Auditing

Q.1. What is Vouching?

Explain the term Voucher. What is the importance of Vouching in the audit?
What is Vouching? What are the Objectives of vouching?
Vouching is the very essence of Audit. Discuss.
In vouching payments, the auditor does not merely seek proof that money has been paid away.
Explain.
Ans. A) MEANING OF VOUCHING:Vouching is said to be the essence of auditing. Auditing is the critical examination of accounts to
determine whether they are true and fair. Vouching is the method of critically examining the documents
which support the entries in the accounts. The purpose of vouching is to prove the accuracy of the entries in
the books of accounts.
According to Dicksee, vouching consists of comparing entries in books of accounts with documentary
evidence in support thereof. In other words, vouching means testing the truth of items appearing in the
books of original entry, which means establishing the accuracy and authencity of entries in the books of
accounts.
According to Joseph Lancaster, it is often thought that vouching consists of the mere examination of the
vouchers or documentary evidence with the book entries. This, however is quite wrong, for vouching
comprises such as examination of the ledger entries as will satisfy the auditor, not only that the entry is
supported by documentary evidence but it has been properly made upon the books of accounts.
In short, vouching means to examine the evidence in support of any transaction or entry recorded in the
books of accounts.
Voucher: Any documentary evidence supporting the entries in the records in called as a voucher. E.g. a Bill, a Receipt,
an invoice etc.
B) OBJECTS OF VOUCHING:The basic objectives of vouching are as follows: 1) To ensure that all the transactions are recorded properly in the books of accounts.
2) To see that all the entries of the transactions are supported by proper evidence.
3) To make it sure that fraudulent transactions are not recorded in the books of accounts.
4) To see that all transactions relating to business are recorded in the books of accounts.
5) To see that the transactions are properly authenticated by a responsible person.
C) IMPORTANCE OF VOUCHING:It is rightly said that vouching is an essence of auditing. Vouching also helps the auditor to a great extent in
detecting, the errors and frauds. It has been rightly called the Backbone of Auditing.
1) It ensures genuineness of transactions: It enables the auditor to ascertain that the entries recorded are in respect of those transactions which have
actually taken place. It ensures him that no bogus entries are made.
2) It enables the auditor to know the nature of transactions: Auditor can check the nature of transactions and he can be sure that whatever transactions are recorded are
not only genuine but also they relate to the nature and type of business carried on by the client.
3) It helps the auditor to ascertain that transactions are pertaining to the accounting period: -

In the course of vouching, the auditor can easily find out transactions pertaining to the next year or current
year, e.g. Prepaid rent, Rates and taxes, Insurance premium etc. Auditor can satisfy himself that the items
included in the profit and loss account are only those items which are pertaining to that accounting period.
This is possible only if the entries are checked with some documentary evidence.
4) It facilitates proper allocation of capital and revenue expenditure: Vouching helps the auditor to determine the proper allocation of capital and revenue expenditure and receipts.
5) It detects frauds and errors: It enables the auditor to detect the existence of frauds and errors in time.
6) It decides authenticity of transactions: It ensures the auditor that the transactions recorded are not only genuine but they are duly authorised by some
responsible officials and they are complete in all respects.
Q.2. What would an auditor see while vouching?
What special points should be considered while doing vouching?
What are the special considerations which auditor should keep in mind during the course of
Vouching?
In vouching, what are the details to which an auditor should give his special attention.
Ans. A) SPECIAL POINTS TO BE BORNE IN MIND BY THE AUDITOR IN THE COURSE OF
VOUCHING:The auditor should examine the vouchers carefully with special reference to the following points: 1) Name of the concern:
The name of the party to whom the voucher is addressed.
2) Date of the Voucher:The date and the year of the receipt or the voucher. He should see that the dates must correspond with the
cashbook, the name of the party to whom the voucher is issued, the name of the party issuing the voucher
and the amount.
3) Serially Numbered:All vouchers have been properly filed, serially numbered and arranged in order. It saves time in finding out
a particular voucher.
4) Stamped:It is the duty of the auditor to see that the voucher is properly stamped.
5) Authority:
He should see that every voucher is passed as in order by an authorised officer.
6) Signature:
He should also note the proper signatures of the payee.
7) Amount in Words and Figures:Amount paid should appear both in words and figures. It will reduce the chances of alterations at a later
date.
8) Revenue and Capital:
He should see as to which account the item is posted. Distinction must be observed between capital and
revenue expenditure.
9) Cancel Checked Voucher:Vouchers which are checked should be cancelled by a stamp and auditor should affix his initials so that they
may not be produced again. Auditor may use special ticks if stamps are not available.
10) Related to business:The voucher should be related to the nature of the business carried on by the client.
11) Payment related to business:The nature of the payment must be in conformity with the nature of clients business.
12) Note in Audit Note book:Various items requiring further information or explanation should be carefully noted in the audit note book.

13) No Receipt Invoice:Receipted invoice should not be accepted as a voucher because there is a danger of payment being made
twice-once as a credit purchase and again as a cash transaction against the receipted invoice.
14) No Help from client Staff:The auditor should not take the help of any member of the clients staff while vouching receipts.
15) Alteration:He should see that any alteration in the voucher has been duly signed and approved by the authorised officer
of the organisation.
16) Duplicate Voucher:If a voucher is lost and a duplicate is produced in its place the auditor should properly check the duplicate
voucher so that no fraud may occur.
17) Documents:He should examine Partnership Deed, Contracts, Minutes Book, Articles of Association etc.
18) Cash Transactions:There is ample scope for fraud in cash transactions. It is more difficult to check receipt side of Cashbook than
to check payment side of cashbook. Auditor should therefore, check cash transactions very carefully.
19) Adequacy of Internal Control:When the auditor is satisfied with the adequacy of the internal control system, he may resort to testchecking. But if even the slightest doubt arises, the checking should be full.
20) Heads of Account Debited / Credited:The auditor should see whether the head of account is correct according to basic principles. Debit the
receiver and Credit the giver etc. The debit or credit should not be given to wrong account.
Q.3. State how would you Vouch the following Receipts: 1) CASH SALE: The auditors should take the following step to vouch cash sales:a) Internal Check:- Examine the system of Internal check to find out loopholes if any.
b) Summary of Cash :- Auditor should see the summary of daily cash sales with the entry made in cash book.
c) Carbon Copies:- He should see the carbon copies of cash memos issued.
d) Cancelled copies:-He should verify the cancelled copies of cash memos (original) to avoid misappropriation
through it.
e) Discount Allowed:- He should also verify the discount allowed on sales, if any.
f) Total of Daily cash:- He should verify the daily deposits of cash received in the bank.
g) Test Check : Test check the postings from cash book into ledger
h) Sale of Fixed Assets : Ensure that sale of fixed assets is not included in sales.
i) Sale of Scrap:- See that sale of scrap is recorded separately.
j) Proper Accounting Policies:- See that sales are properly accounted in the books as per the provisions of
Companies Act.
2) RENT RECEIVED: a) Internal Check:- Examine the system of internal check.
a) Lease Agreement :-Examine lease agreement with the tenants to ascertain the total yearly rent receivable and
see that it is accordingly received.
b) Carbon Copies:-Vouch the rent received with reference to carbon copy of the rent receipt and rent register.
c) Rent received through Agent:- Rent received/ collected through agent should be checked with carbon copy of
receipt, agents statements etc.
d) Advance :- See that rent received in advance is not credited to rent received account.
e) Arrears:-Investigate into all arrears of rent for a long time to avoid the possibility of default.
f) Authority:- Write off of irrecoverable rent is to be authorised.
g) Recording Entry:- See that rent received is recorded in the cash book on the same date.
h) Provision for Outstanding Rent :-See that a reasonable provision for doubtful outstanding rent is made.
i) Vacant Property:-Get a certified list from a responsible officer in respect of a vacant property.
j) Adjustment:-Verify adjustment of rent against deposits.

k) Disclosure:- See that the rent is disclosed separately.

