necessary for the performance of his duties as an auditor. The auditor is bound to state in his report whether he has obtained all the information & explanations which to the best of his knowledge & belief were necessary for the purpose of the audit.Seek confirmations of selected balances by asking the client, vi. Reconcile the total amount of creditors list with the balance in control account. vii, Go though the goods inward book for the two or three weeks before the close of the year. Similutly, the goods outward book should be seen viii. Compare the total amount outstanding at the end of previous year: see that any material deviation is properly explained. ix. Ensure that all bills for services rendered to company have been received & accounted for & that in case where bills have not been recived, appropriate provisions have been created. x. Check credits raised on necount of supplies towards the end of the year to ensure that they are normal & not for any possible manipulation of accounts. 8.4.2 Bills Payable: Where bills payable are large in number a separate register should be maintained. Auditor should obtain from the client a list of bills payable as on the close of the year. Bills payable which have beca paid already can be verified from the cash book. Other bills can be verified from other records. The cash book of the subsequent period can be verified to see whether the bills have been paid. The auditor may request the client to obtain a certificate from the drawer of the bill confirming the amount of the bill payable and otlier conditions, 8.4.3 Outstanding Liabilities For Expenses: 1. Ask for the List of outstanding expenses classified by nature of expenses. 2, Compare the list of this year's outstanding expenses with that of the last year to see the variations. 3. Verify the basis of estimation, carefully in case outstanding expenses are provided on an estimated basis. 4. Verify the documentary evidence supporting the outstanding expenses. 5. See the usual outstanding expenses have been paid off. 6. Verify the reference to correspondences, minute book etc, that no outstanding expenses has been incurred which have not been provided, 7._ Ensure that outstanding expenses have been shown under current liabilities in the Balance Sheet. 8. Examine the service contracts entered into by the client ta see that all outstanding expenses have been provided. 8.4.4 Provision For Taxation: 1. Ascertain tax liability & check the computation of assessable profit by the client & compare with the profit & loss A/c. va 2. Check the amount of tax as per the latest Finance Act. 3 Vouch edvance tax paid & verify the calculations,74 Valuation of Assets Valuation is not merely the determination of values of the assets as appearing in the bal © the critical examination of these values on the basis of norma counting Principles. Auditor is not the valuer, but he is definitely connected intima mately with valuation, For the purpose of valuation assets are classified as follows- lance sheet but it als, lly accepted ace i. Fixed Assets. Eg. Land, Building, Piant. il. Floating or Current or Circulating Assets-Eg. Debtors, Stock, ii Wasting Assets -Eg. Mines, Oil wells. iv. Intangible Assets-Eg, Goodwill, Patent, Copyright. v. Fictitious Assets-Eg, Preliminary exp., Discount on shares. 7.4.1 Valuation of Fixed Assets: ich i i i ion A fixed asset may be defined as an asset which is held eee the that it will be used for the Production or long term purpose & not normal course of business, Accordingly- a. They are carried over from year to year.6.4 Reasons & Circumstances of Frauds & Errors 1. Ignorance of employees about accepted accounting principles & policies ‘This happens duc to not knowing something. 2. Inappropriate account classification by employees during reconeil of subsidiary ledgers with the controlling accounts. 3, Carelessness on the part of those involved in the accounting work. 4, Adesire to conceal the effect of defaleations or shortages of one kind or another. . 5. A tendency of the management to permit prejudice or bias to influence the interpretation of transactions or their presentation in the financial statements. 6. With the purpose of tax evasion. 7, Imentional efforts committed by person- a, To show up or depress the picture b. Convert the error to a personal benefit. 