Auditing BBA VI Sem BBA N 605 Unit 2nd Notes

 

 

 

UNIT -2

 

Internal Check System: Internal Control, audit Procedure: Vouching Verification of Assets and Liabilities. Audit of Limited Companies: Company AuditorAppointment, Powers, Duties and Liabilities. Auditor’s Report and Audit Certificate

 

 INTERNAL CONTROL

Internal control is the whole system of control established by the management for the proper conduct of various activities of the organization. It is not only internal check and internal audit but also the whole system of control financially and otherwise established by the organization in order to carry out the business in orderly and efficient manner.

It is useful for the organization to safeguard the assets and serve the reliability of accounting records. In other words, it is the overall control adopted by the organization.

Features: -

1) It is the overall control adopted by the management.

2) It comprises of plans, methods and procedures for the effective control of the operations of the business.

3) It comprises of internal check, internal audit, accounting system and administrative control.

4) It is established by the management.

5) It intended to help the management to run the business efficiently.

Objectives: -

1) To ensure that transactions are recorded proper books of account.

2) See that all transactions are carried out only on account of a sanction of authority.

3) See that management policies and decisions are properly implemented.

4) To ensure efficient conduct of business.

5) To evaluate the efficiency of performance of the various personnel.

6) To safeguard the assets of the organization.

7) To safeguard the interest of the organization.

8) To ensure reliability of accounting records.

9) To ensure the periodical verification of assets.

Scope or Area of internal control.

1) Accounting Control.

It ensures the reliability of accounting transactions. Accounting

transactions are recorded by using accounting principles.

2) Administrative Control.

It is concerned with distribution of authority and decision making process of management. Overall operation efficiency of the organization is ensured.

Essentials of Good internal Control: -

1) It should be clear and well developed plan of organization.

2) There should be competent and trust worthy personnel for the success of the business.

3) There should be segregation of duties: - Operational duties are separated from recording duties. Physical handling of asset must be separated from accounting records.

4) There should be administrative traditions and practices for the performance of the duties.

5) There should be well developed and adequate accounting system.

6) There should be a sound system of maintenance and recording of accounts.

7) There should be effective internal check system.

8) There should be good audit system.

9) Periodical review of internal control.

Advantages.

A. Advantages to the business.

1) Provide accurate and reliable data to the management for taking correct decisions.

2) Ensure that policies and procedures are complied with.

3) Promotes operational efficiency.

4) Help to attain organizational goal.

5) To safeguard the assets of the organization.

6) To ensure the reliability of accounting records.

B. Advantages to the auditors

1) Helps the auditor in framing the audit program.

2) To ascertain extent of test check can apply.

Limitations of Internal control

1) Expensive.

2) Transactions of unusual nature may not be subject to internal control.

3) Human errors remain in any system of control.

4) Limitation of preventing frauds committed through collusion between persons.

5) It may not be keep pace with the change in the condition.

Internal check

It is an arrangement of accounting work under which the work of one person comes under the security of another person.The work of one staff is automatically checked by another person in order to locate errors and frauds.

Advantages.

A. Advantages to business

1. Proper division of work

2. Fixation of responsibility

3. Greater efficiency of the staff.

4. Increased carrying capacity.

5. Early detection of errors and frauds.

6. Easy preparation of final account.

7. Truth and accuracy of accounting can be available.

B. Advantages to Owners.

1. Genuineness and accuracy of the account.

2. Overall efficiency, economy in operations, increased profit etc..

C. Advantages to Auditor

1. There is no need for detailed examination of book of accounts.

2. It reduces burden.

Objectives.

1) Proper division of work.

2) Minimization of errors and frauds.

3) Easily detection of errors and frauds.

4) Ensures the reliability of accounts.

5) Easily preparation of final accounts.

6) Simplification of the external auditors work

Limitations.

1) Suitable only for big concerns.

2) Sacrifice of quality for quickness.

3) Certain type of disorder, confusions etc... in the working of the organization.

4) Useful only when there is no collusion between employees.

5) Risky for the auditor.

Principles and essential of good internal check system.

1) Simple, easy workable and effective.

2) Not be too expensive.    

3) Carefully devised and properly regulated.

4) Authority should be clearly defined.

5) Proper division of responsibility.

6) Division of work among the staff.

7) Work of similar nature should be entrusted with one person to ensure specialization.

8) No individual should be allowed to perform one work completely.

9) Work should be distributed in such a way that the work of one staff is automatically check another.

10) No employee should be allowed to remain a particular job for a long period.

11) No employee of the concern should be rely upon too much.

12) Proper reporting to the management.

13) Proper system of filing vouchers

 Audit Procedure:

 

Procedure of Audit: -

 

The way in which the audit work should be conducted by the auditor

1) Routine checking

2) Test checking

3) Surprise checking.

4) Audit in depth.

5) Adoption of distinctive tick mark, check mark etc…

1. Routine checking.

It is the checking and casting common books of accounts by the auditor. It

involves following activities.

a) Checking, casting and sub casting of such books.

b) Checking of posting into ledger book.

c) Checking the balances transferred from one book to another

Common Books

Sales ledger, private ledger, wage sheet , general ledger, debit note, credit note, all subsidiary books like cash book, purchase book, journal proper etc..