3)
a)
a)
b)
c)
e)
f)
g)
h)
i)

INCOME FROM INVESTMENTS: Internal Check:- Examine the system of internal check.
Investment Registered:- Examine the investment registered to find out investments held by the company.
Bank Advice:- Check with bank advice and bank passbook the amount of dividend collected by the bank.
Sale of Investment:- If investment is sold see that interest is received to the date of sale.
Charitable Institutions:- In case of charitable institutions, their income is not liable to tax. Therefore, income
tax if deducted should be received from central government.
Bank Deposit:- Interest received on bank deposits should be vouched with reference to the loan agreement
and the counterfoil of the receipt and the bank pass book.
Loans:- Interest received on loans should be vouched with reference to the loan agreement and the
counterfoil of the receipt and the bank pass book.
Investment of Sinking Fund:- Interest received on investment of sinking fund should be credited to such fund
account and not to the profit and loss account.
Securities / Debentures:- Vouch the interest on Securities or debentures with interest warrants and satisfy that
it is properly received and credited.

4) BAD DEBTS RECOVERED: Bad debts denote the amount written off as the irrecoverable from the debtors. Amount of bad debts is
debited to the profit and loss account in the year in which it is written off. However, subsequently such
amount may be received either in full or in part. In such a case: a) Competent Authority:- The auditor should see that the these debts were originally written off by a competent
authority.
b) Proper Entry:- He should see that amount of bad debts recovered is not credited to the Debtors Account but
is shown on the Credit Side of the Profit and Loss Account in the year in which it is received.
c) Carbon Copy of Receipt:- He should verify the relevant document in support thereof like receipt issued.
d) Cash book entry:- See that full amount received is recorded in the cash book.
5) COMMISSION RECEIVED: a) Agreement:- Examine the agreement with parties and ascertain the terms and conditions and rates and basis
of commission receivable.
b) List of Parties:-Obtain the list of parties from whom commission is receivable.
c) Copy of Receipt:-Vouch the entry for commission received from copy of receipts, bank statement etc.
d) Test Check: Test check calculation of commission and see that it is correct according to terms and conditions.
e) Commission actually received:- See that the total commission receivable for each year is actually received
and accounted for duly adjusted.
f) Comparison: If the total commission shown in the financial statement of account materially differs with that
of previous year, inquire into the reasons for the same to ensure that it is genuine and not bogus.
g) Internal Check :- To examine the system of Internal Check.
6) DIVIDENDS RECEIVED/ INCOME: Income from investments generally consists of dividends and interest. Vouching for dividends received would
be done as under: a) Register:- Auditor should see that investment register and dividend received register (when there are many
transaction) are maintained properly and it contains all the relevant details.
b) Rate of Dividend:- He should see whether the rate of dividend is fixed or fluctuating. For this purpose
relevant balance sheet of invested company should be seen.
c) Counter foils:- He should also verify the dividends received with counterfoils of dividend warrant.
d) Income and Assets:- He should see that gross dividend is treated as income and tax deducted at source is
shown as an asset.

e) Investment on Specific Fund:-In case of investments on account of specific funds etc. see that dividend
received on them is credited to the specific fund account only and not to the profit and loss account, e.g.,
Sinking Fund etc.
f) Interim Dividend:- He should see whether all interim dividends are accounted or not.
Q.4. State how would you Vouch the following Payment:s 1) PAYMENT OF WAGES: a) Internal Control and Check:-Auditor should verify the system of internal control regarding payment of
wages.
b) Tally amount:- He should see the amount to be withdrawn from bank for payment of wages should exactly
tally with the wages to be paid.
c) Test Check:-He should check the calculations of wage sheets on test check basis.
d) Proper payment:-He should be very careful to see that there is no payment to dummy workers.
e) Unpaid wages:-He should see that unpaid wages are transferred to separate account.
f) Comparison:-He should compare the wage sheets with earlier months wags sheet and significant variation, if
any, is to be scrutinized.
g) Leave record:-He should also verify the leave record to check the proper deductions have been made for
excess leave taken by any worker. Examine the leave register to ascertain whether leave was granted with or
without pay.
h) Dummy Workers:-In order to ascertain whether any dummy worker has been included in the wage sheets,
check the names of the workers.
i) Standard Costing and Budgetary Control:-If the concern has introduced standard costing and budgetary
control, compare the actual total wages for the year with budgeted wages and see that the material variation
is proper and genuine.
2) CASH PURCHASES: a) Internal Control:-Ensure that the system of internal control is adequate and reliable.
b) Documents:- Vouch the cash purchases with reference to cash memos, goods inward register, stores records
etc.
c) Authorized purchases:-See that such purchases have been duly authorised.
d) Discount:-Where discount is allowed, see that only the amount is paid and recorded in the cash book.
e) Duplicate cash memo:-If duplicate cash memo is produced in place of original one, ensure that it is not in
support of bogus entry for cash purchases.
f) Comparison:- Compare the actual payments made with actual invoices.
g) Test Check:-Test check the posting of material amounts in the general ledger and see that the item is correctly
posted.
3) SALARIES: a) Documents:-Vouch the payment of salary with salary book, appointment letters, agreements, counterfoils of
cheques and minute books.
b) Test Check:-Test check the casting of salary book and see that it is arithmetically correct.
c) Counter Foil of Cheque book:- Check the counterfoil of cheque book to ensure that only net amount is drawn
and not the gross amount by the cashier. If the payment of salary is done by cheque, compare the monthly
salary of each employee with cash book and counterfoil of each cheque issued.
e) Signature:-See that each employee has put his signature against his name.
f) Revenue Stamps:-If the payment exceeds Rs. 500/- see that it bears the revenue stamp of Re.1/-.
g) Certified List:-Obtain the certified list from the management of employees resigned or retired or who have
left the job. Also obtain the certified list of new employees appointed during the year.
h) Salary Book:-See that the salary book is duly signed by the cashier and counter-signed by some responsible
official.
i) Comparison:- Compare the total salaries for the current year with the salaries of previous year.
j) Unpaid Salary:- Check the list of unpaid salary with unpaid register and that the amount is duly redeposited
into the bank.