6.5 Auditor’s responsibility for non detection of Frauds & Errors ‘The responsibility of prevention & detection of fraud & error rests with the management through the implementation & continued operation of an adequate system of internal control. i. A financial audit is conducted by the auditor to obtain reasonable assurance that financial statements are free from material misstatements caused by fraud or error. i. Due to certain inherent limitations even & audit which is properly planned & performed in accordance with generally accepted auditing standards, may fail o detect a cleverly concealed fraud. This particularly happens in cases of frauds involving forgery or collusion among employees or management. The auditor thus, cannot be held responsible for the prevention & detection of frauds & error. ii, The term reasonable assurance implies that some risk of material misstatement could be present in financial statements which auditor may fails to detect. So, he should consider the risk of material misstatement resulting from fraud during all stages of the audit process. iv. The auditor should approach his work with acertain degree of professional skepticism in order to be alert to any signals of misstatement. However, does not imply that he should approach his work with suspicion. Unless there is a reasonable ground of doubt the auditor should not question the authenticity of documents & records.5.2.3 Lien on Working Papers: L Ownership: The working papers are é sidan orking Papers are the property of the Auditor. The Auditor may at his ds reo a mal - Portions of orextr acts from his working papers available to his cleats. The ownership of working papers belongs to the auditor. However he may make copies available to the client, , II. Custody: , The Auditor should take Proper measures for custody & confidentiality of his working papers, Il. Retention Period: The working Papers should be retained for a period of time sufficient to meet the needs of his practice & satisfy any legal or professional requirement of record retention. Working Papers should be requires to retain at least 7 years (earlier 10 years) from the date of auditor's report. Iv. Lien: : Lien arises only in case of other person's property. Hence, the question of lien on the working papers does not arise since they belong to the auditor. 5.2.4 Classification of Working Papers: i. Permanent Audit File ii. Current Audit File The auditor shall assemble the audit documentation in an audit file & completed the administrative process of assembling the final audit file on a timely basis after the date of auditor's report. After the assembly, the auditor shall not delete audit documentation before the end of its retention period.5.2.1 Importance of Working Papers: The audit working papers are of vital importance whether the audit is statutory, al, or the management audit. Audit working papers are tool for accomplishing audit. Audit working papers record evidence gathered by the auditor as support for work intern: the purpose of ty : which will help him in arriving at his conclusions. Also they ac accomplished. Working papers arc tool for accomplishing the purpose of audit. The importance of working papers is as follows- 1) Provide the evidence of the audit work performed to support the auditor's opinion. 2) Aid in planning & performance of audit. 3) Aid in the supervision & review of the audit work. 4) Record & demonstrate the audit work from one tear to another. 5) Plan the timing & extent of audit procedures to be performed. 6) Draw conclusions from the evidence obtained. 7) Standardize the working papers to improve the efficiency of the audit. 2 Facilitate the delegation of work as a means to control its quality. 9 Provide the guidance to the audit staff with regard to the manner of checking schedules. 10) Fix responsibility on the staff members. 11) Act as evidence in Court of law when a charge of negligence is brought against the auditor. 5.2.2 Form & Content of Working Papers: The form & content of audit working papers may vary from one audit to other. If the auditor identified inconsistent information, the auditor shall document how the auditor addressed the inconsistency. The form & content of audit workin; Papers are affected by matters like: : a. Nature of Engagement. b. Form of auditor's Teport. c. Nature & complexity of client's business, d. Nature & condition of client's records: €. Degree of reliance on internal control,3.7.3 General Ledger: General ledger is also called as "Nominal Ledger’ or ‘Impersonal Ledger’, Meontains all the balances which are ultimately included in profit & loss aecount & balance sheet, it contains: i, Nominal Accounts ii, Real or Property Accounts iii, Capital & Loan Accounts iv, Control Accounts, ete, © = Audit of General Ledger can be divided into following stages: Following are the stages for the audit of general ledger- a) Verification of Internal Control System: Auditor has to check the internal control system. He should verify the system & check whether proper allocation of functional responsibilities within the organization, b) — Cheeking of Opening balances: The opening balances of the general ledger are checked from the audited accounts of the previous year. ©) Checking of posting: Sales Register, Purchase Register, Return Register, & other