F.Y.BAF PRESENTS PROJECT ON…..

CONCEPTS IN AUDITING
 INTRODUCTION

Auditing –
§Auditing begins, where accountancy ends. An auditor
examines the financial statements prepared by the
accountant and verifies the items therein with the
help of relevant documentary evidence and
explanation and information given to him.
§In other words he examines analytically and critically
the accounts and financial statements prepared by
the accountant.
 VOUCHING

ØVouching consists of comparing the entries in

the books with particulars in the voucher as
regards date, amount, name of the party.
Ø
ØBut vouching is not a mere comparison of the
entry with the supporting document.
Ø
ØIt is a critical examination of the supporting
documents to understand the substance / essence
of the transaction & to ensure that accounting
of the transaction is done as per substance/
essence of the transaction.
 VOUCHING
What are the Objectives of vouching ?
1.Transactions are authorized.
2.
3.Transactions represented by the entries are not
ultra vires the entity.
4.
5.Transactions represented by the entries have :
- actually occurred
- during the period under the audit.
- pertain to the entry under audit.

4.Transactions have been recorded in the correct

amounts.
5.
6.Transactions have been allocated properly between
capital &revenue.
 POINTS TO BEAR IN MIND WHILE VOUCHING
1.Addressed to the client – all vouchers should be in the
name of the client .if they are addressed in the name of
an employee / official etc. it could be a personal expense
and not a business expense.
2.
3.Date- the date on the voucher should be seen . The date of
the voucher should fall during the period under audit.
Otherwise, it is possible that payments pertaining to
earlier or later period is included in the accounts of
the current period.
4.
5.Cancelled- vouchers examined should be cancelled by
initials /firm’s stamps to avoid the same voucher being
produced again in support of another payment.
6.
7.Amount- the amount entered should be checked with the
amount on the vouchers.
8.
9.Authorization- voucher should be authorized by competent
authority.
 VERIFICATION
Verification of assets & liabilities.
Introduction:
ØVerification means confirmation of the truth ,
accuracy & existence of an item or entry.
Ø
ØVerification of assets & liabilities implies
obtaining and examining evidence in respect of
assets and liabilities.
Ø
ØVerification goes beyond books of accounts and
documentary evidence. It is more than checking
arithmetical accuracy of the record of assets &
liabilities;
Ø
Øit involves physical inspection of certain
assets as shown in the balance sheet really
exist.
 VERIFICATION
Scope of verification/ verification includes:
1.Whether the assets are owned by the company.
2.
3.Whether they are shown in the books of accounts.
4.
5.Whether they are free from any change other than
those disclosed in the books .
6.
7.Whether they are acquired in connection with the
object of the business.
8.
9.Whether they are actually lying with the company or
the balance sheet date.
10.
11.Whether they are properly valued or the balance
sheet date.
 VALUATION

ØValuation of assets means determining the fair value

of assets on the basis of generally accepted
accounting principles (GAAP).
Ø
ØIt is an important part of auditors duty. The
auditor must satisfy himself whether all the assets
shown in the balance sheet are at proper values.
Ø
ØIf the assets are over or under valued, the
financial statement will not disclose true & fair
view of the state of affairs & the profitability of
the company .
Ø
ØThus, the main object of proper valuation of assets
is to represent a true and fair view of the state
of affair of concern through the balance sheet.
 VALUATION
Methods of valuation of assets :
1.Cost price :
In this method, the assets are valued at actual cost
including installation charges if any.

2. Market value :
Market value is the price which exits in the market on the
balance sheet date .

3. Cost of market value whichever is lower :

This method of valuation is generally used for valuation
of current assets.

4. Replacement value:
Here, the replacement value means the amount of money
which could be required to replace an existing asset by
purchasing a new asset of the same type . On arriving, at
such a value, expenses such as commisions , freight etc
are taken into account.
 VALUATION
5.Realizable value:
It means the amount of money which will be realized
in the market from the sale of assets. Under this,
assets are valued according to be anticipated
sale value of assets.

6. Scrap value:
Scrap value means realizable value of assets which
are receivable after long use. Under this, assets
of no use to the business are valued at the
amount for which they can be sold in the market
as if they were scrap.

7. Going concern/ book value / written down value :

Going concern value is the estimated present value
of the asset. It is equivalent to cost less
depreciation written off up to date. Generally ,
fixed assets are value at going concern value.
 VOUCHING v / s VERIFICATION
VOUCHING VERIFICATION
Meaning & Scope: Meaning & Scope:
Is a substantive audit procedure which deals Is a substantive audit procedure which deals
with examination of profit and loss with examination
transactions/items. of balance sheet transactions/items whether
they are assets or liabilities are properly
stated in the balance sheet.
Normally, extensive vouching exercise is Also applies to profit and loss item to check
done during the depth test/cradle-to grave the account balances and their presentation.
test.
Vouching enable the auditor to know whether Verification process encompasses the inquiry
the transactions are genuine and valid to into the ownership/ title, existence, valuation,
enable the auditor to report on the financial completeness and presentation
statements. of assets and liabilities in the balance sheet.

Vouching is the substantive Verification usually deals with the FINAL

testing/examination of transaction at their BALANCE in the Final Accounts viz
POINT OF ORIGIN. the balance sheet and profit and loss
VOUCHING VERIFICATION
Nature of work: Nature of work:
It examines the entries relating to It examines the assets & liabilities
transactions in the balance sheet
Time : Time :
It is done throughout the year It is done at the end of the year
Basis: Basis:
It is based on documentary It includes personal as well as
examination documentary examination

Valuation: Valuation:
It does not include valuation. It includes valuation
 VERIFICATION v / s VALUATION

Verification Valuation
Meaning: Meaning:
verification means determining the accuracy valuation means testing the accuracy of the
of assets and liabilities shown in the balance asset and liabilities.
sheet.

