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Q. 1. Explain the provisions of Companies Act, 1955 and auditors duty

Shares issued other than cash for consideration.
Bonus shares.
Interim Dividend.
(D) Forfeiture of Shares.

A. 1.
(A) Auditors duty as per Companies Act for shares
issued other than cash are as follows:-

Share issued for consideration other than cash. Any company may issue
its shares at (i) Nominal value (ii) at a higher price than the nominal value,
i.e. at a premium, and (iii) shares issued at discount at lower price, in all
such cases it has been principally considered that the issue of
shares for cash and duty of an auditor in connection therewith.
The following circumstance indicates that company has issued its shares
either fully paid or partly paid for consideration other than cash; which are
as follows:


Shares issued to vendors for purchase or a business.

To the nominees of Vendors.
To underwriters of shares.
To promoters who have already defrayed the preliminary expenses.
To issue share in lieu of purchase consideration for any case of
absorption, amalgamation or reconstruction,
Shares issued to existing shareholder as bonus shares out of

The auditor should verify the entries in the journal regarding the issue
of such shares.
He should examine or inspect the details of prospectus or statement in
lieu of prospectus in respect of such contract with the vendors,
promoters, underwriters etc.
He should check the copies of the contract with all above mentioned
In case of issue of such shares registered Auditor has to verify that
company has been filed with the Registrar of Companies within one
month of the allotment Sec. 75 (1)(b).
In case of no written document of a contract, he must verify that
whether the Registrar has been informed of the particulars of the
contractor not.
In case of Bonus shares, auditor should examine the minute books of
the Directors and shareholders. He has to verify the entry made for it
and the auditor has to check that the amount of shares issued for
consideration other than cash should be shown separately in theBalance-sheet.
Inspection of Directors' Minute Book it resolution was passed to give
Necessary entries are given in the books of account. The received
amount should be transferred to the credit of forfeited share account. It
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must be shown in the Balance sheet.

If more than nominal value of shares is received, it must be transferred
to Capital Reserve Account, it being capital profit. Upon such forfeiture,
shareholders' name is removed from the - register of members.
The total number of such shares should have been shown in the Annual
returns of the
A. 1. (B) Bonus shares:
The Auditor should verify the Articles of Association to see whether the
company has authority to capitalize reserve and profits to issue bonus

Memorandum of Association to see whether the paid-up share

capital after the issue of bonus shares would be covered in the
authorized capital.
Resolution for the issue of bonus share passed by the directors in
their Board Meeting and also for the same which has been passed
must be approved in the general meeting of the shareholders.
He should see whether the conditions contained in the guideline
have been complied with SEBI (Security Exchange Board of India)
After examining the application for the bonus issue, he should give
his certificate which has to be enclosed with the application.
He should check the sanction received.
He should check all the accounting entries of capitalization of
reserves and profits.
He should also check entries in the Register of Members. He should
see that the paid-up capital includes the value of the bonus shares
Under the head 'Share capital' information must be disclosed
regarding bonus shares.
He should also check that from which source they have been issued.
e.g. Capitalization of profits, Balance of Profit & Loss A/c
Free reserve
From Share Premium Account
Sinking Fund.

A. 1. (C) Interim Dividend:

A Company may distribute part of its profits during the two annual
general meetings. It is known as "Interim Dividend." That means, the
company may-declare dividends before the close of the accounting year
and finalization of accounts. The auditor should bear in mind the following
points while checking interim dividend.

There must be express power in the Articles to declare it, and an

Auditor must therefore, inspect the Articles and the directors minute
declaring dividend.
Interim accounts are prepared to ascertain the quantum of divisible
Auditor must observe that before declaring, however, the directors
must use reasonable care in order to satisfy themselves that such
dividend is justified, and for this purpose, accounts for the half-year
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or for period of 6 months should be prepared, full provision being

