Вы находитесь на странице: 1из 54


1. Principles and practice of Auditing: Meaning-Definition-Differences between accountancy and Auditing objects of
auditing Types of audits-Statutory Audit-Continuous audit- Periodical audit-particle
audit-Balance sheet audit-Cash audit-Internal audit-Interring audit and cost audit.
2. Preparation before commencement of new audit: Audit programme-audit note book- audit working papers and their important.
3. Internal control and internal check: Meaning-Definitions-Fundamental principles-Internal check with respect to wagesCash sales -Cash purchases-Internal check in a departmental stores.
Internal audit meaning-impotents- Advantages and disadvantages
4. Company Auditor: Meaning-Appointment-Qualifications-Power-Duties-Liabilities (both
criminal) and removal of auditor



5. Audit of share capital and transfer of shares:6. Audit of partnership firms-Co-operative societes-Educaional institutions and social
7. Investigation: Meaning-Differences between investigation and auditing-Investigation with respet to
business purchases-Investigation in respect to investments
8. Verification and valuation of assets and liabilities: Meaning-Definition-General principles-differences between verification and
valuation verification and valuation of fixed assets Goodwill, Land and Building,
Plant and Machinery, Patents, Trade mark, Investments, Current assets, Cash in hand,
Sundry debtors, cash at Bank, Stock, Bills receivables, Modes of valuation of stock,
Valuation of liabilities Sundry creditors, Bills payable, outstanding expenses,
Contingent liabilities.
9. Devisable profits and dividends: Meaning, Provision-Different kinds of reserves-Specific reserve, General reserve,
Capital reserve, Methods of creating secret reserves Its usefulness and effects,
Duties of an auditor with respect to secret reserves provisions with respect to
payments of dividends
10. Depreciation: General Considerations Methods of depreciation, Auditors duties with respect of
11. Vouching: Meaning, Definition, Importants, Routine checking Voucher Types of vouchers,
Vouching with respect to cash sales, Receipts from debtors, Bill receivables, Proceeds
from rate of investments and buildings.
Vouching of payments vouching of cash purchases, payments of creditors, bills
payable, purchase of building, plant and machinery and patents rights.

Page 1 of54

Vouching of deferred revenue expenditure preliminary expenses, under writing

commission issue of shares and debentures.
Vouching of petty cash books Bank transactions, impersonal ledgers income
received in advance accrued incomes, outstanding and prepaid expenses.
12. Mandatory accounting standards issued by ICAI professional ethics of an auditor
13. Practicals: Drafting an audit program for trading and non trading organization in a tabular form
14. Preparation of clean and qualified audit report with special reference to
manufacturing and other companies
Introduction to Auditing : Industrial revolution is the responsible for increase in the volume of trading
operations which necessitates the use of more capital as a result average traders was
compelled to combined in partnership with others.
Therefore big enterprises in the forms of partnership firms and joint stock companies
were responsible for the growth of business enterprises before and after industrial revolution
along with improved accounting system.
Besides there was reparation of ownership from management and the companies made
the shareholders the realize that there interest could be well protected by an independent and
impartial audit. All this developments had direct impact on evaluation of the practice of
Definitions: Audit may be raid said to be the verification of accuracy and correctness of books of alls by
an independent person qualified for the job and not in anywhere connected with the
preparation of such accounts R.B.BOSE
Differences between Audit and Accountancy: Or
(Auditor and Accountant)
Basis of difference
It is constructive in nature.
Nature. It deals with checking and
It deals with competation of
verifications of financial
accounting information for
preparing P&L a/c and
Balance sheet.
It is restricted to preparation of
It is determined by agreement
financial statements and their
between auditor and its claint
No formal qualification has been
He must be a qualified chartered
The main object is to find out
The main object is to ascertain
operating results of the business
truth and fairness of financial
statements and comments thereon
Page 2 of54

Basis of

It starts where book keeping ends

The accountant is not required to
submit a report on accounts and
statements prepared by him
The accountant is paid monthly
He is employee of the business

Level of

He doesnt require knowledge of

audit techniques and procedure


It is conducted through out the


It starts where accountancy ends

Auditor has to submit a report
with respect to accounts audited
by him
He will get fixed remuneration as
per agreement
He is independent outsider
appointed on construct as basis
He must have knowledge of
accounting as well as auditing
It is conducted once in a year

Objectives of Auditing: Objectives of an auditing can be clarified into 2 types: 1. Primary objectives
2. Secondary objectives
1. Primary objectives: Primary objective of an audit is to verify the accounts and to report whether the p & l a/c
and Balance sheet have been drawn properly. According to companies act and whether they
expect true and failure of the state of affairs of the concern
2. Secondary objectives: The secondary objective of an audit is detection and prevention of errors and frauds
Types of errors: Errors of omission
Errors of commission
Compensating errors
Errors of principles
1. Errors of omission: It is arises due to mistake of an accountant or clerk. If a transaction as been omitted from
being entered in the books of a/c wholly or partially it is an exam: - of error of omission
2. Errors of commission: It is usually arise because of negligence in the books of accounts. They are the out come
of a sort of wrong done on the part of the clerk
Exam: - Errors in totaling, balancing, incorrect posting, incorrect carry for ward amounts etc
3. Compensating errors: It is arised when an error is counter balanced by any other error or errors, so that the
adverse effect of debit or credit side is nutralised by the of another on the credit or debit side

Page 3 of54

Example: - Mr.As A/c which was to be debited fro Rs.200/- has been wrongly credited for
Rs.200/- and similarly Mr.Bs A/c which was to be credited for Rs.200/- has been wrongly
debited for Rs.200/4. Errors of principles: It is generally arise due to going against the principles of accountancy. Such errors
are committed unintentionally to falsified and to manipulate the a/cs with an objective of
showing more profit than the actual one
Example: - Non provision of depreciation, over valuation of stock.
Fraud: It is actually false representation or entry, which is made intentionally with some
mischievous objectives. Fraud may be mainly of 2 types
Misappropriation of cash or stock
Manipulation of accounts
1. Misappropriation of cash: Usually cash is misappropriated by theft of cash receipts, petty cash, theft of cheques and
other negotiable instruments, payments made to ficticious creditor or workman
Misappropriation of stock: Goods can be misappropriated by actual theft of stock, issuing fictitious creditors to the
customers and where there is collusion of employee with customers
2. Manipulation of accounts: The accounts of business can be falsified by making false entries in the respect of
ficticious sales or purchases. Usually it involves very large amount and the involvements of
high officials of the business that is directors managers etc.
Types of Audit: Following are the different types of Audit.
1. Statutory Audit
2. Continuous Audit
3. Periodical Audit
4. Partial Audit
5. Cash Audit
6. Interim Audit
7. Balance Sheet Audit
8. Cost Audit
1. Statutory Audit: In case of many undertakings, audit is made compulsory under statute (law). It is so
because there undertakings are established by statute. The audit of there a/cs is terned as
statutory audit Example: - company audit, audit of co-operative societies.
2. Continuous Audit: It is an audit which involves conducting of regular audits of the a/cs through out the year
at regular intervals. For exm:- once in 2 months, 3 months or 6 months. The a/cs in such
Page 4 of54

cases are subject to audit as and when they are prepared. This type of audit is useful where
the transactions are many in number and it is necessary to get them audited at regular
intervals or where the turnover is large in nature.
3. Periodical Audit: (Annual audit of final audit or completed audit)
This type of audit is done at the close of the financial period where the final a/cs are
prepared. This kind of audit is more convient and useful where nature of business small of
4. Partial Audit: In the case of complete audit all the records and books of a/cs are subject to audit by the
auditor. But when audit is conducted on some of the records and books of a part or whole of
the period is called partial audit when auditor asked to audit certain category of transactions
during a part of a period is know as partial audit
5. Cash Audit: In this auditor is concerned with verification of cash transactions. He has to verify the
entries pertaining to cash receipts and payment with the help of relevant vouchers.
6. Interim Audit: It is a kind of audit, which is conducted for a part of the accounting year with some
interim purpose. (Declaring interim dividends) In other words it is conducted between 2
periodical audit
7. Balance sheet audit: In this auditor verifies assets. Liabilities capital, reserves etc, which are appeared in the
balance sheet. He verifies only those documents which are related to the items appeared in
the balance sheet.
8. Cost Audit: It refers to the verification of correctness of cost a/c and following of cost accounting
plans. It is conducted in special circumstances main purpose is to know how for cost
accounting plans have been incremented. The companies act 1956 provides for audit of cost
a/c under section 233 B.
Advantages and Disadvantages of continuous Audit: Following are the advantages of continuous audit: 1.

It ensures complete verification of all the records

It enables early deduction of errors and frauds
It gives valuable suggestions
Early presentation of accounts
It provides for maintenance of upto date accounts
Moral check
It ensures affective proper planning
Page 5 of54

Disadvantages: 1.

It is expensive
Alteration of values are possible
Dislocation of routine work
Monotous or monotony
Loosing link in the audit work

Differences between continuous audit and periodical audit: Continuous Audit

Periodical Audit

1. A/cs are verified frequently by

the auditors

A/cs are audited once in a year by the audit staff

2. Audit comes to an end with a

close accounting period

Periodical audit commences after the closing of

financial year

3. It is very expensive

It is economical

4. A/cs are audited as and when

they are prepared

A/cs are audited at the end of the financial year

5. Audit staff becomes more

efficient and regular

It is not possible because the audit work will

commences only after the completion of financial
Preparation before new Audit: -

Introduction: Preparation before a new audit after having decided has to whether continuous audit or an
annual audit is to be undertaken, the auditor should himself prepare for the work his preparation will
be decided by the scope of work assigned to him and method in which he will proceed. In this
respect he will take the following steps: 1. Scope of the work to be determined
2. Knowledge about the business
3. Introductions to the client
4. Preparation by the auditor
1. Scope of the work to be determined: The first matter which should be verified by an auditor he is the volume of work which he has to
be performed. The scope of work will depends on the agreement entered between him and his client
or upon the conditions stated in the appointment letter
2. Knowledge about the business: Auditor can acquire the knowledge of the business by verifying the following documents: 1. He should verify memorandum of association, articles of association and prospectus
2. He should examined methods of maintaining accounting system
Page 6 of54


He should ask for list of books maintained, records and name of the clerk
He should examined the system of internal check in operation
It there is any technical details he should tries to collect
He should verified previous year balance sheet, p & l a/c and audit report.

