AUDIT OF SOLE PROPRIETOR / SOLE TRADER

A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business. The owner receives all profits (subject to taxation specific to the business) and has unlimited responsibility for all losses and debts. Every asset of the business is owned by the proprietor and all debts of the business are the proprietor's. It is a "sole" proprietorship in contrast with partnerships. A sole proprietor may use a trade name or business name other than his or her legal name.

Audit of sole trader, for obtaining loan from bank etc., may be conducted in the following manners laid down by ICAI in Audit of Accounts of Non-Corporate Entities (Bank Borrowers) :-

1.

Accounts: The primary responsibility for maintenance of books of accounts and records is that of the sole trader. Since there is no legislation prescribing the books of account to be maintained by a sole trader, it will be necessary for the auditor to advise him about the form and contents of the books and records to be maintained.

2.

Auditor: The sole trader is free to choose any practising chartered accountant to conduct this audit. Similarly, he will be free to change the auditor. The auditor should obtain from the sole trader a letter of appointment before accepting the audit. The auditor is required to submit his report to the person appointing him.

3.

Audit Procedures: The auditor is required to express his opinion as to whether the financial statements give a true and fair view of the state of affairs of the sole-trader. In giving this report, auditor will have to use his professional skill and expertise and apply such audit tests as the circumstances of the case may require. Considering the contents of the audit report, he will have to conduct the audit by applying the same principles which are applicable for an audit in the corporate sector. He can apply the technique of test audit depending on the type of internal control procedures followed

by the sole trader. If he finds that there is no internal control, it would not be advisable for him to conduct the audit by applying test checks. The auditor will also have to keep in mind the concept of materiality depending upon the circumstance of each case. He would be well advised to refer to the Standards on Auditing while determining the extent of test check and materiality in each particular case.

4.

Working Papers: In order that the auditor may be in a position to explain any question which may arise alter, it is necessary that he should keep detailed notes about the evidence on which he has relied upon the while conducting the audit and also maintain all his working papers properly. Working papers should include his notes on the following, amongst other matters: (a) What books and records were examined and by whom;(b) Brief note on the system of internal control and procedure followed in the entity;(c) The extent to which test check were applied in the course of audit;(d) What explanations and information were given to him during the course of the audit and by whom; and (e) What decisions on various points were taken.

5.

Formats: The financial statements and the audit reports will be in the format prescribed by the bank giving loan, or the RBI or by the ICAI in the above publication. In the case of a trading entity, the cost of goods sold is to be separately shown. Salaries and interest paid to the proprietor should be disclosed separately. In case of a trading entity, any item of expenditure which is significant, say 5% or more of total sales, should be separately shown under the appropriate heads.

6.

Tax provision: In the case of a sole trader, it is possible that he may be having other income ( e.g., income from house property , dividends, and other sources) which is not credited in the books relating to the business entity which is being audited. In such a case, it would be necessary to find out the total tax liability of the individual in respect of his total income from all sources and provision for proportionate tax relatable to the business income from trading income from trading should be made in the accounts under audit. In such a case, a specific note should be given that the tax liability has been provided in the financial statements on the proportionate basis. For working out the tax liability in any year reference should be made to past tax records for ascertaining disallowance of expenses,etc. The liability should be estimated by

taking into consideration the provisions of the Income-tax Acct applicable to the relevant year.

7.

Fixed Assets: Where the original cost of fixed assets is not available, the book value of the fixed assets on the first day of the financial year under audit can be taken as the original cost of the fixed assets.

8.

Related Concerns: Investments in concerns wherein proprietor or his relatives are interested are to be shown separately under the head Investments. Similarly loans to proprietor or associated concerns have to be shown separately under the head Loans. Similar information is also given in respect of receivables, and loans and borrowings

9.

Accumulated Losses: The accumulated losses, if any, have to be shown in the Balance Sheet and they should be bifurcated into (a) cash losses; and (b) accumulated depreciation.

Following is the summary of the Guidance Note on Special Considerations in the Audit of Small Entities by the Institute of C.A of India

MEANING AND FEATURES

A small entity (SE) has following features: 1) 2) 3) 4) 5) 6) There is a concentration of ownership and management (e.g. proprietor) Source of income are few Activities are simple Record-keeping is simple and personalised Internal control is limited Management may at times ignore such internal controls.

SPECIAL FEATURES OF AUDIT 1) Audit Procedures: The nature and extent of audit procedures and working papers are influenced by special features of SE described above.

2)

Fraud and Errors: Auditor should check the following circumstances which indicate the possibility of frauds and errors:

a) b) c) d) e) f) g) h) i) j) k) l) m) n) o) p)

Whether owner needs to manipulate the accounts Whether personal and business transactions are mixed up Whether advisors are changed frequently Whether audit starts too late or has to be finished in a hurry Whether there are unusual material transactions around year-end Whether there are unusual transactions with group-concerns Whether excessive fees/commission is paid Whether there are disputes about taxes Whether accounting records are partly missing Whether cash transactions are too many Whether documents for many transactions are inadequate Whether many confirmations for debtors/stock have not been received back Whether owner/senior managers have not taken leave for long period Whether working capital is insufficient Whether remarks in earlier audit reports are ignored Whether stock records are not kept

3)

Audit Evidence a) Adequate audit evidence (supporting documents) may not be available. The owner may want that some transactions are not recorded at all. The internal controls, which should generate the documents, may be weak.

b) Auditor should focus on cross-checking of data, quantity reconciliations, analytical review, external confirmations and review of transactions after yearend.