Advantages of routine checking

1) It facilitate through checking of books of original entry.

2) Posting under routine checking, posting are completely checked.

3) Thorough checking of casting and posting are involved.

4) Verifying the arithmetical accuracy in the entries.

5) Clerical errors and ordinary frauds are located through routine checking.

6) It constitutes the basis of entire audit.

7) It ensures there is no alteration of figures.

Limitations of routine checking

1) It is purely a mechanical checking.

2) It is not important in an organization where self balancing system is in operation.

3) Simple type of errors and frauds can be located

2. Test Checking.

Testing of test checking means to select and examine a representative

sample from large number of similar items. The main objective of test checking is

to select representative item and examining it and conclusion is drawn from all of the items.

Essentials of Test Checking

1) The success of test checking depends upon the system of internal check in operation.

2) The sample should be selected at random.

3) Transaction should be selected only representative of the whole of the

group.

4) Homogeneous transactions are taken into account.

5) Selection of sample should be made without bias.

6) Test checking is not applicable in cash book transactions.

7) No indication should be given to small organization.

8) It is not applicable to first month and last month transactions.

9) It is not applicable to checking of opening and closing balance.

10) If the transactions are non-recurring in nature it is not applicable.

Advantages.

1) Complete the audit work in a short time.

2) The volume of work of the auditor is reduced to certain extent.

3) It ensures better accuracy of the book of account if selection is made on properly.

4) It ensures examination of efficiency of the internal check system of the organization.

Limitations

1) All of the errors and frauds cannot be detected.

2) Test checking increase the responsibility of the auditor.

3) The staff of the client may become careless.

4) The current financial position cannot be revealed.

3. Surprise checking.

A system under which the auditor make surprise visit to the organization and check the important items i.e. the verification of the cash book, investment, examination of entries related to stock and stock items and examine the book of original entry.

4. Auditing in depth: - Examination of selected item in depth or to the origin to conclusion. Generally it is adopted where internal control is not effective.

5. Adoption of distinctive tick mark, check mark etc: -

For the purpose of audit the auditor can use the ticks, tick marks, check marks etc to indicate the work done by the auditor.

1) Different type of tick should be used in different type of audit work.

2) It is better to use ballpoint pen instead of pencil.

3) Tick of different colours for different audit.

4) Tick should be too small.

5) Tick should be clear and simple.

6) Tick should not be mixed up with the figures shown in the book of account.

7) Clear instructions must be provided to the client for the use of tick mark.

8) Tick of client staff and audit staff should be distinctive.

 Vouching Verification of Assets and Liabilities

Vouching:-

Vouching is the act of checking or examining the entries made in the books

of account with the supporting the documentary evidences or vouchers.

In the words of .L.R DICKSEE ,”Vouching is an act of comparing entries in

the books of account with the documentary evidence in support thereof”.

Objectives of vouching:-

1) The principal objective of vouching is to ensure that the transactions, as

recorded in the books of accounts, are acceptable, genuine, properly

authorised and correctly recorded.

2) Another objective of vouching is to ensure that all the entries made in the

books are supported by necessary documentary evidence.

3) To see that all the transactions connected with the business have been

recorded in the appropriate books of account.

4) To ensure that no transactions, which is not connected with the business,

has been recorded in the books of accounts.

5) Detection of errors and frauds.

Importance of vouching:-

Vouching constitutes the foundation upon which the super structure of

auditing is erected. It is the back born of auditing. In the words of F.R.M De

Paula, vouching is the essence of audit.

Vouching can be regarded as the essence or back bone of auditing for the

following reasons.

a) The success of an audit largely depends upon the care and attention with

which vouching is accomplished.

b) Vouching is the most potent tool in the hands of an auditor to ascertain

the accuracy of the transactions recorded in the books of account.

c) To see that all the transactions connected with the business have been

recorded in the appropriate books of account.

d) To ensure that there are no transactions, which are not connected with the

business, has been recorded in the books of accounts.

e) Detection of errors and frauds

f) Vouching ensures the arithmetical accuracy of the books of account.

g) If vouching is done with care and caution, the auditor can smoothly

proceed further in his work.

Vouchers:-

A voucher is the documentary evidence in support of a transaction

recorded in the books of account. It is a documentary evidence of an entry in a

book of account. The following are the some of the examples of vouchers:

a) Receipt obtained from a payee.

b) Counter foil of a receipt.

c) Purchase invoice.

d) Sales invoice.

e) Cash memo.

f) Bank pay-in-slip.

g) A contract or an agreement.

h) A resolution passed at the meeting of the board of directors.

i) Minutes of a meeting.

j) Bought notes.

k) Sold notes.

l) Debt note.

m) Credit note.

n) Wages sheet.

o) Salary register

p) Goods inward book.

q) Goods outward book.

Types of vouchers:-

1) Primary vouchers:- a primary voucher is written evident in original.