made for depreciation, reserves for bad debts and for outstanding.
- Auditor should see that Budget system is in force. It will be great
assistance in this connection,
- It should also be seen that the company has sufficient cash
available to pay the dividend.
- The amount of interim dividend shall be deposited in a separate
bank account within five days from the date of declaration of such
dividend. (Sec. 205, Sub sec. 1A of the Act) and it must be paid out
of it.
Lastly, an auditor should go into all the circumstances most
carefully, and see that proper accounts have been prepared and that the
whole position has been adequately considered.
(D) Duties of an Auditor regarding forfeiture of shares:
The share may be forfeited due to non-payment of calls by the
shareholders or. members if Articles allow. Duties of an auditor in respect
to share forfeiture are as under :
Articles to be examined for forfeiture of shares.
Calls or installment of call or the interest outstands.
Due notice is to be given to shareholders for forfeiture.
Inspection of Directors' Minute Book it resolution was passed to give
Necessary entries are given in the books of account. The received
amount should be transferred to the credit of forfeited share
account It must be shown in the Balance sheet.
If more than nominal value of shares is received, it must be
transferred to Capital Reserve Account, it being capital profit. Upon
such forfeiture, shareholders' name is removed from the register of
The total number of such shares should have been shown in the
Annual returns of the company.
Q.2. Discuss the points to be considered before commencing the audit
of a company.
In case of a company, audit is compulsory. Auditor appointed for audit
work is known as statutory auditor. He would require certain preliminary
information and other information that may be necessary for audit work.
Before starting audit work auditor will nee6 or consider the points as
mentioned in the box.
(1) Appointment of an Auditor: Auditor must obtain his appointment in
writing along with a resolution passed by the directors in genera! meeting.
He should see the other provisions of the Companies Act, 1956 for his
(2) Nature of Work: Auditor must obtain definite instructions from the
company regarding the nature and the scope of his work and duties. What
he has to do ? The accounting work or auditing work ? Time limit for
submission of the report and duration of the audit work. As regards his
duties, rights, powers, liabilities etc. are all laid down by the Companies
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Act, 1956.
(3) Accounting system: Which type of accounting system has been
employed by the company, in case of any weak point, he must examine it
thoroughly and make suggestions to remove it.
(4) Books of Accounts : The Auditor must obtain a list of all the books
vouchers, supporting evidence maintained in the office of the company,
He also try to check the names of the keepers of such books, and it must
be duly signed by the authority. The Auditor must have to give in his
report that the books of accounts which has been examined are true and
correct and the financial position is True and fair.
(5) Internal check system: If the system is in operation he should . get,
if possible, a written statement to that effect and examine the system.
(6) List of officers: In case of a company auditor must get a copy, or list
of the officers which include names, addresses, duties powers etc,
(7) Documents of the company: The business of accompany runs
according to the provisions of the Act. The following documents are
required as per the Act : (i) Articles of Association, Memorandum of
Association; prospectus and other important documents, Memorandum of
Association must have at least the name of the company.
Objects, capital including classification of shares, nominal value of
shares names of promoters, first directors, solicitor bankers etc. are also
(8) Nature of the company: In case of the company who has purchased
the. business, auditor must know the particulars of relevant agreements,
purchase consideration, methods for it, etc. in case of a newly started,
particulars of such a business e.g. location, product; market of a product,
registered office, head office, factory, building, depots etc. and also which
type/nature of business is run by the , company-trading, manufacturing, or
any other?
Lastly, the auditor must have information in respect of directors,
shareholders, list, holding of directors in the share capital of the company.
List of public and private limited companies in which they are directors.
Also inquire whether its properties-fixed assets are properly insured or not.
Q. 3.State the provisions of the Companies Act, 1958 and

also mention the duties of an auditor in respect of

shares issued at discount.