k) Deduction:-See that proper statutory deduction for P.F., Income tax have been made.
l) Salary to Partner:-If any salary is paid to partner see that it is in accordance with the provisions of partnership
deed.
m) Postings:-Test check the postings into the ledger and see that the amount is correctly and properly posted.
4) TRAVELLING SALESMANS COMMISSION: a) Appointment Letter:- The auditor should see the appointment letter of the salesman in order to find out the
rate of commission and the terms and conditions subject to which the payment is to be made.
b) Sales Order book:-The auditor should examine the sales order book to ascertain the number of orders booked
by the salesman, the net selling price etc.
c) Sales Return Book:-He should also see the sales return book to find the net sales effected by salesman.
d) Stamped Receipts:-He should examine the stamped receipt signed by the travelling salesman.
e) Provision for outstanding Commission:- See that adequate provision is made for outstanding commission due
but not paid.
5) TRAVELLING EXPENSES/ ALLOWANCES: The travelling expenses are normally payable according to the rules approved by the directors or partners. If
there are not such rules auditor should recommend the framing of such rules for controlling the expenditure.
The following points are to be noted: a) List of Persons:-Auditor should see the list of persons who are claiming this expenditure regularly.
b) Bills and Receipts:-He should see travelling bills (fare), receipts for expenses on accommodation, the rules
governing travelling allowance. These should be checked in details.
c) Authority:-He should see that there is a system of sanctioning these bills by a responsible officer.
d) In Interest of Business:-Regarding the travelling expenses of directors, officers, etc. auditor must see that
they are incurred really for the interest of the business.
e) Board of Directors:-Travelling expenses of an extraordinary nature must be sanctioned by the Board of
Directors.
f) RBI Sanction:-In case of foreign travel, foreign exchange sanctioned by RBI is to be seen.
6) BANK CHARGES: The necessary documents which are required to vouch the item are the Bank Pass Book and the Bank
Reconciliation Statement.
The auditors duty with regard to vouching this item may be mentioned as follows: a) Document:-The auditor should inspect the Bank Pass Book and the Bank Reconciliation Statement to
examine Bank Charges, Commission, Interest on Overdraft and Loan etc.
b) Agreement:-If there is an agreement with the Bank regarding the payment of Bank Charges, the auditor
should see that the payment of Bank Charges has been made in accordance with the agreement.
c) Interest:-The auditors check the calculation of interest where it is necessary.
d) Comparison:- Compare with previous years figures and enquires if there is a material increase in bank
charges for current year:
7)
a)
b)
c)
d)
e)

INSURANCE PREMIUM: Documents:-Check with insurance policy, receipt etc. issued by the Insurance Company.
Prepaid Insurance:-See that proper adjustment entries are passed for prepaid insurance.
Adequate:-See that insurance is adequate and covers client fully.
Non-Renewal:-Enquire into the reasons in case the policy is not renewed.
No. of Policies:- When the number of policies is more, see that a statement is prepared to give details of all
insurance Policies.

8) ADVERTISEMENT EXPENSES: a) Bills:-Auditor should verify the bill received from agent or press.
b) Advertisement Cuttings:-He should see that bill should be supported by advertisement cuttings to prove
genuineness of the advertisement.

c) Radio and Television:-He should check the bills received from respective authorities, in case of radio and
television advertisement`.
d) Prepaid / Outstanding:-He should also check that prepaid and outstanding advertisement expenses are
properly accounted for.
e) Deferred :- See that the expenses are spread over the period of benefit, if the benefit received is for more than
one year.
f) Disclosure:- If the advertising expenses exceed 1% of the turnover it should be disclosed separately every
year.
9) RENT PAID: a) Agreement:- Examine the agreement with the landlord.
b) Voucher:-See that the payment of rent is supported by a proper voucher.
c) Rent in Advance:-See the entry for payment of rent in advance.
d) Authorised:-Ensure that the voucher is properly authorised.
10) PURCHASE RETURNS: a) Internal Check:-Auditor should check the system in operation in respect of purchase returns.
b) Reasons of Return:-Reasons for return should be inquired. Inspection reports should be verified on test check
basis.
c) Credit / Debit Note:-He should check credit notes received from suppliers or debit notes issued to them
should be checked.
d) Documents:-Goods Returned Notes, Gate Keepers Register should be verified with Purchase Returns Book.
e) Proper Recording:-Goods returned at the end of the year should be paid proper attention and such goods
should not be included in closing stock.
11) Telephone Expenses:The auditors should follow the procedure as given below:a) Internal Control Manual:-Get a complete list of telephone connection in the name of the company and find
out the nature.i.e. Landline, Mobile,etc.
b) Bills & Statement of Account: Obtain telephone bills and see that they are in the name of the company.
c) Deposit Receipt:-See whether any deposit is kept with telephone company and it is properly accounted in the
books of accounts.
d) Payment Vouchers:- Trace the payment made in the Bank Statement.
e) Personal Expenses:- Ensure that personal expenses of the directors, partners, have not been debited to profit
and loss Account.
f) Recovery from Staff:- If the company has paid telephone expenses on behalf of the employees, see that it has
been recovered from the concerned employees.
g) Services Tax return:- See whether service tax input credit has been given availed by the company on the basis
of Telephone bills.
h) FBT(Fringe Benefit Tax) returns: Any liability that year end adjustment are made in respect of outstanding
telephone expenses.
12) Interest Expenses:The auditors should vouch the interest expenses as follow:1. Schedule of Interest:- obtain a schedule of loans taken and note down the details there in i.e. the date of loan,
rate of interest, period or repayment, breakup of EMI.
2. Payment Vouchers:- See whether provision is made for interest expenses on loans and trace the amount of
interest payment into bank statement.
3. Bank Reconciliation:- Check whether the Bank has debited interest expenses in the bank statement and the
same is recorded in the cash book.
4. Statement of Account:- Obtain at the end of the year the statement from the bank about confirmation of
interest payment.

5. TDS Return:- See whether TDS has been deducted has been deducted and deposited with the Government
property.
6. General Ledger:- Ensure compliance with AS 16 measurement and disclosure requirement in respect of
interest expenses.
8. Financial Statement:- See that Interest expenses are debited to Profit & Loss Account and proper adjustments
are made for prepaid and outstanding interest.
Q.5 What do you mean by Verification?
What is the Scope of Verification?
What are the Objectives and techniques of Verifications?
What are the Advantages of Verification?
What do you understand by the Verification of Asset? What is the Objective of such Verification?
Ans. A) MEANING OF VERIFICATION:Verification means confirmation or proving the truth. Usually verification is connected with assets
and liabilities. The term verification signifies the Physical Examination of certain class of assets and
confirmation regarding certain transactions. Verification goes beyond the mere checking of arithmetical
accuracy of assets and liabilities. Apart from knowing the genuineness of the transaction, an auditor should
ascertain that assets and liabilities as shown in the Balance Sheet are really existing and they are properly
shown at their true value.
Spicer and Pegler have defined verification as It implies an inquiry into the value, ownership and title,
existence and possess and the2 presence of any charge on the assets.
Verification means proving the truth, or confirmation of the assets and liabilities appearing in the balance
sheet.
Thus, verification includes verifying: 1) the existence of the assets,
2) legal ownership and possession of the assets,
3) ascertaining that the asset is free from any charge and
4) correct valuation.
statement of auditing practices issued by ICAI,
According to the statement of auditing practices issued by ICAI, the auditors object in regard to assets
generally is to satisfy that: a) they exist,
b) they belong to the client,
c) they are in the possession of the client or persons authorised by him,
d) they are not subjected to undisclosed encumbrances or lien,
e) they are stated in the balance sheet at proper amounts in accordance with sound accounting principles, and
f) they are recorded in the account.
B) SCOPE OF VERIFICATION: Verification includes confirmation of the following: 1) That the assets were in existence on the date of balance sheet.
2) That the assets had been acquired for the purpose of business only.
3) That the assets had been acquired under a proper authority.
4) That the right of ownership of assets vested in the organisation.
5) That the assets were free from any charge and
6) That the assets were properly valued and disclosed in the balance sheet.
C) OBJECTS OF VERIFICATION:Following are the objects of verification of assets and liabilities: 1) Correct valuation To show correct valuation of assets and liabilities.
2) True & Fair view: To know whether the balance sheet exhibit a true and fair view of the state of affairs of
the business.
3) Existence: To find out whether the assets were in existence.