Purchase invoice, cash memos for goods purchased etc. are examples.

2) Collateral or secondary vouchers:- even evidences in original are not

available, copies of the evidences are produced in support. Again,

sometimes, subsidiary evidences are also provided for the purpose of audit.

Such vouchers are usually known as collateral or secondary vouchers.

Essentials of vouchers or points to be noted by the auditor while vouching

the vouchers:-

1) Vouchers are consecutively numbered, arranged serially in the order of the

entries and are properly filed.

2) Vouchers are in the name of the client.

3) See the teach voucher is genuine on its face.

4) Voucher is certified as correct by a responsible official.

5) The amount of each voucher is written in words and figures.

6) Every voucher, which is a receipt for cash payment over Rs 5000, bears a

revenue stamp of Rs 1.

7) Alteration made in a voucher is properly signed by the maker and approved by

a responsible official.

8) Any explanation is desired with to any voucher, the same should be noted in

the audit note book.

9) Missing vouchers produced, the auditor should do,

a) Prepare a list of all such missing vouchers

b) Call for explanation from the concerned official from the loss of original

vouchers

Vouching of cash book or cash transactions.

Cash transactions take place almost every day in business. An auditor

should give care and attention to the vouching of cash transactions.

The main objectives of vouching of cash transactions are,

1) To ensure that all receipts of cash are duly accounted for.

2) To ensure that no improper payments are made.

3) To see that all receipts and payments of cash are actually and properly

recorded.

4) To see that all payments have been made to proper persons and the

payments are true payments.

5) To see that cash and bank balance correct and really exist.

Vouching of cash book or cash transaction covers the vouching of receipt side

and vouching of payment side.

Vouching of receipt side or debit side of cashbook or cash receipt

transactions:-

Vouching of cash receipt transactions is more difficult than that of cash

payment transactions, since there is greater chance of manipulation in regard to

cash receipt.

The auditor should bear in mind the following points, while vouching the

cash receipt transactions.

1) The auditor should carefully examine the system of internal check in

operation with regard to cash receipt transactions.

2) An auditor can resort to test checking only if he has satisfied himself that

there is an efficient system of internal check.

3) He should ascertain whether a diary of cash receipt or rough cash book

has been in use. If a rough cash book has been in use, he should examine

the entries in the rough cash book and compare with the entries in the ash

book.

Vouching of the important items on the debit side of the cashbook or cash

receipt transactions.

1) Opening balance:-

The opening balance of the cash book should be vouched by comparing it

with the closing balance of cash book as shown in the audited copy of the

balance sheet of the previous year,

2) Cash sales:-

The vouching procedure in regard to cash sales should be on the following

lines:

1. He should examine the system of internal check in operation in regard to

cash sales.

2. After ascertaining the efficiency of the internal check system as regards

cash sales, auditor should vouch the cash sales as follows:

a) Cash memos written by the salesman should be checked with the

summery sales prepared at the end of the day.

b) He should examine the rough cash book, if any.

c) He should check up the rough cash book with the main cash book.

d) The summaries of daily sales should be checked with the entries in the

stock register

3) Receipts from debtors:-

While vouching the receipts from debtors, an auditor should bear in mind

the following points:

1. He should enquire into the system of internal check in operation in regard

to the receipt from debtors.

2. After satisfying himself about the efficiency of internal check in operation

in regard to the receipt from the debtors, the auditor should conduct the

vouching of receipts on the debtors on the following lines:

a) He should check the total cash received from the debtors by verifying

the rough cash book with the counter foils of the receipts issued to

customers.

b) He should check the cash book with the rough cash book.

c) He should check the details of cash and cheques paid into the bank.

d) He should enquire into whether bad debts are written off by a

competent authority.

e) He should verify the balances due as per the schedule of debtors with

letters of confirmation received.

f) He should be alert to the possibility of teeming and lading.

4). Receipts from bills receivable:-

Bills receivable include bills of exchange, promissory notes, and I.O.U’s

received from debtors. The receipts from bills receivable can be in two ways:

1). Receipts from bills discounted

The vouching of receipts from bills discounted should be as follows:

a) The amount of cash received from bills discounted should be checked by

comparing the bills discounted book with the cash book, pass book, B/R

book.

b) See that proper records have been made in the books for discount on bills

discounted.

c) He should determine the contingent liability in respect of bills discounted

but not matured on the date of the balance sheet.

 

2). Receipts from bills matured

a) The auditor should check the cash received from bills matured by

comparing the bills receivable book with the cash book and the pass book.

b) Special attention should be given to bills which have matured but remain

unpaid.

5). Receipts from sale of investment

Vouching of receipts from the sale of investment should be on the following

lines:

a) Investments are usually sold through brokers, as such, broker’s sold notes

or contract notes should be examined to vouch the amount from the sale of

investments.