3. Instructions to the client: After having acquired an adequate knowledge of a business concern, the audit or should issue
clear and precise instructions to his client, the nature of instruction will depends on the size and
accounting system of an organization.
As a matter of normal routine he should give following instructions: 1. The books of a/cs should be totaled up
2. All the vouchers should be properly arrange and filed
3. Schedules of debtors and creditors should prepared
4. Trail balance and final a/cs should be kept ready
5. List of bad debts, doubtful debts, o/s expenses, prepaid expenses and accrued income should
be prepared
6. List of those documents to which the auditor will have the assess should be prepared
4. Preparation by an auditor: Following are the some of the important aspects of his preparation
1. Distribution of work
2. Audit programme
3. Audit files
4. Audit notebook
5. Audit working papers
1. Distribution of work: The auditor should distribute the work and assign the duties among his subordinates as per their
qualifications, experience and training. Their can be two types of clerks, Juniors and seniors. It is
necessary that senior clerks should be assigned such duties which are difficult and techniqual in
nature and juniors clerks should be given simple work
2. Audit programme: Thecniqually speaking an audit programme is auditors plan of action. It presents an outline of
procedures to be followed to support an opinion on financial statements. The preparation of audit
programmes involves following 3 things: 1. How much work to be done
2. Who will do the particular type of work
3. Time duration within which work has to be completed

Page 7 of54

Advantages of audit programme: 1.


It gives clear instructions to the audit staff with respect to their duties
It enables the auditor to keep in touch with general progress of the audit work
It fixes the responsibility on the audit assistants
It reduces the possibility of errors and negligence
It assures fulfillment of principles of auditing and accounting
Auditor can produce it as an evidence to prove against the charges of negligence leveled
against him, as the programme is the proof to justify to show that a particular work has
already being done by him.

3. Audit files: The work of audit is of a repetitive nature. Since, it is undertaken from time to time, it is
customary to maintain audit files. The maintenance of audit files is important for the office of the
auditor, so as to enable him to keep them for easy and ready reference
4. Audit notebook: The audit clerk cannot remember everything at all times. During the course of audit, he
experiences several difficulties and hence maintains a book with him known as audit notebook. In
which he notes down the important points and enquiries. Which he has to refer to the officials of the
client or the discuss with his senior or the auditor himself.
Advantages of Audit Notebook: 1. It enables the auditor to record important points which are arises during the course of audit
2. Auditor can produce this book as a documentary evidence in case, where a suit filed against
him for negligence
3. It helps in making an assessment of knowledge, efficiency and work of audit clerks
4. It helps in during the course of preparation of audit report
5. It makes the procedure of subsequent audit more easy
5. Audit working papers: Audit working papers are those papers which consists of detailed information about a/cs which
are under audit. The auditor notes down certain important facts and details about A/cs in this paper


Purpose of maintaining audit working papers: It helps in determining the volume of work done by the auditors staff
Auditor can co-ordinate and organise work of audit clerks with the help of working papers
He can give goods advice to his clients with respect to system of internal check and
accounting system
It helps in preparing detailed audit report
It makes subsequent audit more easy

Page 8 of54

Contents of working papers: 1.


It contains schedules of debtors and creditors

Correspondence between accountants, debtors, creditors and the outside public
Important extracts from the minutes records of the meeting
Draft of trail balance and final accounts
Particulars of investment

Characteristics features of working papers: It must contained accurate information

It should be properly organized and arranged
It should be complete in all aspects
Their must be clarity in thought and expression so that the information given their in may be
comprehensive and understandable to everyone who refers them in future
5. Relevant details should always be kept in the audit working papers

Internal control and internal check: Meaning of internal control: In every business organization there is a large number ways and means where a check is
imposed on the accuracy of the executive work
Definition: It involves actual taken within the organization to assist in regulating and direction the
activities of the organization HOWARD. F.SETTLER
Internal check: It is a system where the work of one is automatically verified by the other in the course of
recording of business transaction
Definition: Internal check refers to the organization of office duties in such a way as to prevent or disclose
both errors and frauds
Purpose of internal control: 1. To provide reliable data
2. To safeguard the assets and records
3. To increase the operational efficiency
4. To fulfill the objectives of prescribed policies
Objectives of internal check: 1. To excise moral pressure over stock
2. To ensure that accounting systems provides adeqrate and reliable information
3. Distribution of work in such a manner that no transaction left unrecorded
4. To minimise frauds, errors and irregularities in the business
5. To increase efficiency of the office staff
Page 9 of54

Principles of a good system of internal check: 1. Responsibility

2. Rotation of employees
3. Automatic verification of work
4. Safeguard.
5. Supervision.
6. Periodical preview.
7. To avoid too much dependence on particular of his staff.
8. Division of work to ensure that no single person is allow to complete the work solely by
himself from the beginning to the end.
Internal check with respect to cash sales: It includes
1. Sales at the counter
2. Sales by traveling sales man
3. Postal sales
1. Sales at the counter
Following point should be kept in mind with respect to cash sales: 1. The salesman authorise to sell the goods at the counter should be specifically anme and
particular number should be allotted
2. Cash memo should be printed in numerical sequins. Every sales man should be given
separate book containing blank cash memo
3. The sales man to sells the goods to the customer prepares a four copies of cash memos, 3 of
them will be handed over to the customer and one will be retained by him.
4. The customer is required to carry all the three cash memos to the cashier who after
collecting the cash and recording the sales, returns two copies to the customer by putting
stamp mark cash paid.
5. Goods are handed over to the customer by the security or by the gate keeper. And one copy
of the cash memo is retained by the security
6. At the end of the day the salesman, cashier, security has to prepare summaries of cash sales
2. Sales by traveling salesman: In big business firms, generally traveling salesman are employed to push the sales and to collect
debts. This salesman collects the debts from the old customers and advances from the new
A good system of internal check over this salesman is important. However, following measures
should be adopted
1. He should be given rough receipt book containing serial numbers
2. They should issue the rough receipts to the customer for cash receipt
3. Final receipt should be issued by the Head Office
Page 10 of54

4. If the customer is not received the final received he should ask them to correspond with the
head office
5. He should remit the entire collected cash to the head office without deducting any
commission or any other expenses
6. Head office should send regularly the final statements of accounts with respect to debts and
balances of a customer
7. Special attention should be given to the defaulters
8. Sales man should be transfer from place to place
3. Postal sales: 1. There should be separate record sales by post or V.P.P (Value Payable Post)
2. When cash is received from V.P.P sales it should be entered in the separate register
3. Separate bank slips should be prepared for deposition the cash received against the postal
4. An officer should be appointed to verify the register and special attention should be given to
those goods which have been returned
Internal check with respect to cash purchases: Internal check with respect to cash purchases must includes the following important

Purchase order
Receipt of goods
Making of payments

1. Requisition: The purchase for issuing purchase requisition should be clearly specified. The head of the
department which is in the need of the goods should fill up the requisition slip and then it should
send to the purchase department
2. Enquiry: Purchase departments makes an enquiry about terms and conditions of purchases form different
suppliers for this purpose tenders are generally invited
3. Purchase order: The purchase department places the orders and it should be recorded in the purchase order book.
The purchase order should be prepared in 4 copies. And it should be signed by the responsible
4. Receipt of goods: On the receipt of goods, it should be properly verified by the responsible officials and due entry
should be made in the goods inward book
Page 11 of54

5. Making of payments: The purchase department should verify the invoices and other respective documents carefully;
late it should be send to the finance department.
The finance section should enter the invoices in purchase book. Only responsible official
should prepare the cheque for the payment of invoices.
If the goods are returned to the supplier it should be recorded in the purchase return book
and payment should be adjusted accordingly.
A good system of internal check will reduces the following type of irregularities: Ficticious purchases
Double payments
Internal check with respect to wages: The system of internal check for wages should be devised in a careful and planned manner.
Especially in the case of manufacturing firms. This because in large manufacturing firms employee
more number of workers, possibilities of frauds are always there
Therefore efforts should be made to prevent such kinds of frauds by adopting suitable and
effective system of internal check the system should be actively enforced and supervised by
responsible official.
Objectives: To avoid dummy workers in wage rolls
To avoid incorrect time or peace work records
To avoid manipulation of wage sheets and misappropriation of wage amount
System of Internal check regarding wages

Wages records

Preparation of
wage sheets

Payments of

Time records
Piecework records
Overtime records
Pass out records
1. Wage records: a. Time records: Page 12 of54

The time spend by the workers should be properly recorded with the help of recording clock or
attendance register etc. At the end of the week the records should be send to the wage office for
further processing with respect to preparation of wage bills.
b. Piece work records: For this worker should be provided with a job card containing his name job number, Nature of
work, Wage rate etc. At the end of the work it should be verified and certified by the responsible
c. Over time records: This will be issued by in advance by concerned authorities. He will issue overtime slips
containing name of the worker, Nature of work etc. such slip should be verified and certified by
senior officials. At the end of the week such slip should be sind to the wage officers by time keeper
d. Pass out records: The worker should not be allowed to leave the factory without written permission. In required
cases pass out slips is issued to the workers by concerned officials worker should handed over such
slips to the gatekeeper The wage office should also be given a copy of it.
2. Preparation of wage sheets: - (or Bay rolls)
Following factor should be take into consider while preparing the wage sheets.
1. It should be prepared with the help of attendance register, O.T.Slips, pass out slips etc.
2. Time workers and piece workers should be taken separately
3. Wage rolls should be prepared by the separate departments
4. The wage rolls should be verified and signed by responsible officials
5. Each and every wage sheet should be verified and approved by factory manager or
managing director

Payment of wages: Payment of wages should be done by separate department Accounts department
Wages should not be paid by a person who took part in the preparation of wage sheet
Each workers should be asked to receive his wages personally in presence of foreman
Special arrangement should be made payments to absentees
Advances to the workers should be discouraged. In unavoidable circumstances it should be
given through the responsible person
f. If casual employees are appointed a separate register should to be maintained with respect to
payment of wages
Introduction: In the recent part, business organization have grown enormously in size and operations, many of
them employ thousands of persons and conduct their operations form various locations, It has,
therefore become necessary for the management of this organizations to have a team of experts to
Page 13 of54

review procedures and operations and to report cases of inefficiency lack of control so that
necessary action can be taken.
Internal Audit is a review of various operations and records of the company by a staff specially
appointed for the purpose
Definition: Internal auditing consist of a continuous critical review of financial and operating activities by
a staff of auditors functioning as full time salaried employees W.B.Meigs
Objectives: To comment on the effectiveness of internal control system and to suggest ways and means
to improve the system
To facilitate early retection and prevention of frauds.
To verify correctness, accuracy and authenticity of the financial accounting records
presented by the management
To ensure that accounting standards are followed by the organisations
To take up investigation at the special request of the management
To ensure that assets of the organisations are adequately safeguarded and properly
To ensure that each units of the organisations follows the policies and procedures prepared
by the top management
Advantages of Internal Audit:

It will have continuous check on the accounting records and accounting stock
Errors and frauds are easily detected and books of accounts are free from errors and frauds
It facilitates finalisation of accounts easily at the and of the financial year
Business activities are continuously reviewed
It facilitates adoption of standard accounting practices in the firm

Disadvantages of Internal Audit: It will create, sometimes an adverse effect on the accounting staff
It is expensive additional expenditure will have to be made to run a separate audit wing
There is the possibility of altering the values after they are examined by the internal auditor
Introduction: A company carries on business with the capital contributed by the shareholders. But the
shareholders are not in direct control over the application of capital. The application of capital is left
to the directors, managing directors or other officials of the company
Therefore to safeguard the interest of the shareholders the accounts of the company should
be audited by a independent auditor or auditors.
Page 14 of54

It is for this reason the companies Act provides that, every company ( private or public) must
have a qualified chartered accountant to examine the accounts of the company and to submit the
report to the shareholders at every year at the annual general meeting
Meaning: An auditor is a qualified chartered accountant appointed for the purpose of examining
accounts of a joint stock company and giving report thereon to the shareholders every year at the
annual general meeting.
Qualification: A person can be appointed as an auditor of a company, if he is a chartered accountant within
the meaning of the chartered accountants act 1949. (Under this Act, he must hold the certificate of
practice issued by Institute of Chartered Accountants of India)
Appointment of an Auditor: Under section 224 of companies Act 1954, following authorities can appoint the first auditor
of the company
Share holders in the general meeting
Central government
Appointment of an auditor by special resolution 224 A
1. Board of Directors in Board meeting: According to section 224(5) first auditor or auditors can be appointed by the board of directors
within one month from the date of registration of the company.
The auditor (s) will hold the office until conclusion of first annual general meetion however
auditor so appointed can be removed earlier provided company at general meeting appoints another
A casual vacancy can be filled by the board of directors except in the case of resignation of an
auditor. In case of casual vacancy arises due to the resignation of an auditor it can be filled through
by passing a resolution in shareholders meeting
2. Appointment of an auditor by share holders in general meeting: If the first auditor(s) or not appointed by the board, the company shall appoint the first auditor in
general meeting
Every company shall at each general meeting appoint an auditor(s), who can hold the office
from the conclusion of that meeting, until conclusion of next annual general meeting
If they fails to appoint the company should intimate the central government within 7 days
3. Appointment by the central government: When no auditor(s) are appointed at annual general meeting, the central government may
appoint the person to fill the vacancy
Page 15 of54

4. Appointment by special resolution: According to section 224 A provides that in the case of following companies in which 25% or
more of the subscribed share capitals is held individually or in any combination by
A public financial institution or a government company or any state government or
Any financial or other institutions established by any state act in which a state government
holds not less than 51% subscribed share capital or
A nationalized bank or an insurance company carrying on general insurance businessThe appointment of an auditor(s) shall be made by special resolution
If the company fails to pass a special resolution, it is assumed that no auditor(s) are appointed at
its annual general meeting as such central government will be empowered to make an appointment.
Liability of an Auditor: The company auditor is appointed under the provisions of companies act hence his position is
differs from that of other auditor appointed by a private firm
His appointment. Remuneration, rights, duties, liabilities are defined and laid down in the
provisions of the companies act
The auditors liabilities may be kept under the following heads
Liabilities of an Auditor
Civil Liabilities


Criminal Liabilities


Civil Liability for negligence: An auditor appointed by a company is expected to safeguard the interest of the shareholders. As
such he performs his duties as an agent of the shareholders.
He must exercise reasonable care and diligence while performing his duties as per provisions of
the companies act. If the fails to do so as a result of that principal suffers a loss the auditor is held
liable for the loss thus he can be compelled to compensate the loss caused to the company because
of his negligence.
In other words to hold an auditor liable it should be shown that
There has been negligence in the performance of his duty
The loss or damage is the result his negligence
The loss was suffered by a client to whom he owed (promise) a duty
Case: London oil storage company ltd., v/s sear, Harluck and co,. (1904)

Page 16 of54

In this case it was held that auditor is liable for any damage sustained because of his omission to
verify the existence of an asset stated in the balance sheet.
Treasure India ltd., v/s A.F.Ferguson and co., (1987)
A company issued a prospectus in Feb. 1975 inviting the public to subscribed its shares in
the prospectus auditors report for the year 1973 and 1974 that there was abnormal raise on the rates
of profit for that year as a result public issue was over subscribed and company allot the shares as
per terms of the issue
As investigation later revealed that the sales values had been manipulated by a whole time
director of the company with the help of various heads of the departments of the company.
Realising the implications of the situation, the company offered to refund the subscription
money. The company also rued the auditors for damages of Rs.63.85.000
Liability for misfeasance: - (Breach of duty Sec.543)
It means a wrong done (mistake done) if an auditor does something wrongfully in the
performance of his duties resulting in the financial loss the company is he is guilty of misfeasance.
Directors, managing directors and other officials of the company may also be held liable for
Case: London and general bank (1895)
In this case auditor is liable for misfeasance if he fails to bing to the notice of the
shareholders in clear terms, the unsatisfactory state of affairs of the company when he himself had
not been satisfied.
Criminal liability of an Auditor: An auditor of a company can be guilty of criminal affences, if he willfully makes a false
statement in any report, written, certificate balance sheet etc, under section 2(30) auditor is a officer
of a company.
I. Section 63: - (Mis statement prospectus)
Under this section, auditor is criminally liable for any misstatement in prospectus. He shall
be punishable with imprisonment for a term of 2 years of fine of Rs.5000 or both-unless he proves
that statement was immaterial or at the time of issue of prospectus that statement was true
II. Section 68: Under section 68 auditors can be held liable for fraudulently inducing persons to invest
III. Section 240: Auditor of a company is required to assist an inspector appointed by the central government
to investigate the affairs of the company. If he fails to do so he will be punishable with fine or
imprisonment or both. (Fine Rs.2000 imprisonment 6 months)
Page 17 of54

IV. Section 242: On the basis of report submitted by an inspector the central government can takes an action
and prosecutes any person connected with the affairs of the company including auditor
V. Section 477: In the course of winding up of a company the auditor is subject to private examinations by
the court, at that time he is required to submit any document in his possession. If he fails to appear
before the court he can be arrested.
VI. Section 628: If the auditor of a company makes a statement in any writtens, reports, certificate, balance
sheet, prospectus etc., which is false in any material particulars are intentionally omits any material
facts; he shall be punishable with fine or imprisonment for 2 years
VII. Section 223: If auditors report is made or issued any document which is against the requirements of the
section 227 and section 229, the auditor and the concerned person if any other than the auditor who
sign the report or authenticated the documents shall be punishable with fine of Rs.1.000/Liability under Income Tax Act: Under section 278 of the act prescribes rigorous imprisonment upto 2 years for any person
(including auditor) who induces in any manner another person to make and deliver to the I.T.
authorities a false statement relating to any income chargable to tax.
Duties of an Auditor: Duties under section 227(1A) an auditor is required to enquire: 1. Whether loans and advances made by the company on the basis of security have been
properly secured
2. Whether the terms on which they have been made are not against the interest of the
3. Whether the transactions of the company which are represented mearly by book entries are
not pre-judicial to the interest of the company
4. Whether Loans and advances made by the company have been shown as deposit
5. Whether personal expenses have been charged to revenue account.
Where any of the above matters is answered in the negative manner, the auditors report must
state the reason for the answer
Statutory Duties: - Section 227
1. It is the duty of the auditor to make a report to the members of the company with respect to
accounts, balance sheet, P&L a/c etc. which are examined by him.
Page 18 of54

2. Whether in his opinion required information and explanations are obtained in the manner so
required under the act
3. It is the statutory duty of the auditor to ensure that balance sheet, P&L a/c exhibiter true and
fair view of affairs of the company
4. He should ensured that all the books of accounts which are required by the act have been
properly maintained by the company
5. Whether he had obtained all the information and explanations required by him for the
purpose of audit
6. He should ensure that companies balance sheet and P&L a/c dealt in the report or in
agreement with the books of accounts and writtens
7. He should ensure that balance sheet and P& L a/c have been drawn up accounting the
provisions of the companies act
Duties under companies act: 1. It is the statutory duty of a auditor (Practicing in India) to sign the audit report (Section 229)
2. According to provisional of companies act it is the duty of the auditor to make a report on
certain matters which are going to be included in the prospectus of the company
3. Auditor should make a report on certain matters relating to accounts and allotments of
4. In case of voluntary winding up, the declaration of solvency should be accompanied by the
audit report
Duties of an auditor in relation to mandatory accounting standards: According to the council of (ICAI) institute of chartered accountants of India it is the duty of
the members of the institute, to ensure that accounting standards are implemented in financial
statements of the company
Duty to know the duties: The auditors are duty bound to become aware of their duties under companies act for this he
should refer and understand articles of association of company
Removal of an auditor: According to section 224 (5) states that the first auditor appointed by the board of directors
may be removed at a general meeting by the company and another auditor may be appointed in his
Section 224(7) states that any auditor appointed in: Any annual general meeting or
By the board to fill the casual vacancy or
Appointed by the central government
May be removed from the office before the expiry of his term, only by the company in
general meeting after obtaining previous approval of the central government in that behalf
Page 19 of54

Questions: 1. Who is a statutory auditor?

2. How a first auditor of the company appointed?
3. How auditor is appointed by special resolution?
4. Explain briefly civil and criminal liabilities of an auditor?
5. What do you mean by misfeasance?
6. Explain briefly rights and duties of an auditor?
7. Auditor must be a watchdog and not blood hound?
8. What is a qualification of an auditor?
9. What do you mean by auditors lien?