Provisions of Sec. 79 of the Companies Act3 with regard to issue of shares

at discount :
(1) Lower price : Shares issued at discount i.e. shares issued at a
price less than the face value of shares e.g. nominal value is Rs. 100 but
if issued at Rs. 90 then Rs. 10 is called shares discount,
(2) Time limit: Shares can be issued at discount but only after one year
has elapsed from the date of commencement of business, i.e. after one
year of commencement of the business.
(3) Class of share: According to Sec. 79 of the Companies Act, , it can
be issued in respect of class of shares already issued.
(4) Legal provisions: The issue of the shares at a discount is authorized
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by a resolution passed by the company in a general meeting. Such

resolution must be sanctioned by the Company Law Board.
Rate of discount: Discount cannot exceed 10%. In certain
circumstances Law Board specifically can consider a higher percentage.
(6) Accounting effect: Shares issued at discount must be shown in the
B/s at nominal value and the amount of discount must be shown under the
heading of Misc. exp. as 'Share Discount' on the Assets side. It must be
written off in the forthcoming years.
(7) Auditor's Duties:
(1) It is the duty of the auditor to see that conditions laid down/ in Sea 79
of the
Companies Act, 1956 are complied with.
(2) He should see the resolution passed at the general meeting of the
(3) He should verify the sanction obtained from the Company Law Board.
(4) He should see to it that the rate of discount does not exceed 10% or a
higher rate as
sanctioned by the Company Law Board.
(5) He should see the prospectus for necessary information as required
under the Act
which is disclosed therein.
(6) The Discount on the issue of shares should be shown in the B/s under
the head Misc expenditure" until it is written off.

Q. 4.
State the provisions and duties of the auditor in
respect of 'Issue of shares at

(1) General: Section 78 of the Companies Act, 1956 deals with the issue
of shares at a premium. The company issues shares at a higher price than
their nominal value. It may be for cash or otherwise. The excess amount
of premium must be credited to separate account called "Share Premium
(2) Application of share premium account : The amount credited
under the head of "'share premium account" should be shown under
"Reserve and Surplus/' It is not utilized for paying dividend.
It can be applied for the purposes:
(a) In paying fully paid bonus shares.
In writing off-preliminary expenses, underwriter's commission,
Discount allowed on issue of shares on debentures.
(c) It can be utilized for redemption premium either for preference shares
or debentures.
(3) Auditor's Duties :
(1) Auditor should examine the prospectus.
(2) Auditor should verify the Articles of company to see whether they
permit it.
(3) Auditor also should examine minute book of directors to see whether
they have authorized such an issue or not.
(4) He should confirm the rate of premium from 1, 2 and 3 above.
(5) The Auditor should check all the accounting entries.
(6) The Auditor should verify that it has not been credited to profit and
loss account.
SEBI Guidelines: The Auditor should examine the trend of SEBI
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guidelines in respect of share" premium.

(1) A new company can issue shares at a premium with a five year track
record of consistent profit.
(2) In case of unlisted company the limit is of three years. Lastly, the
auditor will have to verify that the company has issued shares at a
premium for consideration other than cash, an amount equal to the
amount of premium must be transferred to share premium Account.

Q.5. State the provisions of the Companies Act, 1956 and

also the duties of an auditor for redemption of
preferences shares.

(1) Legal Provisions: Section's 100 to 105 deals with the matter of
redemption of
share capital if authorized by A/A and by a special
(2) Pre. Shares Sec. 80: In case of redeemable preference sharessection 80 deals with it if Articles of Association may issue of such shares
and also liable to be
redeemed. The terms of redemption or conversion
have to be disclosed in the
Balance sheet.
(3) Conditions: These shares can be redeemed
Out of the profit which is available for dividend.
Out of the proceeds of the fresh issue of shares.
Shares must be fully paid-up.
Redemption premium must be provided from Profit and Loss A/c or
shares premium account.
The company must have to transfer a sum equal to the nominal
amount to the capital redemption reserve account.
(4) Auditor's Duties:
Examine that the Articles permit issue of redeemable preference
Verify that such shares were fully paid up.
In case of redemption of shares out of the profits, a sum equally to
the nominal value of the shares redeemed is to be transferred to the
"Capital Redemption Reserve Account."
Redemption Premium must be charged to share premium account.
Vouch the entries passed for the transaction or redemptions.
(5) Resolutions: The Auditor must examine the various resolutions
pass for redemption of preference shares.