6). Receipt from the sale of fixed assets

Vouching of receipts from the sale of fixed assets should be on the

following lines:

a) The auditor should see that the sale of fixed asset is properly sanctioned.

b) If the sale of fixed assets is through a broker, the proceeds of the fixed

assets sold should be vouched with the help of sold notes. In the case of

sale of fixed assets is through an auctioneer, the sale proceeds should be

vouched with the help of the auctioneer’s note. He can verify the cash

receipt in the cash book with the counter foil or carbon copy of the receipt

issued to the party. He may also vouch the sale proceeds of fixed assets

School of Distance Education

Auditing Page 52

with the correspondence with the parties and the sale contracts and the

fixed asset a/c.

c) He should see that proper fixed asset a/c has been credited with the sale

proceeds.

d) If there is any profit, the auditor should see that it is credited to capital

reserve.

e) In the case of certain prepaid expenses in respect of fixed assets, the

auditor should check whether suitable adjustments are made in the

expenses accounts.

7). Loan received

Vouching of loan received should be on the following lines:

a) He should ascertain that whether client is empowered to borrow money.

b) In the case of a joint stock company, he should verify whether the legal

provisions have been complied with.

c) He should verify the loan agreement to ascertain the terms and conditions

on which the loan has been received.

d) If the loan is secured, he should ascertain what security has been offered

and the value of security offered.

e) He should ensure that the loan amount received is recorded in the books of

account.

f) If the interest on loan is unpaid, the auditor should see that it is properly

adjusted.

8). Dividend on investment

a) The auditor should verify the dividend received is recorded in the cash

book with the counter foils of the dividend warrants.

b) To see that dividends have been received in the dates.

c) If the dividend is sold ex-dividend, see that dividends are subsequently

received are entered in the cash book and credited to dividend account.

9). Subscription received

10). Insurance claim received

11). Commission received

12). Rent received

13). Royalty received

Vouching of different items on the payment side or credit side of the cash

book

1)Opening credit balance

The opening credit balance in the bank column can be verified from the

previous year’s audited balance sheet.

2)Cash purchases

The vouching of the cash purchases should be on the following lines.

1) The auditor should examine entries in the cash book with the help of cash

memos or invoices issued by the supplier and also goods inward book.

2) Special attention should be paid to trade discount, which should be

deducted from purchase.

School of Distance Education

Auditing Page 54

3) See that the cash paid for the goods have actually received.

4) He should see that the purchases are duly authorised.

5) He should see that the amount paid is debited to the appropriate account.

6) To ascertain whether payment made for cash purchases relates to the

business.

3). Payments to creditors

Vouching of payment to creditors should be on the following lines.

1) Payments to creditors may be vouched with the receipts issued by the

creditors.

2) He should check the amount due to the creditors with the accounts of the

creditors.

3) Examine the goods inward book and see that goods have actually been

received.

4) The auditor should verify the periodical statement of accounts.

5) In the case of purchase made before the close of the year, see that goods

not actually received are kept out of the closing stock of the year.

4). Payment of bills payable

Payment of bills payable on their maturity should be vouched on the

following lines.

1) The payment of bills payable, as recorded in the cash book, should be

vouched with the bills payable book and also with the bills payable

returned by the payees.

2) If the bills payable are through the bank, the auditor should examine the

bank pass book for the payment.

3) He should see that bills payable paid and returned by the payees are

cancelled.

5). Vouching of loans advanced

Loans advanced should be vouched by the auditor on the following lines.

1) He should see that loans advanced are properly authorised.

2) He should examine the loan agreement.

3) He should vouch the loan advanced as recorded in the cash book with the

loan agreement also with the receipt given by the borrower.

School of Distance Education

Auditing Page 55

4) If the loan is advanced against any security, the auditor should examine

the security and its title deeds.

5) Examine the mortgage deed, if the loan is advanced against mortgage.

6) See that the provisions of the companies Act as regards the granting of

loans to directors and officers of the company are complied with.

6). Purchase of investment

Vouching of purchase of investment should be on the following lines.

1) The auditor should see that the purchase of investment is properly

authorised.

2) If the investments are purchased through a broker, he should vouch the

investments purchased with the broker’s note.

3) If the investments are purchased through the bank, he should examine the

bank pass book to check the payment.

4) He should make a physical verification of the investment purchased.

5) If the investments are purchased cum interest, he should see that the

payment made is properly allocated between capital and revenue.

6) See that investments purchased are registered in the name of the client.

7) In the case of accompany, the auditor should see that investments have

been purchased in accordance with the provisions of the companies Act.

7). Payment of capital expenditure

The payment of capital expenditure refers to the payment made for the

acquisition of the fixed assets such as land & building, plant & machinery,

patent, copy right, furniture etc.

Vouching of payment of capital expenditure should be on the following

lines.

1) The auditor should see that the payment of capital expenditure is properly

authorised.

2) He should examine the document pertaining to the purchase and

ownership of the fixed assets.

3) He should examine the invoices and the receipts obtained from the

suppliers to ensure that payments have been made.

4) He should see that all expenses incurred for the acquisition are capitalised.

5) He should see that repairs and maintenance expenses incurred are

charged to revenue account.

School of Distance Education

Auditing Page 56

6) He should physically examine the fixed assets purchased.

7) He should vouch the cash boom entries for the payment of capital

expenditure with the concerned ledger account.