1. Audit of share capital
2. Audit of Transfer of shares
1. Audit of share capital: Points to be remembered by the auditor: The audit of share capital is necessary on in corporation as well as when further shares are
issued. The auditor should pay special attention to the following points.
a. He should ensures that the requirement of section 69 and section 149 have been fulfilled
b. If the authorised capital is more than Rs.1 crore, the permission of the controller of capital
issue have been obtained
c. He should ensure that no allotment has been made to the public for subscription unless
amounts stated in the prospectus as the minimum amount has been subscribed.
d. The prospectus or statement in lieu of prospectus have been filed with the registrar of
He should verify following books and documents: Memorandum of association
Articles of association
Directors minutes book
Application for shares
Application Book
Copies of letters of allotment
Allotment book
Page 20 of54

Copies of letters of regret

Letters for calls
Calls book
Share register
Cash book
Pass book
Refund of excess application money
Audit procedure: The auditor has to follow the different procedure of
1. Shares issued for cash, and
2. Shares issued for consideration other than cash
1. Shares issued for cash: The entire procedure may be divided into 3 stages: Application stage
Allotment stage
Call stage
1. Application stage: Following are the auditors duty: He should verify original applications
He should compare the entries in application and allotment book with the help of
He should verify the entries in appliction and allotment book with the help of cash book and
pass book
The amount collected on application should be deposited in scheduled banks
He should ensure that amounts refunded unsuccessful applicants along with the letters of
He should ensure that amount received application is not less than 5% of nominal value of
2. Allotment stage: Following are the auditors duty: He should verify directors minute book
He should verify the entries in application and allotment book with the help of sale registers
He should confirm that totals are correct and allotments are recorded in journal
He should see that total value of shares issued doesnt exceed authorised capital
Amount received on allotment should be verified in application and allotment book with the
help of cash book and pass book
He should ensure that following journal entry is passed
Page 21 of54

Share allotment A/c Dr

To share capital A/c
3. Call stage: Following are the auditors duties: He should verify directors minute book
He should verify the entries in calls book with the help of copies of call letters
He should verify the postings from cash book and calls book into the share register
He should verify calls received in advance
He should ensure that following journal entry is passed
Calls A/c Dr
To share capital A/c
Other duties of an auditor: 1. He should confirm that nominal value of shares allotted dorient exceed authorised and paid
up capital
2. The conditions of the prospectus are duly fulfilled
3. Totals and balances of the share holders account should be verified by comparing with the
balances of share capital account
4. If the issue is under written, contract with the underwriters should be verified
5. Payment of commission, brokerage etc., should be verified with the relevant documentary
Issue of shares for consideration other than cash: Where the shares have been issued for consideration other than cash (allotment of shares to
vendors). The auditor should examine agreement with the vendors or promoters to verify the
number of shares which have been allotted to them.
He should also examined minutes book of board of directors to confirm this factors and to
ensure that this factors are disclosed in the prospectus.
Audit of Transfer of Shares: Audit duties are as follows: 1. He should verify articles of association of the company
2. He should see that due notices have been given to the respective transferers
3. He should verify share transfer forms and ensure that relevant provisions of the companies
act are duly fulfilled

Page 22 of54

4. He should examine the signatures of the transferors by verifying their specimen signatures
on the original application form.
5. He should ensure that none of the transferers is disqualified for holding the shares in the
6. He should verify the entries in the share transfer journal on the basis of share transfers
7. He should verify minutes book of board of directors for approving transfer of shares
8. Auditor should cancel old share certificate by distinctive mark Cancelled
9. He should confirm that duplicate share certificates are issued in the place of lost or
destroyed with the consent of board of directors.
10. He should ensure that share certificates are issued in printed form and unused stock of share
certificates is being kept under safe custody.
11. If the shares have been issued in the absence of share certificate he should verify letter of
12. In case of transmission of shares, auditor should examined the following documents: He should verify, that provisions of articles of associations are duly fulfilled
Succession certificate granted the court
Order of the court in case of insolvency
13. He should verify that transfer fees is duly received and credited to the P&L A/c
14. He should confirm that, in case transfer of shares have been refused, due notices have been
issued to both transferers and transferee within 2 months
15. He should confirm that, in case of shares held by directors, managing directors, secretary
etc, the relevant entries in respect thereof have been made duly.
Questions: 1. Explain auditors duties with respect to audit of share capital?
2. Mention important points and documents to be verified by the auditor while auditing share
3. Explain auditors duties at application stage?
4. What do you mean by issue of shares for consideration?
5. Explain auditors duties with respect to allotment stage and call stage?
6. What do you mean by transfer and transmission of shares?
7. Explain general duties of an auditor while auditing on share capital?
8. Explain briefly audit of transfer of shares?
Partnership firm: -

Page 23 of54

Duties of an auditor: 1. Auditor should get definite instructions in writing as to work to be performed by him
2. He should carefully read the partnership agreement
3. He should ascertain powers and duties of each partners.
4. He should ascertain amount of capital contributed, profits sharing ration, Withdraws,
salaries, commissions etc
5. He should have thorough (complete) knowledge of Indian partnership act
6. If any doubt arises with respect to any clause in partnership agreement he should with the
permission of the clients, consult the solicitor or pleader, who draft the agreement
7. In case, firm has bought the business, he should verify the contract and ensure that entries
have been correctly recorded in the books of a/cs.
If the business has been amalgamated, he should see that respective entries are properly
8. The basis of valuation of business in case of amalgamation or absorption etc, should be
enquired into.
9. If the partner keeps any minutes book, he should verify and ensure that concerned
resolutions are passed regarding the a/cs
10. He should get list of books maintained by the firm
11. He should verify system of internal check in operation
12. He should obtain silt of members of staff, officials and their duties and powers
13. He should ensure that all the requirements of partnership act are fulfilled( if firm is
14. He should examine the contracts entered into by the firm with outside parties
15. How the a/cs are closed in case of death of a partner or his retirement from the firm
16. How the goodwill of the firm is calculated in case of death or retirement of a partner
Social Clubs: Duties of an auditor: 1. Auditor should verify the M.O.A, A.O.A of the club. Particularly with respect to
and duties of officials, maintains of books of accounts, operation of bank accounts
2. He should verify minutes book of the clerk
3. He should vouch the receipt of cash on account of admission fees, and subscriptions with the
counter files in receipt books and the list of members
4. He should see that life membership fees is callied to insure and expenditure account or It is
treated as capital income according to rules of the clerk
5. He should see that subscription received into advance or in assises or properly apportioned
6. He should enquire into the system of supplying meals, refreshments beverages etc to the
Page 24 of54

7. He should vouch the payment on account of purchase of furniture, provisions, crockery (clay
items) etc
8. He should ensure that expenditure or properly allocated exm: - capital of revenue
9. He should verify the assets particularly stock is hand in the usual manner
10. He should verify the biliates room, receipts, swimming pool receipt, & sale of wine
breverages, cigrates etc
Educational Institution (School, colleges or universities)
Duties of an Auditor: 1. He should examine the university act, rules & regulations, trust duds, rules & regulations of
societies of mgnts especially with respect to accounting produce
2. He should verify the minutes books of board of management
3. He should check the cash receipt on account of admission fees by referring fees receipts
book & register of students
4. Fees outstanding or paid in advance must be properly adjusted of accounted
5. Irrecoverable fees should be written of by reason authorised by the managing committee
6. He should a certain the system of recovery of fine & extras such as examination fees for
duplicate copies of certificates building fund hostel sent etc & this treatment in accounts
7. Receipts from admission fees should be compared with application forms duly signed by the
heads of the intuitions
8. He should see that free studentship fees has been granted by responsible officials
9. He should vouch the income from land property endoments & securities
10. He should vouch the grands from the government or legal authorities by verifying the
concerned correspondence
11. He should verify the payment of salaries to the members of the staff by referring salary
register, cash book, pass book, cheque book etc
12. See that donations for particular purpose is spend accordingly
13. He should verify the capital expenditure, balances at bank and cash in hand
14. A clear distinction between capital expenditure and revenue expenditure has to be made
15. He should see that outstanding assets and liabilities are taken into account while preparing
the balance sheet
16. See that investments representing endowment funds are kept apart and they are not mixed up
with ordinary investments
17. He should verify stock, provisions, furniture stationery as usual
18. He should see that internal cheque system in the organisations
Co operative societies: Duties of an Auditor: 1. The auditor of Co-operative societies is appointed by the registrar of Co-operative society
2. He must have thorough knowledge of Indian Co-operative societies act
Page 25 of54

3. He should vouch the receipt of cash on account of share capital, with the Co-operative
societies act
4. He should vouch the receipt of cash on account of share capital, with the register of
shareholders, relevant documentary evidence
5. He should vouch the receipts on accounts of deposits by comparing cash book, relevant
accounts and other documentary evidence
6. He should vouch money borrowed from the central co-operative bank by referring cash book
and other relevant documentary evidences
7. He should vouch the receipt of interest and written of loans from the borrowers by
comparing copy of the agreements, and relevant rules and regulations of the society
8. He should see that 25% of profits carried to reserve fund and 10% carried to welfare fund
9. He should verify the cash in hand and investments and surplus can be invested either in
government securities or any other securities with the prior approval of the management
10. If the society is the consumers society he should verify the sales by comparing sales book
and sales account etc
11. He should check the purchases with purchase book, stock book, purchase order book etc
12. He should verify the expenditure in the usual manner
13. He should verify the stock and examine the method of valuation of stock
14. He should ensure that accounts are prepared as per the provisions Indian co operative
societies act
15. He should see that dividends are paid to the members as per the rules and regulations of the
society and co operative societies act
Verification and valuation of Assets and Liabilities: Verification: Meaning: It means the procedures normally carried out at the year end, to confirm
1. The ownership, valuation, and existence of items at the balance sheet date. It also involves
confirming that presentation in the financial statements is in accordance with the
Definitions: Spicer and pegler The verification of assets implies an enquiry into the value, ownership and
title, existence and possession, and the presence of any charge on the assets
Objective of verification of assets should fulfill the following
Free from encumbrances
Proper valuation
Proper recording
Verification of liabilities:Page 26 of54

Verification of liabilities is like that of assets is very much necessary to form an opinion with
respect to truth and fairness of the financial statements

Valuation of assets and liabilities:Valuation forms an important part of every audit. It is because the occuracy of the balance sheet
depends much on how correctly the estimation of value of various assets and liabilities have been
Both over valuation and under valuation of assets and liabilities exhibits wrong picture of the
financial affairs of the concern.
Therefore it is the duty of an auditor to ensure that assets and liabilities exhibites true and fair
view of business concern i.e. neither they have been over valued nor under value.
Method of valuation: Cost price
Market value
Replacement value
Book value
Going concern value or conventional value or token value or historical value
Meaning:It is equivalent to the costless reasonable amount of depreciation written off. Fluctuation in the
price of the asset will not be considered.
Realisable value
Scrap value
Auditor and the valuation
The valuation of assets should be done by responsible officer of the concern and the auditor has
to see whether they have been properly valued or not. For this purpose auditor has to obtain
certificates of valuers and other competent persons.
An auditor is not a valuer and cannot be expected to act as such. This duty is to verify the
original cost price and to ensure that current values are fair and responsible and are in accordance
with the excepted commercial principles
It must be ensure that actual valuations are made by the proprietor or officials of the concern
who have a practical knowledge of such assets. It is the duty of the auditor to confined that
valuation has been done properly he cannot, however. In any where guarantee the accuracy of the
But he doesnt mean that he will be free from his liability if the assets are incorrectly valued by
the officers of the company. as per the directions. Of the management.