4)
5)
6)
7)

Ownership and title: To find out the ownership and title of the asset.
Frauds & Errors: To detect frauds and errors if any.
Arithmetical accuracy: To verify the arithmetical accuracy of the books of accounts.
Internal control: To find out whether there is an adequate internal control regarding acquisition, utilisation
and disposal of assets.
8) Properly recorded: To ensure that the assets have been recorded properly.
D) ADVANTAGES OF VERIFICATION:Careful verification of assets fetches the following advantages to the client: 1) Avoids manipulation: It avoids manipulation of accounts.
2) Protecting from improper use: It guards against improper use of assets.
3) Proper recording of Assets: It ensures proper recording and valuation of assets.
4) True and Fair view: It exhibits true and fair view of the state of affairs of the company.
E) TECHNIQUES OF VERIFICATION:Following techniques may be adopted by the auditor for verification of assets and liabilities:1. Inspection:- It means physical inspection of the assets i.e. company cash in the cash box, physical inventory,
inspection of share certificate, document etc.
2. Observation :- The auditors may observe or witness the inspection of assets done by the others.
3. Confirmation:-It means obtaining written evidence from outside parties regarding existence of assets.
Inspection

Auditor

Observation

Confirmation

F) AUDITORS DUTIES REGARDING VERIFICATION:Primarily verification of assets is the responsibility of the management since the management will have the
greater knowledge of the assets as regards location, use, conditions, etc. However, in London Oil Storage Co.
Ltd. Vs. Sear Hasluck and Co., it was laid down that It is the duty of the auditor to verify the existence of
assets stated in the Balance Sheet and he will be liable for any damage suffered by the client if he fails in the
duty. However, an auditor is not a technical person and cannot, therefore, verify each and every type of
asset.
In the case of Kingston Cotton Mills Case, it was held that It is not part of an auditors duty to take stock.
He must rely on the people for the details of the stock-in-trade. But the Companies Act in India requires that
the auditor should certify the accounts to be true and fair. However, the auditor must physically inspect the
assets. Verification of assets will avoid the inclusion of the fictitious assets which never exists or the
overvaluation of assets. In respect of verification he will be held responsible for the damages.
Q.6. Distinguish Between: (I) Verification Vs. Vouching
Verification
1) Nature: Verification establishes truth about the assets
and liabilities.
2) Time: -

Vouching
Vouching examines the entries in the books of
accounts with the help of documentary evidence.

It is done at the end of the year.

3) Basis: It is based on personal and documentary
evidence.
4) Valuation: It includes valuation also.
5) Utility: It certifies correctness of assets and liabilities.
6) Personnel: It is done by the auditor himself.
7) Audit technique:Verification involves scrutiny of ledger,
physical verification, inspection of documents
And confirmation from third parties.

It is done during the whole year.

It is based on documentary evidence only.
It is not concerned with valuation.
It certifies corrections of records.
It is done by the junior staff of the auditor.
Vouching involves checking of vouchers,
supporting documents and entries in books.

Q.7. How would you verify the fixed assets ? as an auditor how you value fixed assets?
Ans:- A)VERIFICATION OF FIXED ASSETS:The auditor should take the following steps in verification of assets as per the guidance Note issued by the
ICAI.
1. Proper Record:- Examine the documentary evidence and see that the assets are properly recorded in the
books of accounts.
2. Opening balance:- Verify the opening balance from the schedule of fixed assets, ledger or register.
3. Acquisition:- Verify acquisition on the basis of orders, invoice, titles deed etc.
4. Self Constructed assets:- Self Constructed assets should be verified on the basis of contractors bills, work
order etc.
5. F.A written off: when fixed assets is written off fully the auditors should ensure its record.
6. Authority : See the authority for retirement or disposal of fixed assets.
7. Proper Procedure : Ascertain omissions, if any, by the following a proper procedure.
8. Ownership :- Ownership is verified on the basis of titles deeds.
9. Existence : Verify of assets by physical verification. He should ensure that physical verification of assets is
carried out by the management.
10. Method of verification:- He should ensure that the method of verification was reasonable.
11. Test check record:- Test check the book records of fixed assets with physical verification reports and see
that discrepancies, if any m are properly dealt with.
12. Charge or lien:- The auditor should ascertain whether the assets are charged. The auditor should verify the
loan agreements, registered of charge, Board of Director resolution, shareholders Resolution in this respect.
13. Audit Report: Under CARO 2003, the auditor should report whether physical verification of assets is
undertaken by the management. Any difference in physical verification and record should be reported.
Q.8.How would you verify the following:1) Investment:An investment may be share certificate, government bond certificate, government loan certificate, debenture
certificate etc. for verification of such securities, the following procedure is adipted.
a) Investment Register: Obtain a schedule of investment in share etc. in hand at the beginning of the audit
period. Obtain the following details from the investment register:

b)
c)
d)
e)
f)
g)
h)
i)
j)
k)
l)
m)
n)
o)
p)
q)
r)
s)
t)
w)