Q.6. What are the auditor's duties in regarding statutory

(1) Meaning: The report that is sent to the members and which is
discussed at the statutory meeting is known as the statutory report.
Statutory Audit is that audit which is required to be performed by the
auditor prior to the statutory meeting of the company. The auditing of
Statutory Report is called "Statutory Audit". The Report is certified by the
director and after that it is certified by the auditor but it should be before
the statutory meeting. The audit of and issue of certificate of the Report is
based on the terms of the Statutory Report.
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(2) Particulars of Statutory Report which, auditor has to audit: It is

prepared by virtue of Section 165 of the Companies Act, by every public
company limited by shares or by guarantee and having a share capital,
must hold a general meeting within six months, but not before one month
from the commencement of business-known as statutory meeting, the
Report is prepared For this purpose in which the following information is
included in respect of
Share capital
Authorized share capital.
Total No. of shares.
Shares Allotted to shareholders.
Paid-up amount on allotted shares-cash
Different kinds of shares.
Shares allotted to directors, management,
promoters and the amount paid up on it.
Deducting necessary expenses, the balance
of cash received on the date of submission
of Report.
Preliminary expenses paid and the total
amount of it.
(iii) Officers:
Manager, Secretary and auditors of the
(iv) Particulars of
Any contract, or modification or
proposed modification must disclose before
the shareholders for approval.
The particulars of any commission,
paid or to be paid in connection
with the issue or sale of shares, debentures,
to be paid to shareholders, directors and or
to the manager.
(3) Auditor's Duty: For the purpose of certification of Statutory Report
auditor; should perform his duty in the following manner:
(1) To check the transaction of share capital
(2) He will make enquiries about internal check for receipts payment and
other transaction.
(3) He should vouch cash book and bank transactions,
(4) Auditor has to audit the details or the shares allotted, cash received
from it and verification of cash received and payments. He has also to
examine the Memorandum, Articles, and the prospectus, minute books
of the Board of Directors.
(5) He will verify all the receipts, documents, register applications, and
allotment of shares
as referred to in the shares audit.
(6) He will vouch all the payments e.g. commission, brokerage, salary and
such other expenses.
(7) Whenever necessary, he will also examine the minutes book of the
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When he is satisfied, he will issue a certificate for the Statutory

Report. Before issuing certificate he should examine the Statutory Report
must be certified as correct by the two directors, one of them must be a
managing director.

Q.7. What are the Auditor's

underwriting commission?





(1) Legal Provisions: Section 76 permits the joint stock companies to

pay commission or brokerage. The person who gets commission or
brokerage must be broker or underwriter who had assured that all issued
shares would be sold and no difficulty would come up for minimum
subscription. The terms for these purposes must be fulfilled which are as
Articles must permit such a payment
Commission must not exceed 5% in case of issue of shares and
21/2% for debentures.
Rate must be disclosed in the prospectus.
A copy of the contract with the persons must be filed with the
Registrar of Companies.
(2) Purposes: Commission for procuring subscription or placing shares.
Person who
procures buyers for the shares of a company gets his
commission. Brokerage is a commission payable to a stock broker.
(3) Auditors, duty:
Auditor will examine Articles and prospectus.
Articles and Minute Book agree to commission.
He should examine the terms and conditions between the brokers or
underwriters and the company.
Auditor must check the application ^for shares signed and stamped
by brokers.
Auditor should examine all cash receipts in respect of the
transaction, e.g. application money deposited by underwriter,
allotment fees on the shares against commission.
Auditors should checked that amount paid for underwriter
commission and brokerage' and should be shown under the head
Misc. exp. on assets side of Balance sheet and every year part of it
has to be written off to Profit and Loss Account.


Q. 1 Give deference between qualified and unqualified
(Clean) auditor's report.
Points of

Unqualified Report
clean Report

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Qualified Report



(1) Meaning It is a report which does It covers or indicates mistakes in

not indicate any mistake or the report.
(2) Circums- (1)

Books of accounts
kept by requirement
P/L A/c shows correct
profit or True and Fair
B/s also gives True
and Fair view.
During examination
auditor is not able to
out any mistakes/de-

Books of accounts are not
kept by
requirement of law.
P/L A/c and B/s can-not show
True and Fair view,
Books of Account are not
prepared according
It does not follow the
accepted principles.