Page 27 of54

But auditor definitely concerned with values set against the assets. Because he is to certify that
find accounts of the company exhibites true and fair view of state of affairs of the company.
Therefore, on auditor should exercised reasonable care and skill, analyse all the values critically.
Enquire into the basis of valuation from techniqual experts and to satisfy himself that the different
assets shown in the balance sheet are properly valued as per generally accepted conventions and
principles. If he is satisfied with the method of valuation of assets he will be free from his liability.
Basis of valuation:In the process of valuation of assets, the auditor has to keep following points in his mind.

Original cost of the assets

Expected working life of the assets
Wear and tear of the asset
Scrap value of the asset
The chances of the assets becoming absolute

Verification and valuation of different assets:Intangible assets: Good will

Trade marks
Copy write
Fixed assets: Land and building, plant and machinery
Floating assets
1. Investments
2. sundry debtors
3. stock in trade
4. cash at bank
5. bills receivable
6. cash in hand
Fictitious assets: Preliminary expenses
Discount on issue of shares or debentures
Good will:Good will is the value of reputation of the firm. Is enables the firm to earn more than firm. It
enables the firm to earn more than the normal rate of profit. Goodwill has no physical existence as
such it doesnt diminish in value with use. It has its own self growth.
Page 28 of54

The value of goodwill varies with the earning capacity of the business. Good will should appear
as an asset in balance sheet when
It has been purchased. Where the price of the goodwill has not been specifically price of the
goodwill has not been specifically fixed, it is determined as the differences between total
price paid less the assets acquired at the agreed value.
Company has revalued the whole of its assets and increases the goodwill amount in its
In case of partnership when a new partner is admitted or old partner is retired or died, it
becomes essential to bring goodwill or revalue it in the books of accounts
When the company succeeded in establishing a special reputation in the market because of
its increase in sales of profit.
Verification of goodwill:Where the goodwill has been purchased along with the running business, the some should be
verified from the agreement with the vendor showing the price paid for it. When the amount is not
specifically fixed, goodwill is amount paid for the purchase of business over the net asset.
In case of partnership firm, auditor has to verify partnership deed. Further if there is any
changes in goodwill he should verify partnership deed and he should also make an enquiry in this
regard with partners.
Valuation: Goodwill should be valued at cost less amount written off. It is not to the duty of the auditor to
comment on the price paid for the goodwill even though he considered it to be expensive
An auditor cannot insist on writing off the goodwill a/c. but if it is appears that there is no future
benefit, he should insist on written off goodwill a/c.
Moreover sound financial policies required for writing of the goodwill a/c gradually over a
reasonable period of time.
Patents: The patents rights are verified by examining the certificates grating such rights. If they have
been purchased auditor should examine agreement deed and ensure that it is registered in the name
of his client.
If the clients holds large number of patents the auditor should ask him to prepare a schedule
Description of the patents.
Registered numbers
Date on which they are acquired
Expired period.

Page 29 of54

The auditor should examine the receipt for the payment of renewal fees. He should also see that
renewal fees has been paid each year at right time the renewal fees should be considered as revenue
The patents have sixteen years of life onless of the team has been extended. After expiry of the
period. The patents rights automatically lapses. If a patents right has been allowed to lapse. The
resolution of the goals should be verified
Valuation: With respect to valuation it may be mentioned here that with passing of time, they losses the
value. i.e patents are subject to depreciation the causes for depreciation are; Lapse of time
Under the above circumstances such assets should be revalued at the date of balance sheet. They
must be depreciated as mentioned above
Its value may be estimated according to the un expired period. In no case it should be valued at
higher value than the amt at which they were purchased even though its present value may be higher
than the cost price.
Fees paid for purchasing of such right are in the nature of capital expenditure therefore in should
be debited to the patents a/c which renewal fees are of revenue expenditure it should be debited to P
& A/c
The free hold land is absolutely the property of the client. Hence he should examine little deeds
relating to free hold land and see that asset is in the name of the client and it is free and fair in its
position and title deeds are original. He should verify the same, if part of it has been sold during the
year and if it is purchase he should verify original invoices, relevant correspondence brokers note
Land is not subjected to depreciation. But there may be some fluctuations in its value according
to the changed circumstances. The auditor should see that no notice of such an appreciation are fall
taken into a/c while valuing the asset.
If the fluctuation is accounted he should ensure that such value is disclosed in the balance sheet.
Usually land appears at cost in the balance sheet.
Building:The auditor should examine original records made in the accounts to ensure that land and
buildings are shown separately. This is because building is subjected to depreciation whereas land is
not subjected to depreciation.
He should verify title deeds relating to the property. If it is purchased through brokers he should
verify brokers notes and other relevant records. If the purchase is made through auction he should
verify auctioneers accounts and other relevant documents. If the building has been constructed by
the clainet he should examine certificates received from builder, contractors, architects, and other
related papers and documents
Page 30 of54

If the building has been mortgaged he should verify the certificate of the mortgages. If the title
deeds are with the solicitors or bankers for safe custody he should ensure that they are for safe
custody and not deposited as security for loan.
Building should be valued at cost less depreciation. Fluctuations in the market value are not to
be considered. If it is considered for valuation purpose, it should be disclosed in balance sheet.
Current assets: Sundry Debtors: According to the companies act the books of accounts of debt of a company should be shown as
Debt considered to be good. In respect of which company is fully secured.
Debt considered to be good for which company holds no security where than debtors
personal security.
Debt considered to be bad.
In order to form an opinion, whether debts are good, doubtful or bad. Following points should
be considered.
The age of the debt
Regular payment.
Heavy dishonored bill
Note on the accounts
A comparison of bad debts (Budgeted and actual)
1. The age of the debt: The age of the debt should be seen from the point of terms of credit allowed by the company. If
the settlement of account regular and within reasonable period it shows debts are good on the other
hand if the payments of debt are irregular in such case debt should be consider as bad or doubtful.
2. Regular payment: If the payments are made regularly the accounts may be good. But if the payments are erratic
and balances are increasing day by day the debts should be considered as bad or doubtful.
3. Heavy dishonoured bill: These are always considered doubtful or bad debts and also return of cheques should also be
verified with suspecion that such debts are doubt full.
4. Note on the accounts: Note on the accounts such as in solicitors hands, in liquidation, address unknown etc clearly
indicates that accounts are doubtful. There should be sufficient provision in the accounts to
safeguard against such doubtful debts.

Page 31 of54

5. A comparison of bad debts (Budgeted and actual): In many business. A simple comparison of actual bad debts with budgeted bad debts provide a
baris for considering debt as bad, doubtful or good. Such a comparison can be made for no. of years
and opinion can be made accordingly.
Conclusion: The auditor should see that debtors have been shown properly. Auditor should examine the
ledger accounts and obtain certified schedule with ledger accounts.
He should verify the schedule of debtors with the help of concerned officers and ensure that
proper provision has been made for doubtful debts, discounts etc., Debts written as bad should be
vouched by referee necessary journal entries for which auditor should examine directors minutes
book. He should contact the debtors through correspondence to verify the amount received form the
Cash at Bank: First of all auditor should compare the balances shown in the pass book with the balances of
cash as shown in the bank column of the cash book. If there is some differences, he should prepare
reconciation statement.
It is possible that fictitious passbook may be presented to the auditor, without bringing the fact
to auditors knowledge. In such case, he should obtain a certificate directly from the bank.
He should obtain separate certificate for F.D A/c, current a/c, savings bank A/c from the bank.
This is the only way of verifying the balances in different accounts
Cash in hand: The auditor should verify cash in hand by actually counting it, on the date of the balance sheet.
Fundamental aspect of verification of cash n hand is the time. That is when it should be verified.
The verification should be made on the date of the balance sheet. The auditor should insist the
presence of cash year at the time of counting. It is quite natural that auditor may not be blamed for
shortage of cash, if any.
In cash auditor finds IOV slips (I owe you) etc., for temporary advance made to the employees,
he should verify carefully.
He should also verify the system of making payments and safety arrangements provided for
protection of cash in hand.
With respect to when a part of the cash is maintained either in the branch office or in the factory
in such case auditor should get clear information from the responsible official.
The auditor should also verify revenue stamps, postage stamps on the close of the financial year,
as they are part of the cash balance to be shown in the balance sheet
The document such as stock of unsold canteen tickets, lunch coupons etc. should be physically
verified by the auditor as they are readily to be converted into cash.
Page 32 of54

Stock in Trade: The correct recording and auditing of stock intrgde or inventories are of paramount
importance. Stock in Trade is the lifeblood of a business. It includes varieties of items like such
1. Stores and spare parts
2. Loose tools
3. Raw materials
4. Work in Progress
5. Finished goods
6. Scrap etc.
If stock in trade incorrectly recorded, the resultant profit or loss for the period will be
incorrect. It also affect balance sheet and the assets will present a wrong picture.
If stock in Trade is overvalued, it may lead to payment of more dividends. If it is
undervalued, secret reserve will be created which leads to fall in share value due to disclosure of
lower profit.
Therefore verification and valuation of stock in trade occupied very important place.
Objectives of verification: Auditor must try to satisfied himself to the maximum extent about
Existence of stock and
Its correct valuation
Physical verification of stock is practically impossible for the auditor to physically verify every
item of stock because of following reasons: Limited time
Lack of technical knowledge etc.
Therefore, auditor has to relay upon test checks to ascertain the accuracy of stock in trade.


Verification: The auditor should proceed for the verification of stock in the following manner.
He should verify the management control over receipt and issue of stock
He should verify and familiar with the procedure and arrangements for maintenance of stock
The auditor should obtain list of instructions in connection with stock verification.
A few items should be verified in rough stock sheet
The totals and balances of stock sheets should be thoroughly verified
The value of different items of stock should be verified with the help of valuation sheets,
invoices and related documents.
He should ensure that valuation of stock is done on the basis of cost price or market price
whichever is less.
Page 33 of54

8. The principles and the method followed in the valuation of stock should be verified to
ensure that, they are followed in previous year.
Cost price: The term cost price is interpretated in the following ways: 1. Unit cost method: Under this, each articles is valued at the actual price at which is was purchased. The cost
price of unsold stock will be the cost price at which such goods are acquired.