4)

Audit Planning: Audit of a SE may be done by a sole C.A. Hence, audit planning will be simple.

5)

Management Certificate: Auditor should obtain a written certificate from the owner that the accounting records/financial statements are complete and accurate.

6)

Analytical Review: Evaluating the Gross Profit Ratio over years/trade is often very helpful in a case of a SE.

7)

Audit Sampling: In a view of the small size, it may be possible to check 100% entries or at least select a large sample size for checking.

AUDIT OF HOSPITAL

The special steps involved in audit of a hospital or a dispensary run by a trust are stated below: 1) Trust Deed: Examine the Trust Deed or Regulations in the case of the hospital and note all the provisions affecting accounts.

2)

Minutes : Read through the minutes of the meetings of the Managing Committee or Governing Body, noting resolutions affecting accounts to see that these have been duly complied with, specially the decisions as regards the operation of bank accounts and sanctioning of expenditure.

3)

Registers of Patients: Vouch the Registers of patients with copies of bills issued to them. Verify bills for a selected period with the patients occupancy record to see that the bills have been correctly prepared. Also see that bills have been properly issued to all patients from whom an amount was recoverable according to the rules of the hospital.

4)

Cash Collections: Check cash collections as entered in the Cash Book with the receipts, counter folios and other evidence for example, copies of patients bills, counterfoils of dividend and other interest warrants, copies of rent bills, etc.

5)

Investment Income: See by reference to the Property and Investments Registers that all income that should have been received by way of rent on properties, dividends, and interest on securities settled on the hospital, has been collected.

6)

Legacies: Ascertain that legacies and donations received for specific purpose have been applied in the manner agreed upon.

7)

Donations: Trace all collections of subscription and donations from the Cash Book to the respective Registers. Reconcile the total subscriptions due (as shown by the subscription Register and the amount collected and that still outstanding).

8)

Expenses: Vouch all purchases and expenses and verify that capital expenditure was incurred only with the prior sanction of the Trustees or the Managing Committee and that appointments and increments to staff have been duly authorised. Compare the totals of various items of expenditure and income with the amount budgeted for them and report to the Trustees or the Managing Committee significant variations which have taken place.

9)

Stocks:

Examine the internal check as regards

the receipt and issue of stores;

medicines, linen, apparatus, clothing, instruments, etc. So as to insure that purchases have been properly recorded in the Stock Register and that issue have been made only against authorization.

10)

Grants: Verify that grants, if any, received from Government or local authorities have been duly accounted for. Also, that refund in respect of taxes deducted at source has been claimed.

11)

Depreciation: See that depreciation has been written off against all the assets at the appropriate rates.

12)

Physical Verification: Inspect the bonds, share scrips, title deeds of properties and compare their particulars with those entered in the Property and Investments Registers. Obtain inventories especially of stocks and stores as at the end of the year

and check percentage of the items physically; also compare their total values with respective ledger balances.

AUDIT OF EDUCATIONAL INSTITUTION

Audit of books of educational institutions like school, college, universities etc. or other such institutions which are engaged in the educational field is known as audit of educational institutions. Auditor should check income and expenditure account and balance sheet of such institutes in order to verify and report the true and fairness of results presented by income statements and financial position presented by the balance sheet. Generally, the methods and procedures for vouching and auditing is same even though an auditor of educational institution should perform following tasks:

1. The auditor should go through the University Act. Trust deeds and should note the rules and regulations relating to accounts. The governing body may pass resolutions from time to time in respect to accounts. A copy of minutes books should be made available to him so that he may be able to confirm whether the decision of the government body have been compiled with.

2. Auditor should obtain a copy of budget or financial statements to study of different heads of income and expenditure.

3. Auditor should thoroughly assess the strength of internal check.

4. Auditor should vouch the grant-in-aid from the government carefully.

5. Auditor should verify the receipts of monthly fees from students, from counterfoils or carbon copy of the receipts. He should also see whether cash received has been banked daily or not.

6. Other charges from the students such as examination fees, laboratory fees, fines etc. should be carefully verified.

7. Any fees received in advance should be properly adjusted.

8. The concession of fees and other charges should be duly authorised by the proper authority. Any charges becoming irrecoverable should be written off only after proper authority has recommended.

9. Any grant-in-aid or funds received for a particular purpose must be utilised for the same.

10. The donations and other subscriptions from the various authorities have been accounted for and acknowledged.

11. The income from property, investment etc., should be properly verified from the vouchers.

12. Auditor should vouch the amount of salaries paid with the Salary Register. Any increment given to an employee shall be duly sanctioned.

13. The staff provident fund should be verified and it should be seen that it is invested as per the rules.

14. The establishment expenses must be carefully vouched and it should be seen that capital expenditure has not been treated as revenue expenditure or vice versa.

15. The payment of scholarship should be verified with the receipt from students and Scholarship Register.

16. All the assets and liabilities should be properly exhibited in the balance sheet.

17. The stock of equipment, stationary, furniture should be carefully verified.

18. While making payment of staff salaries, income tax should be deducted at source and shall be duly deposited with the Income Tax Department.