Description of investment, face value, date of purchase, book value, rate of interest, date of payment of
interest or date around which dividend is declared etc. with also the details of interest or dividend received
along the tax deduction at sources.
Investment in Subsidiaries:- See that regarding the investment in subsidiaries, disclosure requirement of
section 212 are complied with.
Investment in the name of the client:-Balance this schedule and compare the balance with the general ledger
and balance sheet. See that the investment are in the name of the clients.
Sanction of Board:-Where investment stand in the name of the persons other than that of company they are to
be confirmed by appropriate sanction of the board of directors.
Company Law:- See that investment made by Joint Stock Company are not contrary to the provision of
Section 372 of the Indian Companies Act, 1956.
Application Money:- In case of application money p[aid for shares which are still to be allotted, the fact is to
be specifically disclosed in balance sheet.
Accrued Income:- Compare the income received with amount due and adjust the accrued income.
Market Value:- Check the market value of Investments on balance sheet date and see that it is disclosed in
balance sheet.
Provision for Short fall:- See that adequate provision is made for any short fall in the book value of
investment shown in the balance sheet.
Contingent Liability:-Confirm that uncalled amount on partly paid shares held as investment is shown as
contingent liability in balance sheet.
Certificate from the bank:- where investment are lodged with banks as security, obtain a certificate to this
effect.
Investment with brokers:- Verify physically investments held by brokers for sale, but not sold before the
balance sheet date.
Partnership Deed: For investment in the capital of partnership firm to the partnership deed and copy of
accounts of partnership firm, where the company is a partner, adjust the share of profit or loss during the
accounting year.
Inspection: Inspect the certificate or securities physically on balance sheet date.
Brokers Note:- Add to the above list, purchase made during the year and delete the investment sold during
the year. Examine brokers note in case investment are purchased through brokers.
Disclosure: See that investment are disclose in the balance sheet as prescribed by law.
Charge:- The auditor should ascertain whether the investment are subjects to any charge, lien or
encumbrance. He should check loan agreements, registered of charges, board resolution and minutes of
shareholders meeting.
Report: The auditor has to report as per section 227 (1A) of the companies Act whether any shares,
debentures sold at a price lower than their cost. In case of Finance company under CARO 2003 the auditor
has to report whether proper records are kept regarding investment.
Foreign Exchange: If foreign exchange is involved in purchases and sale onf investment, the auditors should
see that the amount are converted into rupees in a proper manner.
Events after Balance sheet date:- Events after Balance sheet date affecting the value of Investments should be
ascertained.
Scripts held by the depositary: In case the scripts are held by the depositary, the auditors should verify the
certificates.

2. Plant and Machinery:The auditor should take the following steps:a) Plant register:- See whether a Plant Register is maintained which gives details of the plant and machinery or
equipments. If not, suggest that the same be maintained. since it is compulsory for limited companies to have
fixed asset register.
b) Adequate depreciation: From the details, ascertain the life of the depreciation is provided and also see that
the depreciation is fair and adequate.
c) Consistency in depreciation: See that the method of depreciation adopted is followed consistent from year to
year.

d) Installation / acquisition expenses:- A usual verify the cost of machinery and see that relevant expenditure for
acquiring or installing it is capitalized.
e) Separate Reserve:- Where any item of plant and machinery is revalued or devalued where the asset is
acquired from a foreign country or upon reduction of share capital, a separate reserve account is created.
f) Machinery on hire: Machinery brought for use in the business on hire basis should not be shown an assets.
g) Physical verification:- The auditor, if possible should physically examine plant and machinery periodically
i.e. at least once in three or five years.
h) Sale of Plant and Machinery:- Where any Plant or item of Machinery is sold, scrapped or transferred check
their entries and find out the profit or loss on such transfer or sale.
i) Entry for depreciation:- Sale of Plant even the client can asked to prepare a schedule of fixed assets showing
the total cost and depreciation charged and verify the normal entry recorded for depreciation.
j) Opening Balance:- Verify the opening balance from the last years audited statement of account.
k) Proper Authority: See that the sale and additions are made by a proper authority. Refer to the minutes book,
agreement of purchase or sale, entry in cash any other correspondence.
l) Valuation and Disclosure:See that Plant and Machinery is properly valued and disclosed in the financial statement. It should be valued
at cost less depreciation.
m) Plant and machinery abroad:-If plant and machinery is kept abroad, the auditor should get a certificate from
the local auditor with regard to the machinery.
3 FREEHOLD PROPERTY/ LAND & BUILDING:a) Title Deed: The auditor has to examine the Title Deed of the property owned by the client and confirm that
the same is freehold.
b) Correspondence: If the property has been purchased during the year, the auditor has to examine the
correspondence with the broker, or solicitor in detail.
c) Builders Bills: When a building has been constructed on the freehold property, it is to be verified from
builders bill, or architects certificate.
d) Certificate from Mortgager: Where the title deeds are deposited with the mortgager for a mortgage, then a
certificate from him is to be obtained for verification.
e) Insurance: The auditor has to ensure that the property is properly insured.
f) Basis of Revaluation:-In case, there is an appreciation in the value of land and building by revaluation, the
auditor has to verify and confirm the same.
g) Separate accounts: The auditor should see that separate accounts for land and for building are maintained.
Because on land usually no depreciation is provided.
h) Certificate from bankers:-If the titles deed are deposited with the bankers or solicitor for safe custody, he
should get a certificate from them to confirm the fact.
i) Registration:- The auditor has to see that the conveyance of the property is in the name of the client and the
same is properly registered.
4. LEASEHOLD PROPERTY:Normally the lease or right to use the property is granted for certain number of years. At the expiry of the
period of lease, the rights go back to the original lessor. Various steps involved in verification are: a) Lease deed :Auditor should examine the lease deed and see that the conditions are duly fulfilled and lease is
in force.
b) Receipt: The receipt of the last payment of the lease rent should be verified to see that it is not in arrear.
c) Expenses Written off: If expenses in the nature of improvements to the leasehold property have been
incurred, the auditor should see that they have been brought to accounts and written off over the remaining
life of the lease.
d) Certificate of Mortgaged: If the leasehold property has been mortgaged, the title deed will be in the
possession of the mortgage or his solicitor. The auditor in such cases, should obtain a certificate to that effect.
e) Method of Written off: The leasehold property should be written off on straight line basis.
f) Document of sub-let :-If the leasehold property has been sub-let, the right for sub-letting should be
determined with reference to original deed and the tenants agreements.

g) Disclosure in the balance sheet :-The auditor should also see manner of disclosure in the balance sheet. In
case of a company whether or not requirements of the Companies Act, 1956 have been followed.
h) Registration: See that the lease is properly registered with the registrar because a lease exceeding one yr is
invalid unless it has been granted by a registered document.
5. Furniture & Fixtures:
The auditor should take the following step:a) Internal control: The auditor should ensure that a suitable Internal Control exist for recording purchases and
inspection of furniture & Fixture.
b) Serial No:- See that each item of furniture is given stock Register Serial no. and the same is prepared on that
item.
c) Schedule of Furniture: Obtain a schedule of furniture which shows details of furniture, location, cost, date of
acquisition etc.
d) Physical Examinations: Conduct physical examination to verify the existence.
e) Verify cost: Verify cost of furniture with reference to the invoices received. Any expenditure regarding
purchases is capitalized.
f) Depreciation: See that adequate depreciation is provided on the furniture and fixture.
g) Verify existence: observe the physical verification being conducted by the management.
h) Verify ownership: Examine the purchase invoice, freight bill, Insurance and Installation charges relating to
furniture. Examine the loan document and see whether it is mortgage.
i) Verify Disclosure: As per AS10, the furniture & fixture has to be disclosed. Examine the compliance of
Schedule VI of the companies Act and CARO 2003.
AUDIT OF LIABILITIES:
6.
a)
B
c)
d)
e)
f)
g)
h)
i)
j)

OUTSTANDING EXPENSES:List of Outstanding expenses:- Obtain the list of outstanding expenses classified by nature of expenses.
Provision:-Auditor should see that all the outstanding expenses have been provided for.
Certificate:-He should obtain certificate from management regarding such outstanding expenses.
Vouchers and Receipt:-He should verify the vouchers and receipts a few weeks before and after the close of
financial year.
Balance of Ledgers:-He should verify the balances of ledger accounts of expenses.
Compare:-Compare current years outstanding expenses with that of previous years and enquire into the
material variations if any.
Correspondences:-Examine the correspondence, minutes book etc.
Documentary Evidence:-Examine the documentary evidence supporting the outstanding expenses.
Payment of outstanding expenses:- See that the usual outstanding expenses are paid off by the time of audit.
Disclosure:-See that outstanding expenses have been disclosed in the balance sheet under liabilities.