2. Standard cost method: Under this method, the stock is valued at sum pre-determined cost per unit called standard
3. Fifo Method: Under this method stock is valued at the rate at which the most recent purchases were made.
4. Lifo Method: Under this method stock is valued at the rate at which the earliest purchases were made.
5. Hifo Method: This method is based on the assumption that the closing stock of materials should always
remain at the minimum value, so that issues are priced at the highest value of available
consignment in the stores.
Market Price: In general market price means the price of a commodity as between willing buyers and sellers.
Following are the different ways of expressing market price: Current replacement cost
Net realisable value
1. Current replacement cost: This is virtually the cost of replacing the stock at the date of balance sheet. That is what it would
cost to purchase similar quantities at the market price ruling on the date of balance sheet.
2. Net realisable value: It represent the price at which goods can be sold in the market. The estimated selling expenses
are deducted out of the selling price.
Outstanding liabilities for expenses: The auditor should obtain certificate form responsible officer of the company station that all
outstanding liabilities for expenses incurred, have been brought into account.
The auditor can verify those items of expenses which usually a part of outstanding expenses.
For exm: - Salaries payable, legal expenses rent, wages, audit fees etc.
He should compare all the paid and unpaid expenses of the corrent yeay, with previous year to
see that there is not much difference
Page 34 of54

He should verify the entries in the books passed on the basis of invoices and demand notes for
some weeks after the close of financial year to ensure that they are not related to the year under
Contingent liabilities: Contingent liability is a liability which may or may not arise in the future unless a
contingent liability is quite negligibl, its existence should be disclosed by appropriate note in the
balance sheet.
According to the relevant provisions of the companies act, disclosure of a contingent liability
need only be made through a foot note in the balance sheet specifying amount involved.
Ex: - Liability under a guarantee.
1. Liability arising out of litigation in respect of trade marks. Copyrights etc.
2. Liabilities for penalties under forward contacts.
Auditors Duty: The auditor should verify the various contracts entered into by the company and assess the
likelihood of contingent liability arising likely liabilities have been accounted and shown in the
balance sheet. He should obtain a certificate from the management to the effect that all the
contingent liabilities are disclosed in the balance sheet provided which are going to materialize in
the future.
Investments: Investment includes government securities shares debentures etc., where the number of
investments is considerable, the auditor should ask for schedule of investments held by the client.
Such a schedule of investments should include the following information:1. Name of the Securities
2. Date of their purchase
3. Nominal value
4. Cost price
5. Market price at the date of balance sheet
Objectives of Verification of investments: 1. To know ownership and custody of the investments.
2. Clarification of investments as long-term assets or current assets in the balance sheet.
3. It there is any pledging or hypothecation with respect to investments.
Verification: He should verify details of the schedule of investments by applying certain test.
Ex: - Financial Journals and newspaper should be verified to know existing market rates.
The auditor should verify the amount of interest or dividends accrued on investments.
Page 35 of54

The auditor should verify the existence of investments by his personal inspection. If number of
investments are large in number he cannot verify in one sitting in such case he should keep the
verified investments under his control until he verify all the investments of the company.
If the securities have been kept in the bank for safe custody, the auditor should abrain a
certificate from the bank giving details about all such securities.
According to sec. 49 of companies act 1956. All the investments made by the compant should
be in his name if any such investment ate not in his name before the commencement of the act, the
company should within a period of one year from the commencement of such act should be
transferred to his name.
Valuation: If the investments ate held as a fixed asserts for the purpose of caring interst or dividend in such
case it should be valued at cost which includes brokerage, stamp duty etc.
If the investments ate held as a current assets in such case it should be calued as cost price or
market price whichever is less.
If the auditor is unable to determine value of any investment accurately he should fully disclose
the facts in the audit report.
Bills Receivables: It denotes a broad category of formal documents of indebtedness including promissory notes
and acceptance receivables.
Objectives of valuation of B/R: To establish the accuracy of financial statements.
A fare disclosure in the financial statements.
Validity of the bills as claim.
Following are the steps to be taken by the auditor to verify the B/R:

He should verify B/R book.

He should prepare schedule of B/R. Which are not going to realisable before Balance sheet

If the bills have been deposited with banks either for safe custody or for security of a loan
he should obtain a certificate in this regard from the bank.

If the bills are dishonored before to the balance sheet date and not renewed should not be
shown as B/R but is should be included in sundry debtors.

If the bills have been retired before the balance sheet date in such case he should verify

From the following particulars prepare an audit program for vishal enterprises Bangalore.
1. Name of Audit firm Madhu and Co., Bangalore
Page 36 of54

2. Date of commencement I st July 2003

3. Period of Audit 4 days
4. No. of staff 4 (3 seniors, 1 Junior)


Audit programme for vishal Enterprises,
Date /





Verification of cash
Verification of stocks

Verification of
Bill of exchange
Verification of

Trial Balance
audit report

Verification of schedule
of debtors and creditors
Asset to Manju

Verification of
Assist to Sunil

Verification of
ledger boos
Verification of
Internal check
Assist to Manju


Balance sheet
Assist to

For Madhu And Co.,

Non Trading organisations: Prepare an audit programme for national college, Bangalore with imaginary details
Audit organisations Bonde and co., Bangalore
Period of Audit 3 days
Staff 4 person (3 Seniors, 1 Junior clerk)
Date of commencement of Audit 1/8/04

Date/ person


For National College, Bangalore.
Verification the Library
and its stock
Valuation of Laboratory
Vouching debit side of


Verification the sports materials

and government grant
Valuation of assets
Vouching credit side of the cash

Preparation the
Balance sheet
Preparation the Trial
Preparation the

Page 37 of54


the cash book

Assist to Manju

Assist to Shivu

audit report
Assist to Srikanth

For M/s Bonde and co.,

Chartered accountant
Verification internal check system
Valuation of assets
Valaution of miscellaneous receipts
Verification of salary registers wages system
Cash book, Purchase book, sales book vouchers, Ledgers
From the following particulars prepare an audit programme for R.V.Institute of Engineering
with imaginary details
Auditor Shivaprasad & co., Bangalore
Date of commencement 1-Sep- 03
Staff deputed 4 seniors, 1 junior
Period of Audit 5 days
M/s Shivaprasad & co., Bangalore
Chartered Accountatants
For R.V.Institute of Engineering
Verification of Verification of
Valuation of Preparation of
of Lab
Sports items
side of the of
fixed bilities Balance sheet
cash book
Valuation of
Valuation of
Verification of Verification of Preparation of
Library stock
fixed assets
cr.side of the
cash book
Verificaton of
Valuation of
Verification of Preparation of
of Govt
Misc receipts
A/cs system
audit report
Valuation of
Valuation of
Valuation of
Verification of Preparation of
current assets
P&L A/c
Assist to
Assist to
Assist to Manju
Assist to
Assist to
For M/s Shivaprasad & co
Chartered Accountant
Prepare an audit programme for DMM Enterprises, Tumkur with imaginary details
Auditor M/s Pampapathi an co., Bangalore
No. of staff 2 Seniors, 1 Junior clerks.
Period of audit Ist Aug 04 to 6th Aug
Page 38 of54




of Dr.side of
of Cr.Side of
of sales book

M/s Pampapathi and co.,

For OMM Engineers, Tumkur
Verification Valuation of Vouching the
of Purchase liabilities
intern check
Valuation of Verification Verification
fixed assets of ledgers
Valaution of Verification Verification
salary of vouchers



of P&L a/c


of Schedule
of Drs and



For Pampapathi and co.,

Chartered Accountant
Audit Report: According to sec 227 (2) of the companies act 1956 the duty of the auditor is to make report to
the shareholders. The auditor should his report addressed to shareholders or responsible officials of
the company.
Contents of Audit report: According to internation auditing guidelines (IAG) 3. Auditor should review and assess the
financial position of the company and made a conclusion on the basis of evidence available to him.
After the review and assessment of conclusions the auditor frames up and overall conclusion.
The overall conclusion should include the following: 1. Whether the financial information disclosed in financial statements has been prepared
according to accepted accounting principles.
2. Whether financial information fulfils the statutory requirements of the act
3. Whether financial information disclosed the balance sheet gives true an fair view of state of
affairs of the company
4. Whether in his opinion, all the books of accounts required by the law been kept by the
5. Whether the auditor has obtained all the information and explanations which to the best of
his knowledge and belief were necessary for the purpose of audit.
6. Whether in his opinion, P&L A/c and Balance sheet fulfills the requirements of accounting
standards as stated in sec.211(3c)
7. Whether in his opinion P&L A/c and balance sheet are in agreement with the books of A/cs
and writtens.
Page 39 of54

Basic elements of Auditors report: The auditors report should contain following important elements: Title
Identification of financial statements audited
Reference to the auditing standards, practices followed
Expression of opinion on financial statement.
Auditors address
The date of the report
Types of audit report: The auditor express his opinion about the finacial information reported in annual statements of
A/cs. His opinion may be
Unqualified or clean report
Qualified report
Unqualified report or opinion: The auditor will give unqualified report if he satisfied in all material respects with the matters he
reports to the shareholders. It is also called as clean report or positive opinion.
Qualified Report: The auditor issues qualified report if he is not satisfied in material respects with the metters
concerning the areas of his report.
Following are the circumstances, the auditor will express qualified opinion are negative opinion:
In adequate provision for depreciation
In adequate provision for Bad and doubt fuldebts
Improper value of investments
Contingent liability is not disclosed
Violation of provisions of company law: Matters to be included in the audit report for manufacturing, mining or processing company.

Fixed assets
Loans taken
Loans and advances given
Purchases and sales
Page 40 of54


Wastages, Bye products, scrap etc.

Public deposits
Internal audit
Maintenance of cost records.