Auditor is satisfied
with all explanations.
(3) Special It is not required.

(4) Auditors When auditor has worked

Liabilities according to the requirements of law and with care
and skill, he is not liable for
such clean report.

When auditor has not given

explanation he puts special note for
During the work of examination of
books of accounts it he has found
any defect and not pointed out and
has given the report without it, the
auditor is liable for the report.


Directors are not respon- In case of queries realized by the

sible for submission of any auditor, directors are responsible
for explanation of directors is
(6) When to When
is Auditors is not satisfied in material
satisfied in all material Respects with matters concerning
respects with the matter, the areas of his reports.
he reports it to share
Creates good impression of Creates bad impression on readers.
Impression company.

Q.2 Diff. Audit Report Vs Auditors Certificate.

Meaning :

Audit Report
It is Auditor's opinion.

Auditor's Certificate
Auditor's issuing or signing \l
vouchsafes the truth of the
statement he makes.

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Examinatio Auditor
of accounts because he has
Accounts: to prepare report for the
books of accounts that
they are properly-drawn up
in accordance with the
Companies Act, so as to
give True and fair view1.
Responsibi Report is merely an opinion
lity of an of an auditor, he may be
wrong and for that one he
will not be held responsible.
To whom it Auditor is appointed by
concerns : shareholder and for that
reason audit report is addressed to shareholders.
Nature :
it may be clean or qualified
Period :

Is not required to certify the books

of accounts.

Certificate - what he states is cent

per cent true and correct. Later on
if. it is found that it was wrong, he
will be held responsible.
It is not addressed to any party.
Simply it is a statement by the
requirement of the Companies Act.

Certificate itself is based on

correctness. So it cannot be
It covers the accounting As and when it is required by client,
period yearly.
Certificate can be prepared.

Q.3 "True and fair" :

The phrase "True and fair view" has been used in Sec. 211 of the
Companies Act. This means that the profit and loss account must state
clearly and correctly the result of the working of the company for the year
under audit. There should be no manipulation of accounts. Similarly, the
balance sheet should show the honest position, i.e. there should be
neither over valuation, nor under valuation of assets or liabilities.
Before the Act came in force in 1956, the same phrase was used as
"True and correct" in Sec. 145 of the Act of 1913 with the help of this
Phrase. There were loopholes by which company could create the secret
reserve. To prevent, it the phrase has been changed and accepted as
"True and fair". "Correct" shows that the annual accounts are according to
Books of Accounts and it is reproduced only while "Fair" denote state of
affairs of the company. The arithmetic accuracy is fair for Balance sheet
and Profit & Loss Account for the financial year. Auditor will not only trust
on books of accounts but go beyond the transactions, so that true aspect
is shown in financial statements. Annual accounts must show ail material
facts properly disclosed in a "true and fair" way. The standard of
presentation of information must be one set by the current business
practice of honest men in relation to company's accounts.
Fair view also means disclosure of unusual, exceptional or nonrecurring items of income or expenses, Profit & Loss separately to clarify
trading and financial position of the company. Books of accounts must be
kept to give "true and fair view" of state of the company affairs and
explain the transactions.
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Q. 1
What is capital profit? State the auditor's
duties in respect of distribution of dividends out
of capital profits.
(1) Meaning : Capital profit is not normal profit. Capital profits are not
earned during the ordinary, regular course of the business. Profits which
are not earned on account of trading, or operational activities are called
capital profits. It is known as Non-Trading profit of the business e.g. the
surplus of the revaluation of fixed assets.
(2) Sources : The Capita! profits may be computed in the following
circumstances :
Profits earned on the business purchased but before obtaining a
certificate of commencement of business.
Premium received on issue of shares or debentures.
Profits made on the reissue of forfeited shares.
(D) Profits earned on the sale of fixed assets.
Surplus on the bona-fide revaluation of the assets.
(3) Auditor's duty regarding capital profits : Auditor should see
that the company has not declared dividend out of capital profits unless;
The Articles of Association of the company may permit for such
It must have been realized in cash.
(iii) It must have been computed after the proper valuation of the
assets, (iv) The Capital losses are made good.