appropriate accounts. Entries are posted in general ledger from almost all the books of accounts. Corresponding control accounts are also posted from these books. While checking the posting, auditor should see that correct, amounts are posted in correct account & on correct side. He should also see the item has remained un-posted. d) Checking of Totals & Casting: After the checking of posting auditor should check up the totals & casting, He should check up whether figures are properly & correctly curried over to the next page. e) Checking the balances in Trial Balance: The next stage of checking of the balances of general ledger in trial balances, Because the books are recorded on the principle of double entry system of book keeping. The total of debit side must equal to the credit side of the trial balance. Scrutiny & Scanning of ledger accounts: The auditor must scrutinize all the ledgers one by one & find out whether necessary adjustments are already recorded. While scrutinizing the partner's capital accounts, auditor should see whether the conditions laid down by the partnership deed are complied with. Interest should be allowed on the capital at a rate decided by the partnership deed 3.8 Kinds of Frauds in Relation to Ledgers Ledger keeper may commit some frauds by manipulating the entries in the ledger. Some of the frauds which may be committed by ledger keeper are as follows- 1, In the Bought Ledger/ Purchase Ledger Creditors Ledger: Frau s may occurs like+ a. Crediting the supplier's account on the basis of a fictitious invoice.Differentiate between statutory audit & Voluntary andit Particulars [Statutory Audit Voluntary Audit Meaning leaning Auli is prescribed by law i ‘Audit is purely optional & goveming statute or regi conducted as per requirement, Advantages | Stututory compliance isthe | Advantages of independent chief audit advantage. audit will gain, Qualifications | Oaly a person possessing the | Qualifications for conducting prescribed qualification shall | audit are not prescribed by law conduct the audit. Scope ILis defined by law. Itis defined by the letter of engagement. Rights & | Rights & duties of the auditor | Rights & duties of the auditor ties are prescribed by law & can't | defined by client. be restricted by appointing authority, Format of | Format of audit report Format of audit report are [report generally defined by law. defined by the scope of work. 2.3 Audit Techniques It refers to the methods and mens adopted by the auditor for collection and evaluation of audit evidence in different auditing situations. Techniques refer to the methods employed for carrying out the audit procedure. Audit techniques are generally interdependent. A combination of techniques is applied in a particular procedure. For example, © Physical Inspection @ Confirmation © Inquiry : © = Calculations of ratios ‘Audit techniques may vary from the organization to orgenization depending ‘number of transactions, etc. However it is important upon the nature of business, to remember that the principles of auditing remain constant. 2.4 Key Concepts ‘The audit which is prescribed by Jaw i.e. governing by statute or by regulations is called statutory audit. ‘Anaudit which is conducted between two annual audits is called an interim audit. When the Auditor's staffis eng: of the client during the whole year round it is called a Continuc lance Sheet Audit means Auditor reviews the Balance SI oie al entry and other evidences. aged continuously in checking the accounts ous Audit. The Bal Sheet and© Interim reporting: Interim financial statement can be prepared easily & in timely manner, © Detailed coverage: All verifications are carried out in detailed than in final audit Disadvantages of Interim audit ‘ince work is carried out in several installments, the © Failure to keep truck: audit staff may fail to keep track of things, Asa result some of the transactions may escape. © Tampering: The staff of the client may alter entries in the books of accounts after checking thereof, © Uneconomic: The audit is uneconomic for small size concem as a great deal of time & efforts would be wasted. © — Missing links: Continuity in work may be lost when work is executed ied, Continuous audit will be Since all transactions are v © Time consuming time consuming. © No guarantee for fraud detection: Complete verification of all transactions in detail, dees not guarantee detection of all errors é frauds. Some material misstatements may still exist. 