7. BILLS PAYABLE:a) Outstanding bill:- Obtain a detailed statement of bills payable which are outstanding on the balance sheet
date.
b) Compare:-Compare the outstanding bill with bills payable book.
c) Verification : verify payment against bills on the basis of cash book entries.
d) Test Check posting: Test check posting from bills payable book to bills payable account in the ledgers.
e) Confirmation :Obtain confirmation from drawers or holders of Bills irrespective of the amount due on them
and Compare them with bills payable book.
f) Disclosing :See that the charge if created on any asset is properly disclosed.
g) Entries for dishonour:-See the entries regarding dishonour of bills on due dates.
8. LOANS BORROWED:a) Documents: Examine the partnership deed or Memorandum and Articles of Association to find out the
powers of the client to borrow money.

b) Agreement: Examine the loan agreement and corresponding relating to loans.

c) Receipt issued: Check the cash received along with the receipt issued and check up the same in the cash
book.
d) Overdraft: Scrutinised the agreement made with the bank in case of overdraft.
e) Secured Loan : Enquire into the details of security given against loan in case the loan is secured.
f) Reason of borrowing : Find out the reason of borrowing and see that it is in the interest of the client.
g) Mortgage: See that the mortgage is registered with the Registrar of Companies under Section 125 of the
Companies Act, 1956.
h) Payment: Verify the payment of interests and installments with the receipt issued by the lender.
i) Confirmation: Obtain confirmation letter from the parties.
j) Utilisation: Ascertain the purpose for which loan is taken and see that the book balance agrees with the
statement sent by the lender.
k) Reconcilation: The auditor should verify the reconciliation and see that it is utilized for the right purpose.
l) Compliance with Companies Act:- Ensure that the provision of company Act regarding the maximum
amount of loan that the company can raise, have been complied with.
9. DEBENTURES:The auditor should examine the following: a) Memorandum and Articles of Association :Examine the Memorandum and Articles of Association to find out
the powers of the company to borrow.
b) Trust Deed: Examine the terms of debenture issue as contained in Trust deed.
c) Verify cash received : Verify cash received with cash book entries.
d) Properly Interest paid: See whether the interest on debentures is paid properly at regular intervals.
e) Secured or Unsecured debentures: Confirm whether the debentures are secured or unsecured and see that
they are properly disclosed.
f) Collateral security: Issue of debentures as a collateral security should be disclosed in the balance sheet
properly.
g) Evidence: Confirm redemption of debentures on the basis of minutes of Board of Director, Counter foils of
the cheque books, Bank pass book and cash book, returned debentures certificates etc.
h) Proper Disclosure:- Confirm whether the debentures are secured or unsecured and see that the same is
disclosed properly.
i) Board Resolution:- The auditor should see that there is a proper board resolution passed issue of debentures.
j) Limit of Borrowing: The auditor should check the limit on borrowing including debentures as per section
293. In case the limit is likely to be crossed, the shareholder in the annual general meeting can pass an
ordinary resolution to increase the limit.
k) Sanction of SEBI:- The auditor should see that necessary permission of the SEBI has been obtained by the
company before issues of debentures.
l) Issue of Prospectus:- The auditor has to see that in case debentures are offered privately, the statement in lieu
of prospectus is filed with the registration of Companies. In case of public offer the prospectus is issued.
m) Charge:- The auditor should verify the charge and its registration with the registrar of Companies.
n) Sinking Fund: See that a sinking fund has been created if it is one of the terms of issues of debentures and the
transfer from profit & Loss Account is made each year as per SEBI guidelines.
10. PUBLIC DEPOSITS:While verifying public deposits, auditor must ascertain the following facts: a) Memorandum of Association: He should commence his work by examining the Memorandum of Association
and the resolution of the Board of Directors authorizing public deposits.
b) Limits:-He should see that the deposits satisfy the manner, limits and the conditions as laid down by the
Acceptance of Deposits Rules, 1975.
c) Reserve:-He should see that reserves had been correctly calculated so that the deposits do not exceed the
limits prescribed by law.
d) Legal Requirements :He will go through the advertisement for the deposits and see that it had satisfied all the
legal requirements. All the provisions of Section of Section 58A of the companies Act, 1956 are respected.

e) Deposit:-He should verify that 10% of the deposits maturing before 31st March of that year have been kept
deposited with a scheduled bank.
f) Application forms: He will also check the application form for deposits, receipts issued for the deposits,
entries made in the Register for Deposits and the deposit returns filed with the Registrar.
g) Premature Payment:-He should also ascertain that rules with regard to the premature repayment of deposits
and interest etc. have been duly complied with.
h) Provision for Interest:- Adequate provision is made for outstanding interest.
i) Disclosure:-Public deposits are disclosed as unsecured Loans in Balance Sheet.
k) Proper record:- Proper receipt are issued, registers are maintained, repayment is made on maturity necessary
returns are filed, interest is paid regularly.
11. CONTINGENT LIABILITIES: A future uncertain liability which is dependent on the happening of some event is known as contingent
liability. It may or may not arise. Incidence of such a liability is conditional. Following are some of the
instances of contingent liabilities: a) Investment:- Examine the Investment held by the client, and if any of them are partly paid up, make a note
for the unpaid amount on such investment.
b) Confirmation: Obtain a confirmation certificate from the bank regarding the liability that may rise on account
of bills of exchange discounted with them, but not matured as on the balance sheet date.
c) Consult the solicitor: Consult the solicitor of the client to find out the position of any pending suits, their
likely results etc. to ascertain whether a contingent liability exist.
d) Dividend on Cumulative Preference Shares:- Ascertain the year up to which the dividend on cumulative
preference shares are paid. If any arrears exist then the same are to be shown as contingent liabilities.
e) Unexecuted Contract:- He has to ask the client that the position of unexecuted contract on capital account, to
ascertain the contingent liability under this head.
f) Guarantee : Enquire whether the client has given any guarantee or counter guarantee liabilities.
g) Minutes Books:- Inspect the minutes books of the company to ascertain all contingent liabilities.
h) Discussion with heads: Have a discussion with various departmental heads to ascertain the possibility of any
contingent liability.
i) Bills of lawyers: Inspect the bills of the lawyers to ascertain contingent liabilities.
j) Written Statement:- Obtain a written statement from the responsible officer of the company that all the
known liabilities are provided for and contingent liabilities are disclosed. Obtain advisers regarding pending
legal suits. Obtain a written statement from the company legal advisers regarding pending legal suits.
The auditor should keep in mind the provision of AS4 while auditing the contingent.