"Divisible Profit" :

Profits are different from "Divisible Profits". Profits imply a comparison

between the state of a business at two specific dates. The fundamental
meaning is the amount of gain made by the business at two dates. The
total assets of the business on the two dates may be compared, and the
increase which they show at the latter date as compared with the earlier
date, represents the profits of the business during the period.
All profits are not divisible profits. "Divisible profits" represent that
portion of profits which can be legally distributed by the company as
dividends. This will depend upon the :
Provision in the Articles of Association of the company.
Provisions of the Companies Act, 1956 and other related Acts. e.g.
Income Tax Act, 1961.
(iii) Principles of Accountancy.
Provisions- contained in A/A :
Clauses 85 to 94 Table A (Schedule 1 of the Companies Act, 1956)
deal with- dividends and reserves.
The Board may, by recommending any dividend, set aside out of-the
profit of the company after making provision for meeting contingencies or
equalizing dividends. Dividend must be declared and paid; on paid up
amount of share capital of the company. No amount of profit can be
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distributed as dividend which is against the provisions of Articles of

In case of limited companies in general, the determination of
divisible profits has always been found to be problematic specially in view
of the following factors :
(1) Depreciation, Reserve for probable losses etc. are charged to Profit
and Loss Account. It is often a matter of dispute as to what should
be the correct amount of such charge which vitally affects the state of
(2) Capital Profit - whether such profit can be distributed.
(3) Capital Losses - whether they will be taken account of before arriving
at profits
available for dividends.
(4) Capital and revenue items - How to ascertain their nature and on what
basis to
apportion the same.

Q. 1 Draft audit programme on a "Self-finance commerce

The following special points should be observed by the auditor:

(1) Examine carefully the University Act. He must also refer the trust deed
or constitution of the self-finance college.
(2) Go through the minutes book and carefully study the resolutions and
official orders.
(3) Examine the internal check-system or an internal audit system.
(4) The auditor must check the cash receipts on account of fees. He must
vouch from the fees register and the counter foils of the fees receipt
issued. He must also compare the fees receipt with the application forms
approved and signed by the principal of the college or by the Head of the
Managing committee.
He should check that fees other than tuition fees like examination
fees, library fees, caution money, hostel fees, sport fees etc, are credited
to their respective heads. Income from donation, if permissible, income
from investment, if any, Govt. Grant should be properly verified. Income
from endowment, if any, should be separately vouched.
(5) Payments: The auditor should see that management expenses are
not mixed up with the college expenses. He should vouch all the expenses
carefully. He should see that the internal check system-regarding purchase
of stationery, provisions etc. is proper.
Salary paid to teaching and non-teaching staff should be verified. He
should see that the increments to the staff are within the rules and
approved by the managing committee. He should also check the leave
records and statutory deduction and tax deduction. He should also see
that the adequate provisions for provident fund, gratuity, medical aid etc.
are made.
He should examine the cases of fee-concession and scholarship. It
must be within rules should have been and sanctioned by the committee.
(6) Verification: The auditor must verify the cash on hand, petty cash on
hand and Bank balance. He must also verify the balances as regards to
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stores and stationery, and existence of fixed assets acquired by the

(7)The auditor should see the proper record for capital expenditure like
furniture, building, equipment; library books, sports goods, are
maintained. He should also see that adequate depreciation is provided
and the assets are shown in the balance-sheet. He must check all the
revenue expenditures debited to income & expenditure account.