8) See that property purchased is registered in the name of the client.

Vouching of payment made for the acquisition of patents

Vouching of payments made for the acquisition of patents should be on the

following lines.

1) If the patent has been purchased, the auditor should vouch the payment

made for the patent with the help of the contract for sale and the receipts

for the payment obtained from the seller.

2) If the patent has been purchased through an agent, the auditor should

vouch the agent commission with the help of agents account and receipt

given by the agent. He should see that the agent’s commission is

capitalized.

3) He should see that expenses incurred on the purchase of the patent are

capitalized.

4) Where the patent is acquired through research, the auditor should see that

all the expenses incurred on the experiments and the research connected

with patents are capitalized.

5) He should see that payments made towards the renewal fee are charged to

revenue account.

6) He should actually see the patent.

Vouching of wages

The object of vouching wages is to ensure that the payment for wages as

recorded in wage sheet and cash book, were actually made properly authorised

and were correctly maintained.

Vouching of payment of wages should be done in the following lines.

1) He should enquire into the system of internal check in force in regard to

the maintenance of wage records, preparation of wage sheet and payment

of wages.

2) If the internal check is effective, the auditor can conduct the vouching of

wages on the following lines.

a) He should check a few items of wage sheets here and there to ensure that

the calculations are correct.

b) He should check totals of wage sheet with the cash book.

School of Distance Education

Auditing Page 57

c) He should see that the amount of cheque drawn for wages tallies with the

totals of wage sheet.

d) He should see that deduction from wages have properly adjusted and

recorded in the books.

e) He should see that wages recorded in the cash book have actually been

paid.

f) He should examine the system of employment of casual labour and check

the payment made to casual labour.

g) He should see that proper record is maintained for unpaid wages.

h) Wages for the current months should be compared with the wages of the

previous month. If there is a material difference, the auditor should

enquire into the reason for the difference.

Vouching of salaries

Vouching of payment made for salary should be on the following lines.

1) An auditor should enquire into the system of internal check in operation in

the concern in regard to the payment of salaries.

2) If the internal check system in regard to the payment of salaries is sound,

an auditor can conduct the vouching of salaries on the following lines.

a) He should see that the salary bill is prepared with the sanction of a

responsible officer.

b) He should see that the salary register is duly signed by each employee and

counter signed by a responsible official.

c) He should check the salary register with the entries in the cash book.

d) He should see that the deduction for provident fund, life insurance

premium, income tax etc have been correctly made and properly recorded

in the books.

e) For vouching salaries of the secretary, manager and other important

officials, the auditor should examine the board’s minutes book.

f) He should check the attendance register.

g) He should compare the salary bill for the current month with the salary bill

of the previous month. If there is any material difference, enquire into the

reason for the difference.

h) He should see that the total of the salary book for a particular month

agrees with the cheque drawn for salaries.

School of Distance Education

Auditing Page 58

Vouching of petty cash book.

Vouching of petty cash book should be on the following lines.

1) He should examine the system of internal check in force in the business in

regard to the petty cash transactions.

2) If he finds that the system of internal check is sound, he should adopt the

following lines.

a) He should find out find out the system of petty cash book.

b) He should ascertain the name of the petty cashier to the amount of the

imprest.

c) He should check some petty cash payments at random with the vouchers

to ensure the correctness of the petty cash payments.

d) He should see that all petty cash payments over a certain amount are

supported by proper vouchers.

e) He should see that petty cash payments not supported by proper vouchers

are supported by slips by the officer who have spent the amounts.

f) See that the petty cash book is periodically checked and initiated by some

responsible officer.

g) See that the petty cash balance as shown in the petty cash book agrees

with petty cash balance as shown by petty cash account.

h) He should check the casting of total payment column and the individual

expenses column.

i) He should physically count the petty cash balances on the balance sheet

date. If he fails to do so, he will be held liable for damages. This was upheld

in the case of London Oil Storage Company Limited v/s Sears Hasluck and

Company.

j) He should see that I.O.Us are not included in the petty cash balances.

Vouching of trading transactions

Vouching of trading transaction is concerned with credit purchases, credit

sales, purchase returns, and sales returns are entered in the purchase book,

sales book, purchase return book and sales return book respectively. So

vouching of trading transactions also means that vouching of purchase book,

sales book, purchase return book, and sales return book.

One main object of vouching of trading transaction is to detect

misappropriation of goods, if any.

School of Distance Education

Auditing Page 59

Vouching of credit purchases or vouching of purchase book.

The main objective of vouching of purchase book or credit purchases is to

ensure that all purchase invoices are entered in purchase book, that goods

entered in the purchase book are actually received and the business pays only for

those goods which are delivered by the suppliers.