Auditing Other Trust Areas

Q.1. Define System Audit?
Ans:- A] DEFINITIONAn audit that controls throughout a computer system to evaluate their effectiveness and to recommend
improvements.
B] MEANING OF SYSTEM AUDIT
Q.2. Define Tax Audit? Explain the Provision for Section 44AB.
Ans:-A] DEFINITION OF TAX AUDITTax Audit refers to the audit carried on under the provisions of Sectional 44AB of the Income Tax Act, 1961.
It was originally introduced by the Finance Act, 1984, in the Income Tax Act, 1961 w.e.f. 1 st April, 1985
through Section 44AB. Even if the income s below taxable limit, tax audit is compulsory if turnover, the

business or profession exceeds the prescribed limit. So, Section 44AB provides for compulsory tax audit for
certain persons carrying on business or profession.
B] PROVISION OF SECTION 44AB:Section 44 AB of the Income Tax Act, 1961 requires the following persons to get their accounts auditeda) Every person carrying on business, the total sales turnover or gross receipt of which exceeds forty lakhs
rupees in any previous year.
b) Every person carrying on a profession whose gross receipt from the profession exceeds ten lakhs rupees in
any previous year.
c) Every person carrying on business, Income from which is determined on presumptive basis specified under
Section 44AD or 44AE or 44AF or 44BB or 44BBA and who claims income from such business to be lower
than the rates specified in the Sections.
Where the accounts of such person have been audited under the provisions of any other law, it shall be
sufficient if such person furnishes a report of such audit along with an additional report specified in this Act.
C] PURPOSE OF TAX AUDIT REPORT:Tax Audit would serve the following purposes:
1. Ensure that the books of accounts and other records are properly maintained;
2. Faithfully reflect the income of the tax payer and claims for deduction correctly made by him;
3. Help in checking fraudulent practices;
4. Facilitate the administration of tax by a proper presentation of accounts before the tax authorities and
considerably saving the time of assessing officers in carrying out routine verifications like checking
correctness of totals and verifying whether purchases and sales are properly vouched or not, thereby their time
could be utilized for attending to more important investigational aspects of the case.
Q.3. Write a Short Note on Environment Audit
Ans:- A] MEANING OF ENVIRONMENT AUDIT
An environmental audit is typically undertaken in three phases:
a) Pre-audit
b) On-site audit
c) Post-audit
Each of these phases comprises a number of clearly defined Objectives, with each objective to be achieved
through specific Actions, and these actions yielding results in the form of Outputs at the end of each phase.
B] DEFINITION OF ENVIRONMENT AUDIT
An examination of a facilitys environmental records and practices while checking for both accuracy and
conformance to the organizations environmental policies and regulatory responsibilities.
C] OBJECTIVES OF ENVIRONMENT AUDITING
The objective of environmental auditing is to measure environmental performance. This involves two factors:
(i) To measure what has been achieved; and
(ii) To measure the effectiveness of the systems or management processes which are, or have been, used to
achieve it.
This involves two distinctly different concepts1. the management system and
2. the actual performance that results.
An environmental audit can be used to review the degree of company compliance with the policy intent and
current or prospective legislation/standards (including discharge consents). The means of establishing future
strategy should also be examined.
Q.4. Write a Short note on Energy Audit.
Ans:- DEFINITION OF ENERGY AUDIT

An Energy Audit can be simply defined as a process to evaluate where building or plant uses energy, and identify
opportunities to reduce consumption.
B] MEANING OF ENERGY AUDIT
Formal examination process comprising of
(1) Identification of every energy consuming device in a facility,
(2) Determination of its rate of energy consumption, and the
(3) Number of hours it operates in a 24-hour period.
An energy audit is a preliminary activity towards instituting energy efficiency programs in an establishment. It
consists of activities that seek to identify conservation opportunities preliminary to the development of an energy
savings program.
C] CONTENT OF ENERGY AUDIT
The following are the main content of Energy Audit
1. Analysis of energy use
2. Identification of energy projects
3. Cost benefit analysis
4. Action plan to set implementation priority
D] OBJECTIVES OF ENERGY AUDIT
The Energy Audit aims at:
1. Identifying the quality and cost of various energy inputs.
2. Assessing present pattern of energy consumption in different cost centers of operations.
3. Relating energy inputs and production output.
4. Identifying potential areas of thermal and electrical energy economy.
5. Highlighting wastages in major areas.
6. Fixing of energy saving potential targets for individual cost centers.
7. Implementation of measures for energy conservation & realization of savings
Q.5. Write a Short Notes on Forensic Audit.
Ans:- MEANING OF FORENSIC AUDIT
Forensic auditing examines individual or company financial records as an investigative measure that attempts to
derive evidence suitable for use in litigation(legal action).
B] DEFINITION OF FORENSIC AUDIT
- An audit whose purpose is to use accounting procedures to collect evidence for the examination
or investigation of financial crimes such as theft or fraud. Forensic audits may be conducted to determine if
wrongdoing occurred, or to gather materials for the case against an alleged criminal.
- Forensic auditing could be defined as the application of auditing skills to situations that have legal
consequences
- Chatterji (2009). It is also seen as an examination and evaluation of a firms or individuals financial
informations for use as evidence in event
C] FUNCTION OF FORENSIC AUDITING
Albrecht and Albrecht (2001) identified the following key functions of forensic auditing:
To carry out the vision and mission of forensic audit to prevent, detect, and investigate issues of fraud and
financial abuse within an organization/entity.
Identification and collection of facts for individual weaknesses that allows unethical business behavior and
practices to occur and go undetected.
Help in the development of fraud awareness training and analyze fraud trends and internal control
procedures.
Perform comprehensive analysis of investigations

Oversee the investigations, planning, and forensic report writing process for forensic audits, and
investigations and presentation of findings through reports and exhibits.
Work closely with financial training function to enhance fraud-auditing skills.
Develop the Fraud prevention, detection and investigation program and management of companys Fraud
Risk Assessment program.
Conduct activities in areas of moderate to high risk.
Conduct complex and extremely sensitive investigations.
Promote education and awareness on fraud risk management throughout the bank.
Testifying in court as an expert witness.

D] ADVANTAGES OF FORENSIC AUDITING TO FRAUD CONTROL

The advantages of forensic auditing to fraud control was outlined by Dr. Ovute (2013) in one of his classes,
they include;
i. Forensic auditing strengthens control with the objective of protecting the business against fraudulent
practices that try to threaten the possibility of business.
ii. It ensure that their anti-money laundering procedures are effective in order to protect the company from
public ridicules.
iii. It helps improve efficiency by identifying areas of waste.
iv. A forensic auditing process can help to identify misreporting at different levels of an organization.
v. It helps in detection of fraud and errors and improve transparency and accountability in both public and
private sectors.
E]
i.
ii.
iii.
iv.
v.