Q.2 Audit Programme of a Hospital run by Public Charitable


A hospital is a medical institution offering health-services. It may be

established by the government or by a private trust. The main object
before the auditors must be to look at the budget allocations and proper
accounting of incomes and expenditure.
The following points should be examined before preparation of an
audit programme.
(1) Constitution: In case of hospital run by government auditor should
examine the rules and regulations or bye-laws of the institution. Examine,
in particular, those clauses which affect the accounts directly or indirectly.
In case of Trust, he has to examine the constitution of the hospital See
that the provisions of the applicable Trust Act, 1950 are complied with.
Verify the minute books of the managing committee or the governing
body, as the case may be.
(2)Act and provision of Act: He has to see that to run the institutionhospital rules framed by the medical council are properly applicable or
not. If it is run by the Trust. The auditor should see the provisions of Trust
Deed which are applicable to the hospital e.g. investments of trust-funds,
transfer or immovable properties, trust income and expenses etc.
(3)Internal check: Examine the internal check as regards the receipt and
issue of stores, medicines, linen, clothing instruments, etc. so as to ensure
that purchases have been properly recorded in the stock register and that
issues have been made only against proper authorization.
(4)Books of accounts and its preparation: The auditor should
examine the method of accounting system followed by the hospital. If it is
run by the government, the accounts" are required to be maintained in
accordance with legal requirements of government accounting policy. In
case of trust, auditors should see that forms prescribed in schedules 8, 9,
9C of the Trust Act, 1950 are filed in time in the office of the charity
commissioner. He has to submit auditor's report every year.
(5) Vouching of cashbook:
(A)Receipts : The following are the receipts in case of the hospital
-Donations, membership fees, e.g. x-ray charges operation theatre
charges, operation charges, medicines other facilities, other receipts like
dividends, interest on securities, rent etc. Vouch the receipt of all these
types from the counterfoils of the receipts issued. See that all receipts are
credited properly in" the books of accounts.
Auditor must verify the total fees received as per patients' registers
also examine that bills are prepared properly from such register Vouch the
grants received from government authorities and other sources Copies,
calculation and other documents should be examined
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(B) Vouching of expenditure or payments : The following are the

important expenses of capital nature, e.g. purchases of Land-construction
of building, operation theatre, purchases of different kinds of machineries,
revenue expenses includes administrative expense, e.g. salary,
remuneration paid to hospital staff, doctors and administrative staff,
purchases of medicines, medical instruments, stores, drugs, lien, cloths,
All these payments should be properly authorized and accounted
for. Payments should be vouched with vouchers. Compare the bills with
the attendance register of the patients. Vouch the administrative
expenses in the usual manner.
(6) Valuation & Verification of Assets & Liabilities: Auditor must
examine & verify the value of assets. In case of fixed assets, it must be
shown in the balance-sheet cost value less depreciation. Investment at
market price and other stocks are at lower price.
Verify equipments, furniture, fittings, and stocks of medicine on
hand. See that the capital expenditure under different heads does not
exceed the budgeted amounts.
(7)Allocation of expenses: Auditor should verify the expenses paid also
try to consider the proper head of capital expenses and revenue
expenses. Auditor should see that it is shown in the balance sheet and
charged to Profit & Loss account properly.

An audit is the inspection, examination or verification of a person,
organization, system, process, enterprise, project or product. It is
used to determine the authenticity and validity or to ensure that a
process is being followed. Also, an audit is mainly used in accounting
to ensure the validity and reliability of information in the statements
and that the information is free from material error. An audit can be
done anytime.
An investigation is the process of detailed examination of activities
so as to achieve certain objectives. It is the act of investigating; or is
the study to enquire about a particular thing. It is an important
factor in journalism for investigating various cases. It is the best
method to tackle or identify the case; and make a thorough report
about the case. Investigation is made in suspected places. In this,
the main focus is on an inquiry into the accounts and financial
matters of a business and to the overall aspects of it.
Comparison between Audit and Investigation:
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Audit means the

inspection, examination
or verification of a
person, organization,
system, process,
enterprise, project or

Investigation means an
inquiry, or is the act of
detail examination of
activities so as to
achieve certain


Audit is conducted on
behalf of owners only
and they make the

Investigation may be
conducted either by
owner of the
undertaking or by an


To determine the true

and fair view.