Firstly, an auditor should examine the system of internal check in force in

the business in regard to credit purchases. If the system of internal check is not

sound, he should check all the entries in the purchase book in detail. If the

system of internal check is sound, he need not check all the entries in the

purchase book in detail. He has to vouch the credit purchases on the following

lines:

1) He should examine the inward invoices from which entries are made in the

purchase book. While examining an inward invoice, an auditor should pay

attention to the following points:

a) The invoice is in the name of the client.

b) The date given in the invoice relate to the period under audit.

c) The invoice is related to the business in which the concern deals.

d) The invoice is initiated by a responsible officer.

e) The trade discount has been deducted from the amount of invoice and then

only net amount has been entered.

f) Quantity mentioned in the purchase invoice tallies with the quantity

recorded in the purchase book.

Vouching of credit sales or vouching of sales book.

Outward invoices, which are the vouchers for the credit sales, are not

completely reliable, as they are prepared by the staff of the business. So an

auditor has to very careful in vouching credit sales.

Vouching purchase returns or purchase returns book.

An auditor should undertake vouching of purchase returns on the following

lines:

1) He should enquire into the system of recording of purchase returns.

2) He should vouch the purchases returns book with the credit notes received

from the creditors.

3) He should examine the goods outward book and the related

correspondence to ensure that there is no suppression of purchase

returns.

4) He should check the casts and carry forwards of purchase returns book.

School of Distance Education

Auditing Page 62

5) He should check the postings from the purchase returns book to the

purchase returns account and customers account in the ledger.

 Audit of Limited Companies:

AUDIT OF LIMITED COMPANIES

The companies Act not defined the term 'auditor '. But one can define an

auditor as a qualified Chartered Accountant within the meaning of the Chartered

Accountants Act of 1949 appointed for the purpose of examining the accounts of

a joint stock company and giving the report there on to the shareholders every

year at the annual general meeting.

QUALIFICATION OF AN AUDITOR

A person can be appointed as an auditor of a company only if he is a

Chartered Accountant within the meaning of the Chartered Accountants Act of

1949.

In case a firm is appointed as an auditor of a company, all the partners of

the firm must be Chartered Accountants.

One holder of a certificate under the Restricted Auditors Certificate Rules

1956 is also qualified to Act as an auditor of a company.

DISQUALIFICATION OF AN AUDITOR

Certain persons are disqualified from being appointed as auditor of a company.

They are:

(1)A body corporate

(2)An officer or employee of the company

(3) A person who is a partner or who is the employment of an officer or employ of

a company.

(4) A Person who is indebted to the company for an amount exceeding RS1000.

(5) A director or a member of a private company.

Besides the above disqualification, certain additional disqualifications are also

prescribed by the companies (Amendment) Bill 2003. These are:

(1) An auditor who has any direct financial interest in the company.

(2) An auditor who received only loan or guarantee from or on behalf of the

company.

(3) An auditor who has any business relationship in the company.

(4) An auditor who has been employed in the company

(5) An auditor whose relative is in the employment of the company

Company AuditorAppointment,

FIRST AUDITOR

The first auditor of a company is appointed by the Board of Directors within

the month of the Registration of the company. The first auditor, appointed by the

Board of Directors will hold office till the conclusion of the first annual general

meeting of the company.

If Board of Directors fails to appoint the first auditor, the company

may appoint the first auditor in the general meeting. The first auditor appointed

by the shareholders in the general meeting, will also be reappointed at the first

annual general meeting of the company

SUBSEQUENT AUDITOR

Every subsequent auditor is appointed every year at every annual general

meeting by the shareholders. A subsequent auditor appointed by the

shareholders at any annual general meeting will hold office till the conclusion of

the next annual general meeting.

APPOINTMENT OF AN AUDITOR BY THE CENTRAL GOT

If a subsequent auditor is not appointed by the shareholders at any annual

general meeting, the company must bring it to the notice of the central govt.

within seven days of the con conclusion of the annual general meeting. On

receiving the notice, the central govt. may appoint an auditor to fill the vacancy.

APPOINTMENT IN CASE OF CASUAL VACANCY

Any casual vacancy in the office of an auditor can be filled up by the board

of directors. However, the casual vacancy caused by the resignation of an auditor

cannot be filled up by the Board of Directors; it can be filled up by the

shareholders at the general meeting. An auditor appointed to a casual vacancy

can hold office only till the conclusion of the next annual general meeting.

 

REMOVAL OF AN AUDITOR

An auditor may be removed before the expiry of the term for which he has

been appointed.

The first auditor appointed by the directors of the company may be

removed before the expiry of his term of office and another person may be

appointed in his place by the shareholders at a general meeting by passing an

ordinary resolution to that effect.

A subsequent auditor appointed by the shareholders at an annual general

meeting can be removed from the office before the expiry of his term of

appointment by the shareholders in general meeting by passing an ordinary

resolution after obtaining previous sanction of the central govt.

For the removal of any auditor before the expiry of his term of office and for the

appointment of another auditor in his place, in the following procedure has to be

followed:

First, a special notice of the days containing the proposed resolution to

remove an auditor before the term of office and to appoint a new auditor in place

must be given to the company by any member interested.

On receipt of the notice of such resolution, the company must send a copy

of the resolution to the auditor who is sought to be removed.

After receiving a copy of the proposed resolution, the auditor concerned

can make his representation to the company.