DISADVANTAGES OF FORENSIC AUDITING It consumes time. i.e. the time used to interview staff could be used for another things.
It raises doubt among employees of various organizations, to them it is afraid of their responsibilities.
They require more finance so some organizations cannot afford to do that.
It exposes the forensic auditor risk, treats from his employees.
Confidentiality: The company exposes their financial statement to outsiders

Q.6. Write a Short note on Peer Review

Ans:- A] MEANING OF PEER REVIEW
The term peer means a person of similar standing. The term review means re-examination or
retrospective evaluation of subject matter. In general, for a professional, the term peer review would mean
review of work done by a professional, by another member of the same profession with similar standing.
B] SCOPE OF PEER REVIEW Peer Review lays down the following scope
1. The Peer Review process shall apply to all the assurance services provided by a Practice Unit.
2. Once a Practice Unit is selected for Review, its assurance engagement records pertaining to the Peer Review
Period shall be subjected to Review.
3. The Review shall cover:
(i) Compliance with Technical, Professional and Ethical Standards
(ii) Quality of reporting
(iii)
Systems and procedures for carrying out assurance services
(iv)Training programmes for staff
C] OBJECTIVES OF PEER REVIEW
The main objectives of peer review as under:
1. To ensure that in carrying out the assurance service assignments, the members of the Institute comply with
Technical, Professional and Ethical Standards including other regulatory requirements thereto, and
2. To ensure that such a member has in place proper system (including documentation system) to amply
demonstrate the quality of assurance services

D] PERIODICITY OF PEER REVIEW

The Periodicity of Peer Review will be
(a) Level - I Practice Units Once in 3 years.
(b) Level - II Practice Units Once in 4 years
(c) Level - III Practice Units Once in 5 Years
However, if the Board so decides or otherwise at the request of the Practice Unit, the Peer Review for a
Practice Unit can be conducted at shorter intervals.
Q.7. Write a short notes on Code of Ethics.
Ans:- A] MEANING OF CODE OF ETHICS
Code of Conduct State principles and expectation governing behavior of individual and organization in the
conduct of auditing. It describe the minimum requirement for conduct, behavioral expectation rather than
specific activities.
B] FUNDAMENTAL PRINCIPLES OF CODE OF ETHICS
The five principles are set out below:
1. Integrity
Members shall be straightforward and honest in all professional and business relationships.
2. Objectivity
Members shall not allow bias, conflicts of interest or the undue influence of others to compromise their
professional or business judgement.
3. Professional competence and due care
Members have to maintain professional knowledge and skill required to ensure that clients or employers
receive competent professional service. Members shall act diligently in accordance with applicable
technical and professional standards when providing professional services.
4. Confidentiality
Members shall respect the confidentiality of information and shall not disclose any such information to third
parties without proper and specific authority or unless there is a legal or professional right or duty to
disclose. Similarly, confidential information acquired as a result of professional and business relationships
shall not be used to the personal advantage of members or third parties.
5. Professional behaviour
Members should follow rules and regulations and shall avoid any action that may discredit the profession.
Members shall behave with courtesy and consideration towards all with whom they come into contact in a
professional capacity.
Q.8.Explain the procedure to be followed by a company for declaration and payment of dividend as per
Companies Act, 1956.
Ans: A] PROCEDURE TO BE FOLLOWED FOR DECLARATION AND PAYMENT OF DIVIDEND:
I) Procedure for Declaration of Dividend:
A company desirous of declaring dividend in its shares will have to observe the following issues:
1) According to Section 205(1), dividend can be declared or paid by the a company for any Financial year
out of:
a) Its Profit for that year, arrived at after providing for deprecation as par section 205(2); or
b) Its profit for any previous financial year or years, after providing for deprecation as aforementioned and
remaining undistributed; or
c) Out of balance of profit mentioned in (a) and (b); or
d) Out of moneys provided by the Central of State Government for payment of dividend pursuant to the
guarantee given by the government.

2) Transfer to reserve [Section 205(A)]:

According to Section 205 (2A), of the companies Act, 1956.No company is permitted to declared to pay
dividend for any financial year out of profit for that year without first transferring to reserves profit, to the
extent specified under companies (transfer of profit to reserve) Rule, 1975. The percentages of profit required
to be transferred to reserve depends on the amount of dividend proposed for the year and are given here
under:
Rate of proposed dividends
Amount to be transferred to
reserve
Upto 10%
Nil
Exceeding 10% but not exceeding 12.5%
Not less than 2.5 % of Current Profit
Exceeding 12.5% but not exceeding 15%
Not less than 5% of Current Profit
Exceeding 15% but not exceeding 20%
Not less than 7.5 % of Current Profit
Exceeding 20%
Not less than 10 % of Current Profit
3. Declaration of Dividend out of reserve:
Companies Rules, 1975 provides that in case of absence of profit in any year, company can declared dividend
out of its accumulated profit (and transferred to reserve) earned in previous year, subject to the following
conditions:
a) rate of dividend proposed to be declared should not exceedi) average of rate of dividend of past 5 years immediately preceding that year.
or
ii) 10 of its paid up capital
WHICH EVER IS LESS.
b) Amount to be drawn from accumulated profit should not exceed an amount equal to 1/10 th of paid up capital
& free reserve.
c) Amount so drawn must be utilised to set off the losses incurred in the financial year before declaration of any
dividend.
d) The amount so drawn cannot be used for declaring interim dividend.
e) Balance of Accumulated reserve, after such withdrawl should not fall below 15% of its paid up capital.
4. Provision for Income Tax (Income Tax Act, 1961):Profit cannot be utilised for distributing dividend unless adequate provision for Income Tax has been made,
as payment of Income tax from business earning is a legal obligation.
5. Setting off of brought forward debit balance of P&L A/c:
Debit balance of P&L A/c is an fictitious assets. There is no mandatory rule in accounting or any legal
requirement that fictitious assets must be written off before declaration of dividend . Accordingly, the amount
of loss or depreciation (Contained in the debit balance of P&L A/c) whichever is less, should be set off
against revenue profits before declaration of dividend. However fictitious assets must be written off if
dividend is to be declared out of Capital Profits. However following capital profit cannot be used for
declaration of dividends:
a) Premium on issues of shares.
b) Profit on reissues of forfeited shares
c) profit prior to Incorporation
d) Profit from redemption of debentures at a discount.
II) Procedure considered before Payment of Dividend:
1) Dividend can only be paid in cash (however company can capitalized its profit for issuing full paid bonus
shares or for paying up paid up amount on shares held by shareholders)-[Section 205(3)]
2) Dividend payable in cash can be paid by cheque or warrant and should be sent directly to the registered
address of the shareholders or can be transferred electronically if consented by shareholders-[Section 205(4)]
3) Dividend, once declared by the company becomes a debt of the company to its shareholders and must be paid
within 30 days of declaration- [Section 205 (4)]

4) Where dividend has been declared by the company but not paid within 30 days from the date of declaration,
every director of the company shall be punishable with imprisonment which may extend to 3 years and fine
of Rs.1,000 for every day during which such default continues and liability to pay simple interest of 18%
(Section 207)