Dividends: A portion of the devisable profit of the company, which a shareholder is entitled to receive when
it is formerly declared at annual general meeting of the shareholders.
Reserve: It is a part of the profit set aside for some general contingencies are some specific purposes. It is
undistributed portion of the profit.
Differences between reserve and provision: Reserve
It is available for distribution as dividends
It is not available for distribution as dividends
The amount of reserve fund depends on policy and The amount of provision cannot be ascertained
discretion of the management
accurately even thought liability is known at
the date of balance sheet.
It is an appropriation of profit. If there is an profit It is a charge against the profit, even if there is
reserve will be maintained, if there is no profit no no profit provision is a must.
reserve will be maintained
It ads to the amount of reserve to the working It is for meeting an anticipated liability or loss
It is a question of financial policy of a company. It is a question of financial urgency to make a
That is it is optional
provision. It is a must.
It strengthen the financial position of the company Its purpose is to meet specific clauses due to
realization of assets or an accruing liability.
Reserve is a sum for unknown liability
Provision is a sum for known liability

Types of Reserves: o General reserve

o Specific reserve (provision)
o Capital reserve
o Secret reserve
1. General reserve: It is a portion of the net profit with held from distribution amongst the shareholders
It is an appropriation of profit
It is not compulsory for the management to credit such reserve
It helps in maintaining uniformity in dividend rates and unknown contingencies
It strengthen the financial position of the company
It is treated as revenue reserve
Page 41 of54

2. Specific Reserve (Provision)

It is a reserve created for some specific purposes to meet some certaion but unestimated
Exm: - Repairs and renewals. Depreciation etc.
It is created for specific purposes
It is compulsory to be made, even if there profit or loss
It is not available for distribution as dividends
It is usually shown along with the item with which it is concerned
3. Capital Reserve: It is a reserve created out of capital profits. In case of limited company capital profits may arise
in the following circumstances.
Issue of shares or debentures at a premium.
Sale of fixed assets at a profit.
Profit on re valuation of assets.
Capital reserve is not available for distribution as dividends. Among the shareholders.
4. Secret Reserve: Secret reserve is a reserve which is not shown in the balance sheet of the company. it other
words any reserve which is not apparent on the face of the balance sheet. It is also known as internal
reserve, hidden reserve or inner reserve.
Methods of creating secret reserve: Following are the different methods of creating secret reserve
1. Undervaluing the investments, stock in trade, land, plant and machinery etc., showing
them much below their cost and market value.
2. Not recording the permanent raise in the value of fixed assets.
3. Providing excessive depreciation of fixed assets
4. Over provision for bad and doubtful debts
5. Under estimation of goodwill
6. Omitting some of the assets totally from the balance sheet
7. Over valuing of liability
8. Inclusion of fictitious liability
9. Showing contingent liability as real liability.
10. Charging capital expenditure to revenue expenditure etc.


Objects of creating secret reserve: A reserve may be utilized to meet an unforeseen loss without making the fact known to
owners or outsiders.
It helps in avoiding competation form the rival company as true profit will not be shown.
A secret reserve enables the company to maintain normal rate of dividends.
It increases the working capital of the company
Page 42 of54

5. It strengthen the financial position of the company



Effects of creating secret reserve: By creating secret reserve balance sheet doesnt exhibit true financial position of the
The directors favour the creation of secret reserve which provides an opportunity of mis
appropriation of funds.
Since actual profits will not shown to the owners of the business, by creating secret reserve
the directors make involve in mal practices speculations in the share price of the company,
which go against the interest of the firm.
The firm losses its reputation in the market.
It deprise the legitamate.
The value of shares go down in the market.
The value of shares go down in the market
If an asset is omitted all together from the balance sheet to create secret reserve, the auditor
may omit verify the existence of an asset which can be easily mis appropriated.

Note: Creation and utilization of secret reserves is now prohibited under the provisions of the
companies act, except in the care of banking companies, insurance companies and electricity
Auditors duties with respect to secret reserves: It is clear that no secret reserve can be created by public company other than banking, insurance
and electricity supply company. Has a result the position of an auditor is safe. If he finds that
something contrary to this has been done, he may disclose the fact in his report.
He should never certify the profit and loss A/c and balance sheet as correct under such
circumstances. Following are the some of the important auditors duty with respect to secret reserve.
1. He should, first of all enquire into the necessity of creating secret reserve.
2. He should verify articles of association for creating secret reserve.
3. He should confirm that intention of the directors to create secret reserve is quiet honest.
4. He should collect all information about creation of secret reserve. He should satisfy himself
about the method and procedure of creation of such reserve.
5. If the secret reserve is created by overvaluing the liabilities or undervaluing the assets, he
should discuss the issues with the management and verify the policies and practices behind
6. He should not accept the creation of secret reserve as valid unless it is necessary to be
created and ask the management to prepare revised accounts, if not agreed he should
mention this fact in his report.

Page 43 of54

1. What is an error of principle?

Ans: - It is generally arised out of a disregard for the principles of accountancy. Such errors are
committed intentionally to falsify and to manipulate the accounts with an objective of
showing more or less profits, than their actual values.
Example: - over valuation of stock, non provision for depreciation.
2. Mention 2 differences between audit and investigation?
Ans: - 1) Audit is conducted on behalf of share holders or proprietors while investigation is
Carried out on behalf of outsiders who intended to purchase the business or to know the
earning capacity of the firm.
2) Auditing is a kind of checking while investigation is thorough examination of books of
acts for a particular year or for no of years.
3. State the primary objectives of an audit?
Ans: - Primary objective of an audit is to verify the a/cs and to report whether balance sheet and
P&L a/c have been drawn properly according to the companies act and whether the exhibit a
true and fair view the state of affairs of the firm.
4. What is teaming and lading?
Ans: - When cash received form on customer is misappropriated and remittance received form
debtor is posted to the first debtors A/c and from the third debtors A/c to the 2 nd debtors
A/c and so on
6. What is an error of omition?
Ans: - Technically speaking an audit programmed is the auditors plan of action. It presents an
outline of procedures to be followed to support an opinion on the financial statements.
7. What is voucher?
Ans: - Vouchers are documentary or other evidences in support of transactions entered in the books
of A/cs. There are 2 types of vouchers.
Primary vouchers
Collateral vouchers.
8. What do you mean by deferred revenue expenditure?
Ans: - Expenditure which though of revenue nature is spread over a number of years because its
benefits is derived during those years.
Exp: - research and development expenditure, preliminary expenses, Advertisement
9. What is an auditing?
Ans: - It means an examination of books of A/cs and the relative documentary evidence by an
independent qualified person in order to ascertain the accuracy of the values appear therein.
10. Give the meaning of capital reserve?
Ans: - It is a reserve created out of capital profits or gains of capital nature. It is arised out of
Sale of fixed assets at a profit.
Profit on revaluation of assets or liabilities.
Page 44 of54

11. State the causes for depreciation?

Ans: - There are 2 causes for depreciation
o External causes.
o Internal causes.
External causes.
Effluxion of time
Obsolescence (out dated)
Permanent fall in the market value.
Internal causes: Wear and tear
12. What is Depreciation?
Ans: - Depreciation is permanent fall in the value of an asset from any cause. In other words
gradual detoriation in value due to use.
13. What is internal check?
Ans: - It is such an arrangement of accounting work so that errors and frauds are automatically
prevented or discovered by the very operation of the book keeping itself.
14. What do you mean by clean report?
Ans: - A clean report is one in which auditor doesnt insert any qualification or modification of
reservation. If he finds it necessary to do so, he must state the reason for it. It is also called
as unqualified report
15. What do you mean by auditors lien?
Ans: - As a general rule, the books of A/cs must be kept at Head Office of a company for
inspection by shareholders or the public as such. An auditor who has exercised a right of lien
cannot remove them. It was decided in the case of herbest Alfred vurleigh V/s Iragram Clark
Ltd., (1901) it was held that auditor has no lien on the books of A/cs in the respect of audit
work done by him.
16. What is devisable profit?
Ans: - Divisable profit are those profit which can legally be distributed to the shareholders to the
company in the form of dividends are called devisable profits.
17. What is vouching?
Ans: - It means verification of authority and authenticity (accurate) of transactions as recorded in
the books of A/cs.
18. What is an audit note book?
Ans: - The audit clerk cannot remember every thing at all times. During the course of audit, he
experiences several difficulties as a result he will maintain a book with him popularly known
Page 45 of54

as audit note book. In which he notes down the important points and enquiries which he has
to refer to the officials of the clients, of to discuss with his senior or the auditor himself.
19. What is compensating errors?
Ans: - It arises when an error is counter balance or compensated by any of other error or errors. So
that the adverse effect of credit or debit side is nutralised by that of another on the credit or
debit side respectively.
20. Who can appoint the first auditor of joint stock company?
Ans: - Following authorities can appoint the first auditor of joint stock companies.
o Directors
o Shareholders in the general meeting
o Central government
o Appointment by special resolution.
Introduction: Vouching is concerned with examining documentary evidence to ascertain the authenticity of
entries in the authenticity of entries in the books of A/cs, vouching is a technic used by an auditor to
judge the truth of entries appearing in the books of A/cs
Vouching is essential part of auditing without vouching auditing is incomplete.
Meaning: Vouching means testing the truth of items appearing in the books of original entry
Definition: Vouching is an act of comparing entries in the books of A/cs with documentary evidence in
support thereof Dicksee.
Objectives of vouching: 1. To verify that all the transactions recorded in the books of A/cs or supported by documentary
2. To ensure that no fraud or error committed while recording the transactions.
3. Care as been taken while totally carry forwarding and recording an amount in the A/c
4. To ensure that transaction has been by forgather or divided between capital or revenue items
Voucher: Voucher is a documentary evidence in support of a transaction in the books of A/cs
Types of Vouchers: Primary voucher
Collateral voucher

Page 46 of54

1. When a written evidence available in original it is called primary vouchers Ex: - Cash
memo, Purchase invoice etc.
2. When original vouchers is not available, copies of such evidences are made available for the
purpose of audit
Ex: - Carbon duplicates of cash memos copies of minuts book etc.
Importance of vouching: The definition of vouching disclose that it is a sort of preliminary work which forms an
important form of audit work. Since accounts of business is begin with passing of entries, it
becomes a basis for further scrutiny to be made at a later stage.
The importance of vouching can hardly be over emphasized the purpose of checking entries by
comparing appropriate documentary evidence is to ensure that the transactions relating to particular
period have been recorded and there is no voucher left un recorded in financial book.
If auditor satisfied about authority and authenticity of transactions he can express that books of
A/cs, balance sheet, P&L A/c exhibits true and fair view of financial position of the company.
It is certainly true that vouching has to be done in intelligent and searching manner so that he
can detect any fraud or errors in the early stages of auditing. This is why vouching is said to be back
done of auditing.
If vouching is done intelligently and faithfully, it will be help in establishing reliability of P&L
A/c and Balance sheet.
In practice vouching may be lengthy process in many big organisations. For this, an auditor may
apply test checking (random checking) depending upon system of internal check in the
Routine checking and vouching: Routine checking is simple checking involving checking of postings to ledger, balancing of
A/cs, Trail balance etc.,
Different types of tick marks are used for routine checking. Vouching is a broader term, which
includes routine checking. Both are important in auditing routine checking is mechanical devise
whereas vouching is intelligent checking of transactions with the help of documentary evidence.
Points to be remember at the time of vouching: 1. While vouching auditor should not take the help of clients staff
2. Every voucher should be certified by responsible officials of the company
3. Any alterations in the voucher should be countersigned by the officials
4. Proper classifications should be made between capital and revenue items.
5. He should ensure that all vouchers are numbered serially and dated.
6. If any voucher is doubtful, the auditor should proceed cautiously and use special ticks for
such vouchers.
7. Auditor should examine all expenses pertaining to the business
Page 47 of54