2.2.4 Concurrent Audit: Itimplies verification of transactions of a year on a continuous basis. The Period of verification is primarily determined by the auditor. Financial statements are not prepared. Assets & liabilities are verified only at the time of finalization at 2.2.5 Continuous Audit: When the Auditor’ staff is engaged continuously in checking the accounts of the client during the whole year round or when the staff attends audit work at some intervals, it is called a Continuous Audit, Advantages of continuous audit © Immediate errors and frauds detection: Management can exercise a stricter control over the accounts in as much as itis able to check sooner the causes of any errors or frauds uncovered by such an audit. © Acts as Deterrent: The frequent attendance of the audit staff deters persons from committing fraud. @ — Upto date accounts: The accounting staff of the client is ‘motivated to keep the books of account upto date, © = Early Final Audit; The final audit can be completed in short span of time... © — Knowledge of clients' affairs: The Auditor can obtain-a.more detailed knowledge of the ctient's affairs, which helps the auditor to discharge his dutics more efficiently, 7 © Detailed Coverage: All aspects of verification are carried out in detail than in final audit,10.6 Auditor’s Remuneration [Section 142 of Companies Act, 2013] j;. Where appointment by the Board of Directors: When an auditor is appointed by the Board of Directors, remuneration is also fixed by them. The resolution appointing the auditor should also prescribe the remuneration. ji, Where appointed by Shareholders: In this case the remuneration is determined by the shareholders at the AGM. Sometimes, shareholders may delegate the power of fixing remunerations to the Board of Directors or the Chairman. iii, Where appointed by the Comptroller & Auditor General of India: , The remuneration shall be fixed by the company in general meeting or in such manner as the company in general meeting may determine. iy. Remuneration other than audit fees: . Where an auditor renders services other than those as an auditor, he is entitlec to get extra remuneration. Such remuneration may not be fixed in advance by the appointing authority while appointing him as an auditor & while fixing his remuneration.Sales ledger contains the accounts of customer. So, client's capital blocked up in debtors & receivables. There must be proper control on all the receivables, In the absence of such control, the receivables would not be collected in time & as a result they may become doubtful of recovery & time barred. Following are the stages for audit of sales ledger- a) b) c) Verification of Internal Control System: Auditor has to check the internal control system. He should verify the system & check whether proper allocation of functional responsibilities within the organization. Verification of Opening balances: The auditor will check up the opening balances of sales ledger. The control accounts should be verified in the general ledger. Checking of posting: The next.stage of the audit of sales ledger is the checking of posting into the ledger from cash book, Sales register, bills receivable book, sales return register, & other relevant books of accounts. While checking the posting, auditor should see that correct amounts are posted on the correct side of the proper account. © Credit balances in the sales ledger: If the party has sent money in excess of the invoice value, then there may be a credit balances. If the credit note is issued to the customer, the customer may send the amount after deducting the amount of the credit note.Meaning Time period Trial balance 4 ween Interim aut An audit which taken UP between two annual audits is called Interim Audit. A specilic date, as per client's Requirement. Eg. 30th September, 31st December, week etc. Trial balance is drawn & verified with a view to prepare financial Statements. Audit & Cone urrent Audit Concurrent Audit It implies verification of transactions on a continuous basis, at various point of time ina yea The period of verification is determined by the auditor, Eg. Fora month/ fortnight. Trial balance may be drawn with a view to establish arithmetical Accuracy. Financial Financial statements are Financial statements are not Statements | prepared for the interim prepared. audit period. aoe . Assets & liabilities are verified | Assets & liabilities are verifies rification | for Interim balance sheet only At time of finalization purpose. at year end.Az Statutory Report Und statutory mee months, ection 165 of Companies Act, every public company must hold a #8 Within a period of not less than one month & not more than six ter the date on which company is entitled to commence business. a report forwarded by the directors to every member for this meeting at leas! days before the day of the meeting is known as the Statutory report. e Contents of a Statutory report: Total number of shares allotted, distinguishing between ers a fully paid or partly paid-up otherwise than in cash & a pai bee the up shares, the extent to which they are so paid up, in either case, consideration for which they have been allotted.