Varies from business to



Routine process

Investigation is not a
regular process


It includes only an
examination of the
accounts of a business

It covers an
examination of the
accounts bur also
covers an inquiry into
other matter that are
connected with the
purpose for which it is


Year or six months

May cover several



Does not examine


May examine


Usually conducted
before investigation of

Usually conducted after

the audit of accounts

Person performing work

Audit is to be
conducted by a

Investigation may be
take on even by a non-

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Legal Obligations

chartered accountant

chartered accountant

Audit is mandatory
under law

There is no such legal

obligations with regard
to investigation


RUNNING BUSINESS:The purchaser of the business wants to know the real position of the
business. Keeping in view the business condition he has to decide
whether he should purchase the business on that price or not ?
So the investigator should pay special attention on the following
points :
1. Cause Of Selling :The investigator should pay special attention to this point that why
the seller wants to sell the business? He should see that it is a
genuine case of sale.
2. Examine The Trend Of Business :Investigator should examine carefully the trend of business whether
it is going on the road of prosperity or not. In this regard he should
compare expenses revenue and profit of the previous years.
3. Checking Of Liabilities :Investigator should verify that liabilities of the business are properly
valued. It should be compared the figures shown and decide that it is
correct or not.
4. Value Of Assets :Investigator should check that the assets have been properly valued
and sufficient depreciation has been provided on these assets.
5. Verify The Goodwill :Investigator should also check that good will of the business that is
properly valued or not? He should also examine that sufficient
provisions have been made for doubtful debts or not?
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6. Checking Of Auditors Report :Investigator should also examine the auditors report if it is
previously audited.
7. Verify The Profits :Investigator should verify the profits of previous years which might
have been inflated by inflation of closing stock.
8. Competition Situation :He should also check the competition situation which the concerned
firm is facing in the market.
9. Examine The Capital :Investigator should examine that working capital of the business is
sufficient or not?
10. Proper Vouching :Investigator should check that capital, expenditure, and revenue is
properly vouched or not ? He also pay proper attention to the
deferred revenue and expenditure.
11. Examination Of Machinery :Investigator should check the condition of machinery. Whether it is
new, old or replaceable.

Q-3 INVESTIGATION ON BEHALF OF BANK GRANTING LOAN :Generally banks require complete and detailed informations about
the borrower's. The lender of money wants complete satisfaction of
repayment. So investigation is made on the behalf of the lender.
Investigator should pay special attention to the following points :
1. Reason For Loan :Investigator should know the real cause that why the borrower is
demanding the additional loan for the business.

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2. Use Of Loan :Investigator should also examine that for which purpose loan will be
used. It should be used properly for that object for which it is
3. Character Of The Borrower :Investigator should also investigate about the character of the
borrower. If borrower is honest, efficient and a man of character then
he will repay the loan in time.
4. Examine The Security :He should also examine the securities offered against loan. Are
these sufficient or not?
5. Loans Against General Assets :If the loans are to be advanced against the general assets of the
company then he should examine the net value of the assets.
6. Description Of Property :Investigator should give full description about the real property,
plant, building and decoration.
7. A List Of Investment :He should give the list of all the investment shown in the books
which market value.
8. Earning Capacity :Investigator should check the earning capacity of the borrowers. He
should verify the profit and loss accounts of the past several years. If
earning capacity is better then repaying capacity will also be better.
9. Reputation Of The Firm :Investigator should examine the reputation of repayment of loan in
the past if any party has refused to advance the loan then what were
the reasons.

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Q-4 In case of fraud suspection investigator should keep in

view the following points :
1. Checking The System Of Accounting :Investigator should study the system of accountancy and internal
check which is followed in the business.
2. Confirm The Balance :Investigator should confirm the balances by writing letters to the
creditors with the permission of his client.
3. Check The cash Sales :Investigator should compare the cash sales and sales of goods. He
should detect if any sale is omitted from the book.
4. Checking Of Payment System :He should check the salaries and wages payment system. There is a
chance that payments have been made to the fictitious employees.
He should also check the signs and endorses of cheques.
5. Examine The Petty Cash :He should check the petty cash transactions very carefully. Also
check the vouchers if possible.
6. Verify The Discount :Investigator should also verify the rules regarding the discounts
allowed and paid.
7. Examine The Profit And Loss :He should examine the profit and loss account transactions by using
his skill and experience.
8. Point Out The Fraud :He should indicate the amount of fraud and the person who
committed the fraud.
9. Suggestions :Page 20



Investigator should also suggest the ways and means to protect the
business from fraud.

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