There after, if the members desire that the auditor should be removed

before his term of office and another person should be appointed in his place, an

ordinary resolution should be passed by the share holders at the general

meeting.

It may be noted that for the removal of a subsequent auditor, the

provisions approval of the central government also must be obtained.

REMUNERATION OF AN AUDITOR

The remuneration of the first auditor is fixed by the Board of Directors, if

he is appointed by the Board of Directors.

The remuneration of every subsequent auditor, who is appointed by the

company, is fixed by the company in the general meeting.

Where a subsequent auditor is appointed by the Central government on the

failure of the company to appoint the auditor, his remuneration will be fixed by

the Central Government.

LEGAL STATUS OR POSITION OF A COMPANY AUDITOR

1) An agent of the shareholders.

2) An officer of the company.

3) A servant of the company

 Powers, Duties and Liabilities.

RIGHTS OF A COMPANY AUDITOR

1) Right of access to books of account of Vouchers:

An auditor of a company has a right of access to the books of accounts

and vouchers of the company whether they are kept at the head office of

the company or elsewhere

2) Right to examine the cost records:

An auditor of a company has a right to examine the cost records along

with the quantitative records relating to production, sales, stocks etc.

3) Right to obtain information and explanations:

An auditor of a company has a right to obtain from the directors and

officers of the company such information and explanation as he may

think necessary for the performance of his duties as an auditor.

4) Right to correct any wrong statement:

An auditor of a company has a right to correct any wrong statement

made by the Directors relating to the accounts to be laid before the

company in the general meeting.

5) Right to comment on the inadequacy of the accounting system in his

report:

If the system of maintaining accounts is inadequate, he can advice the

directors to amend the system of accounting.

6) Right to visit branches:

The auditor of the company can visit the branch and examine the books

and accounts and vouchers at the branch.

7) Right to receive notice and other communications of general meeting: -

An auditor of a company has a right to receive notice and other

communications relating to any general meeting, in the same way as a

member of the company.

8) Right to attend the general meeting of the shareholders

An auditor has the right to attend every general meeting of the

shareholders.

9) Right to speak at the general meeting: - An auditor of a company has a

right to speak at a general meeting where his certified accounts are

discussed.

10) Right to sign the audit report: - An auditor has the right to sign the

audit report.

11) Right to report to the members of the company: - An auditor has a

right to report to the members of the company, if the accounts audited by

him show an unsatisfactory state of affairs.

Duties and Responsibilities of a Company Auditor

The various duties of an auditor of a company can be grouped into four

categories. They are:

(1) Statutory duties.

(2) Contractual duties

(3) Certain duties imposed by legal or court decisions

(4) Duties arising out of professional etiquette.

Statutory Duties: - Statutory duties refer to the duties imposed by the

statute, i.e., by the Companies Act. The various statutory duties of an

auditor under the Companies Act are:

(1) Duty to make certain enquiries: - An auditor of a Company should

enquire:

1. Whether loans and advances have been properly secured.

2. Whether loans and advances have been shown as deposits.

3. Whether the transactions of the company are not prejudicial to the

interests of the company.

4. Whether the personal expenses have been charged to revenue

account.

(2) Duty to Report: - An auditor of a company should make a report to the

shareholders on the accounts examined by him and balance sheet and profit and

loss account.

(3) Duty to comply with the directives of the Central Government: - The

Central has been empowered to issue necessary directives to the auditors

of certain companies to give specific reports on certain matters. When the central

government issues any such directions, the auditors are required to comply with

those directives.

(4). Duty to sign his audit report

(5). Duty to give a statement in prospectus: - A prospectus issued by an

existing company should contain a statement from the auditor.

(6) Duty to certify the statutory report.

(7). Duty to certify the declaration of the solvency of the company.

(9). Duty to assist Central Government in connection with prosecution.

(10). Duty to make report on public deposits.

 

 The important contractual duties of an auditor are:

1. An auditor has a duty to see that his appointment is in order.

2. He must perform all the duties under common law.

Duties imposed by legal or court decisions: -

1. An auditor must make himself fully acquainted with his duties under the

Companies Act and the Articles of Association of the company.

2. He must not confine himself only to verify the arithmetical accuracy of the

balance sheet but should also enquire into its real accuracy and fairness.

3. He should satisfy himself about the valuation of assets.

4. He should perform his duties with great care and skill.

5. It is the duty of a company auditor to check the stock properly.

Duties arising out of Professional Etiquette: -

1. Every auditor should carry on his duties with due regard to public interest.

2. An auditor should comply with the rules and regulations formulated by the

Institute of Chartered Accountant of India.

3. He must be honest, sincere, technically competent and independent.

4. He should disclose full and fair information about the working and

financial position of the company.

 

Liabilities of a Company Auditor

 

A Company Auditor is appointed under the Companies Act. So his

liabilities are determined by the Companies Act.

 Under the Companies Act, the liabilities of a company auditor can be grouped

under two heads. They are

1. Civil Liabilities

2. Criminal liabilities

Civil liabilities: - Liability of an auditor to pay damages is known as civil liability.