Scope: Scope:
The scope of verification is wide. The scope of valuation is limited
Execution: Execution:
Verification is executed by auditor. Valuation executed by the client's staff.

Nature : Nature:
The nature of verification is objective. The nature of valuation is subjective.

Proof : Proof:
It proves the existence, ownership & title It certifies the correct value of Asset &
Liability
Evidence : Evidence :
Title deeds, receipts & payments. Certificate from owners/directors.
 PRIMARY OBJECTIVE OF AN AUDIT
§The basic primary objective is expression of opinion as to
truthfulness and fairness of financial statements.
§
§ACCORDING TO DE PAULA- “The main object of an audit is to
ascertain that the balance sheet and profit and loss account of
undertaking do show true and fair view of its financial position and
earnings”.
§
§This object has statutory recognition in India and has been clearly
stated in section 227 of the companies Act 1956. It requires the
auditor of a company to state whether in his opinion the accounts
give a “true and fair view” in case of balance sheet, of the state of
company’s affairs as at the end of financial year and incase of the
profit and loss account, of the profit or loss for the financial year.
 SECONDARY OBJECTIVE OF AN AUDIT

ØPretention and preventions of frauds and errors

is a major secondary objective of an audit.
Ø
ØA “true and fair view” cannot be expressed by
the auditor on the basis of accounts which have
material misstatements resulting from errors
and fraudulent manipulations.
Ø
Ø‘Fraud’ refers to intentional misstatement which
is material to the financial statements,
management , employees or third parties may get
involved in committing frauds to obtain an
illegal advantage of personal gain.
Ø
ØFraud generally involves either misappropriation
of assets that maybe called ‘employee
 SECRET RESERVE

ØIn “a dictionary for accountants” Eric L- Kohler

defines the secret reserve as, ‘the amount by which
the net worth has been deliberately understated – a
hidden reserve.
Ø
ØSuch a condition exists where the assets are omitted
or under-valued or where liabilities are over-stated.
Ø
ØThe term does not represent any actual account
bearing that name.’

Øthus a reserve which is not disclosed in the balance

sheet of the entities called a “secret reserve”,
hidden reserve or an inner reserve .
 SECRET RESERVE

Some of the ways of creating secrete

reserves are given below:
Ø
•By writing off excessive depreciation on fixed
assets
•
•By undervaluing the closing stock
•
•By charging capital expenditure to reserves
•By surprising sales
•
•By making excessive provisions for bad debts
•
•By making excessive provisions for contingencies
 WINDOW DRESSING

ØWindow dressing is the art of showing a

substantially better financial position of the
company that it is in reality.
Ø
ØA sound financial position is painted on the face
of the balance sheet by concealing the actual
state of affairs.
Ø
ØIn window dressing, assets are over valued ,
liabilities are under valued and profits are over
stated or, if there are losses they are under
stated.
Ø
ØIt is one of the methods of manipulating
accounts , but it does not necessarily involve
misappropriation of cash or goods .
 DIFFERENT WAYS OF WINDOW DRESSING

1.Charging inadequate depreciation on fixed assets.

2.
3.Providing inadequate reserves for bad and doubtful
debts.
4.
5.Charging revenue expenditure to capital account
6.
7.Over valuing closing stock at the end of the year .
8.
9.Showing actual liabilities as contingent
liabilities.
10.
11.Showing fictitious credit sales & thereby over
valuing debtors.
12.
13.Showing fictitious assets.
14.
15.Creating inadequate provision for outstanding
expenses.
 OBJECTS / BENEFITS OF WINDOW DRESSING

1.It helps by attracting more applicants for shares or

debentures in case of fresh issue of shares .
2.
3.It helps in getting more remuneration to the
managerial personnel when it is given on the basis
of percentage of net profit.
4.
5.It helps in getting easy finance facilities like
bank overdraft or loan from bank and other financial
institutions
6.
7.It helps in getting more favourable credit terms on
purchase from suppliers .
8.
9.More goodwill can be demanded in the case of
absorption and in the case of admission of a new
partner .
 TEEMING & LADING

•Teeming and lading is one of the methods of

misappropriation of cash.

•Under this method, the money received from the

first customer is misappropriated by the
cashier.
•
•The money received from the subsequent
customer is then credited to the account of
the first customer and this process continues
till such a time that the cashier is able to
replace the money misused by him, or such time
that the cashier is caught.
 TEEMING & LADING

•The auditor can detect such a fraud by taking the

following steps :
•
i. The auditor should verify the system of internal
control and check regarding receipt of cash from
customers and the deposits take place into bank.
ii.
iii. The auditor should scrutinize the Debtor’s Accounts,
especially those accounts which show part payment.
iv.
v.He should co-relate the dates of cash receipts from
debtors with the date on which the amount is
deposited into the bank.
vi.
vii. He should get the balance confirmation certificates
from debtors.
viii.
ix. He should check the discount allowed column in the
cash book with the prevailing discount rate.
CONCLUSION
BIBLIOGRAPHY
 ACKNOWLEDGEMENTS

We are heartily thankful to Professor Afsha

Kirkire , Professor Ashok Vanjani and our
co-ordinator Professor Deshpande, whose
encouragement, guidance and support from the
initial to the final level enabled us to
develop an understanding of the subject.
Lastly, We offer my regards and blessings to
all of those who supported us in any
respect during the completion of the
project.
 PRESENTED BY :

JAPJIV SINGH ANAND 18

SAHIL GANGWANI 20
SHIKHA SACHDEV 23
KOMAL RATANPAL 27
JHANVI PATEL 49
FAHAD HINGORA 59
SHUBHDA VARDE 60
 Y OU
A N K
TH