8. For missing vouchers he should get explanation from concerned officials

9. As for as possible vouching of books of A/cs must be completed in one sitting
10. He should use specific ticks for vouching cash payments, receipts, purchases, sales etc.
Received from Debtors: The cash received from debtors can be vouched with reference to the counterfoil of the receipt
issued to them. Thus counterfoils is only the documentary evidence for this purpose. But this is not
reliable vouchers since following types of frauds are usually committed.
They are: By inserting less amount in the receipts than what is actually received from the debtors or
By issuing a receipt from unused book if they are not kept in proper custody
Teeming and cladding: When cash received from one customer is misappropriated and remittance received from
another debtor is posted to the first debtors A/c and from third debtor to the second debtor and so on
There is a practice on the part of the cashier to misappropriate the cash through the process of
teeming and ladding. Auditor should verify cash book and counterfoil of pay in slips in order to
avoid such practice.
The auditor should pay special attention to discount allowed to customers and bad debts written
off. He should enquire into the methods and rate of granting discounts, similarly for bad debts
written off. He should enquire as to who is made responsible to write off debts as bad.
Vouching with respect to bills payable: Bills honored and written by the payee should be verified by referring bills payable book. If
payments are made through banks he should verify passbook and bankers advice
Vouching with respect to acquisition of patents: The acquisition of patents should be vouched with receipt issued by the seller, agent notes and
agreement with respect to purchase of patents.
All the expenses which are incidental to the acquisition of patent rights to be capitalized. If
patents are developed through research and development (R &D) all the expenses incurred on
research and development should be capitalised as cost of patents.
Vouching with respect to payment to the creditors: It should be vouched with receipts issued by the creditor, money due to them can be compared
with accounts of the creditor and goods received he should refer invoinces.
He should scrutinised the methods of comparing the statement of A/cs with the actual A/cs.
Before passing an entry as correct he should refer minutes book, contract and other documentary
evidence in support of it.
Vouching with respect to cash purchases of goods may be made. Purchase of stores and
stationeries are made usually on the cash basis.
Page 48 of54

A good internal control system will be helpful in controlling manipulation of cash purchases. He
should see that goods purchases are actually received by the store keeper.
Cash memos can be compared with goods inward book to verify the goods receipt. Only the net
amount after trade discounts should be entered in the books
Vouching with respect to plant & machinery: A auditor can vouch the purchase of plant & machinery with the invoice received from the
supplier. The expenses incurred on purchase and installation of machinery are to be capitalised by
debiting concerned asset a/c in case of imported machinery any import duty and clearing charges
paid should also be debited to the asset A/c.
Vouching with respect to purchase of land and building: Land may be purchased either on lease hold or freehold basis. If land is acquired on leasehold
basis auditor should study terms and conditions of lease agreement. The payments made for
leasehold should be as per terms of the contract. Auditor should vouch the payment with lease
agreement and receipt issued by the lesser.
All the expenses incurred for acquiring the leasehold land should be debited to leasehold land
Conveyance deed is prepared for the purchase of land of freehold basis. He should vouch the
payments for freehold land with receipt issued by the seller and amount paid should be compared
with sales price as shown in the conveyance deed.

Conditions of lease agreements

Terms of contract
Conveyance deed
Vouching with respect to deferred revenue expenditure: Expenditure which, though of revenue nature is spread over a number of years because its
benefits is derived during those year.
Exm: - Research and development expenditure, Expenditure of advertisement campign,
preliminary expenses etc.
A portion of the expenses is carried forward to be written off in the future. It is an o/s asset
fictitious asset.
The auditor while verifying such exp should see that only proper amount is carried forward.
Expenditure which are of capital nature should not be treated as deferred revenue expenditure.
For exp: - Renovations and expansions of Building.
The entire deferred revenue expenditure shall not be charge to one year. That is year of
spending. This will unnecessarily reduced profits of the year. Unwritten portion of the deferred
revenue expenditure is shown on asset side of the balance sheet until it is completely written off.
Vouching with respect to contingent liabilities: Contingent liabilities are those liabilities which may or may not arise after the preparation of
balance sheet. Therefore necessary provisions should be made for such unknown liabilities.
Page 49 of54

Exm: - Interim dividend, Bill of exchange discounted.

Vouching with respect to preliminary expenses: When a new company is incorporated some promotional expenses are incurred. Such
expenditure is called preliminary exp. The whole of such expenditure shall not be debited to P&L
A/c of the year. But it should be write off over a period of 3 to 7 years.
No doubt such expenditure is of capital nature, but it is not represented by an asset. So it must
be write off over a period of years.
Vouching with respect to prepaid expenses: Prepaid expenses are those expenses that are paid for a particular period not falling within the
current accounting year.
Exp: - prepaid insurance, rent and taxes etc.
Auditor in case of prepaid expenses should verify nominal A/c, demand notes, receipts etc, and
he has to see that proper adjustments for unexpired period is made in the books of A/cs at the
balance sheet date. Amount paid in advance should be shown on the asset side of the balance sheet.
Vouching with respect to accrued incomes: These are certain incomes which might have accrued but might not have been received at the
time of balance sheet.
Exm: - Dividend declared but not received o/s rent receivable.
Above incomes must be included in P&L A/c. auditor should be very careful that such incomes
are given effect in the books only if they are likely to be recovered.
Vouching with respect to petty cash book: First of all auditor should check the system of internal check with respect to petty cash
transactions. There is no proper vouchers chances of mis appropriation of cash exists. He should
ensure that system of internal check is very sound.
He should verify payment entered in the cashbook, which has been made to the petty cashier for
petty expenses. He should examine totals and balances of petty cash.
If vouchers for few months are available he should be examined. He should insist upon having
vouchers for every expenditure Rs.10/- or more.
He should see that petty cash book is periodically verified and signed by some responsible
persons to ensure hat petty cash payments are (true) bonafide.
He should verify closing balances of petty cash on the balance sheet date, if possible he should
also count the amount of petty cash in hand.
1. What do you mean by vouchers?
2. Define vouching?
Page 50 of54

3. Vouching is back done of auditing?

4. Mention types of vouchers?
5. How do you vouch the following: o Sale of investment.
o Cash sales.
o Payments to creditors.
6. What do you mean by deferred revenue expenditure? Give example?
7. What is a contingent liability?
8. How do you vouch the following: o Sale of fixed assets
o Petty cash book
o Received from debtors.
9. What is accreted incomes?
10. What do you mean by o/s assets?
(Deferred revenue exp or fictitious asset)

It is a special kind of examination of records and accounts done by an investigator with a pre
determined purpose. In most of the cases investigation is done to ascertain ture financial position of
the company, its profit earning capacity, the existence of fraud and the extent of mis management.
Meaning: Investigation involves enquiry into facts behind the books and A/cs into the technical, financial
and economic position of business.
Definition: Investigation involves enquiry into the facts behind the A/cs that is, into the technical financial
and economic position of the business organisations Taylor and perry.


Objects of investigation: Investigation on behalf of a person who is interested to joint partnership firm as a partner.
Investigation on behalf of a person or a company which wants to purchase a running
Investigation on behalf of a person who wants to lend money to a business and is interested
to know its financial position.
Investigation under Indian companies act.
Investigation, in the case the proprietor of the business suspects a fraud.
Page 51 of54

6. An investigation when a person seeks different avenues of investment.




Differences between investigation and Audit: An audit is carried out to ensure that balance sheet and P&L A/c shows true and fair picture.
But investigation is carried out for some certain purpose to know the financial position of
the company or its earning capacity.
Auditing is compulsory under companies Act.
Investigation is not legally compulsory.
Auditing is conducted by chartered accountant whereas investigator need not to be a
chartered accountant.
An audit always relates to a period of year or 6 months, but investigation may cover several
years say 2 to 4 years.
Investigation is done when the books of A/cs are already audited i.e investigation starts
where audit is ends.
Audit is conducted on behalf of owner of the business, whereas investigation may be
conducted on behalf of proprietor of the business, government, court, shareholders etc.
Report of the investigation is given to the concerned parties, whereas report of the audit is
given to the director of the company who places it before the shareholders.
Auditing includes examination of books of A/cs of a firm but investigation is not only
examination of A/cs but also an enquiry into other factors affecting the business, reason for
fall in the profit, fraud etc.
Report of the investigator is positive in nature whereas report of the auditor may be positive
or negative.

Introduction: The word ethics means a set of or moral philosophy and standard of conduct. In other works it is
a behavior of a professional man towards members of the public in general.
Professional misconduct: According to Sec.22 of the Chartered Accountants Act 1949 the lieu professional mes conduct
includes any act or omillyan specified in any of the schedules of the Act.
The Act contains two schedules which contains various circumstances in which a Chartered
Accountant can be found cruelty of professional misconduct.
First schedule: This schedule includes part1, part2, part3, and contains 13 clauses. Among them following are
Clause 1: This clause prevents unqualified persons from practicing in the name of qualified chartered
Page 52 of54

Clause 2: According to this clause no commission Brokerage or fees can be paid to third parties nor
profits of the professional business can be shared with third parties.
Clause 3: This clause states that chartered Accountant in practice cannot share the profits of persons
belonging to other professions.
Clause 6: This clause banes all forms of canvassing for professional work by Chartered Accountant in
Clause 7: This clause prohibits a chartered accountant in practice to publics his professional achievements
in any manner.
Clause 11: This clause prohibits a chartered Accountant to engage himself in any trade or business other
than that of a chartered accountant.
Clause 13: According to this clause financial statements should be signed by himself or on behalf of his
Part II: Of this schedule deals with professional misconduct is relation to members of the institute in
Part III: Of schedules deals with professional misconduct of members of the institute generally.
Second schedule: This schedule contains part I & part II
Part I consist of 10 clauses among them following are important ones: Clause 1 : This clause prohibits an auditor to disclose any information regarding affairs of his clients to
outside parties.
Clause 2: According to this clause chartered accountant sign the reports which are prepared by outsiders.
Clause 5: He should disclose in his report any material fact, which is known to him but disclose in
financial statement.
Page 53 of54

Clause 6: He should also report any misstatement in financial statements.

Clause 8: According to this clause he cannot expenses his opinion on financial statement without proper
Clause 10: According to this clause he should not misuse the money entrusted to him by his clients.
Part II of this schedule contains 2 rules of misconduct which are applicable to all chartered
accountants whether they are in practice or not.

Page 54 of54