The civil liabilities of company auditor may be grouped under two heads. They

are:

1. Liability for negligence

2. Liability for misfeasance

Liability for negligence: - An auditor of a company is appointed by the

shareholders. As such, he becomes an agent of the shareholders; he must

safeguard the interest of the shareholders and the company. To safeguard the

interests of the shareholders and the company he must exercise reasonable

care and skill in the performance of his duties .If he fails to do so, and

shareholders or company suffers any loss, the auditor will be held liable to

make good the loss.

Liability for misfeasance: - Misfeasance means wrongful performance of a

fiduciary duty. In other words, it means breach of duty imposed by law. If an

auditor of a company does something wrongfully in the performance of his

duties, resulting in financial loss, he is guilty of misfeasance.

Criminal liability of a company auditor

Criminal liability means liability for a crime. It arises out of an act constituting a

crime. The criminal liabilities of an auditor may arise under the Companies Act,

the India penal Code, the Indian Income Tax Act and Chartered Accountant Act.

Criminal liabilities of an Auditor under the Companies Act

Under the Companies Act an auditor is held criminally liable in the following

cases.

1. Under section 63 for misstatement in prospectus.

2. Under section 68 for fraudulently inducing persons to invest money.

3. Under section 233, for on complaints with section 227 and 229 of the

company’s Act.

4. Under section 240 for failure to assist investigation

5. Under section 242 for failure to assist prosecution of guilty officers.

6. Under section 477, for failure to return property, books or papers.

7. Under section 539 for falsification of books

 

Criminal liability of an Auditor under Indian Penal Code.

If an auditor issues signs any certificate believing that such a certificate is false

in any material point, he becomes punishable.

Criminal liability of an Auditor under the income tax act of 1961.

An auditor may become criminally liable in the following circumstances.

1. If has been committed of an offence in connection with taxation

proceedings, he will be disqualified from representing an assessee for a

certain period .

2. If an auditor submits knowingly any false statement in the form of account

for the preparation income tax returns, he becomes liable for imprisonment

Criminal liability of an Auditor under a Chartered Accountants Act

1. If a person not being a chartered accountant acts as an auditor of a

company and signs any document, he becomes liable for criminal

prosecution.

2. A member of the Institute will be deemed to be guilty of professional

misconduct if he submits any return, statements or form to the council

knowing them to be false.

Auditor’s Report

AUDIT REPORT

An audit report is a statement through which an auditor submits his

findings and expresses his opinion on the state of affairs of the company’s

business. In other words, it is a statement through which an auditor summarizes

result of his audit work. In short it is the medium through which an auditor

expresses his opinion on the financial statement of a business.

CHARACTERISTICS OF AUDIT REPORT

1) It is the medium through which an auditor expresses his opinion on the

financial statement.

2) It is the end product of audit.

3) It is based on factual information.

4) The audit report may be short or long.

5) The audit report may be in the form of letter or statement.

6) The audit report is attached to the balance sheet

IMPORTANCE OF AN AUDIT REPORT

It is a statutory requirement in the case of a company audit.

It is the end product of audit. It summarizes the result of the audit work done by

the audit.

It is the medium through which an auditor submits his findings and expresses

his opinion on the state of affairs.

An audit report ensures to the shareholder that the accounts of the company are

properly maintained.

It is evidence in the court of law

CONTENTS OF AUDIT REPORT

An audit report has to contain matters as per section 227(3) of the companies act

of 1956 the audit report of a company cannot contain the following matters:

1) Whether he has obtained all the information and explanation.

2) Whether proper books of accounts as required by law have been kept by the

company.

3) Whether the company’s balance sheet and profit and loss account are in

agreement with the books, accounts and returns.

4) Whether any other statements have been concluded as required by the central

govt.

5) Whether in his opinion

a)Balance sheet represents true and fair view of the state of affairs.

b)Profit and loss account represents correct profit or loss for the financial

year.

ESSENTIALS OF AN AUDIT REPORT

1) It must be a statement of facts.

2) The report must contain the auditor’s opinion.

3) The report should not give vague statement.

4) The report should be convincing.

5) The report must be coherent.

6) It must be simple to understand.

7) It must be forceful.

8) It should be unbiased.

9) The information given in the report should be clear and concise.

10) The report must convey to the client the material facts known to the

auditor.

11) The report must be signed by the auditor.

 

 

 

DISTINCTION BETWEEN AN AUDIT REPORT AND AN AUDITOR’S CERTIFICATE

An auditor’s report is merely an expression of the auditor’s opinion on the

financial statement of a business. On the other hand, an auditor’s certificate is

the declaration as to the truthfulness of a statement given by a person.

An auditor’s report is based on facts, estimates and assumptions, whereas

auditor’s certificate is based only on facts.

An auditor’s report is not guaranteed of the absolute correctness and accuracy of

the financial statements. But an auditor’s certificate is a guarantee of the

absolute correctness and accuracy of the financial statements.

If a signed report by an auditor is wrong, the auditor cannot be held responsible.

On the other hand, if a duly signed certificate by an auditor is wrong, the auditor

will be responsible.

 

 

and Audit Certificate