B.com Part2 Auditing Notes!

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Chapter 8 - Divisible Profit

* Divisible Profit

* Concept of Profit

* Principles of Divisible Profit

* Importance of Correct Profit

* Secret Reserves

* How Secret Reserves is Created

* Advantages of Secret Reserves

Introduction of Divisible Profit

Those profits are term as the divisible profit, which is legally distributed to the shareholders of a company as dividend.


Factors of Divisible Profit

The following are the main factors, which influence the divisible profit.


1. Capital Profit

The divisible profit ca be paid, if there is some capital profit or gain.


2. Capital Loss

If some part of the capital is lost or there is capital loss the dividend can be paid out of the current profits without making any provisions for any capital loss.


3. Depreciation

The depreciation is charged before the distribution of the divisible profit


4. Transfers of Reserves

Under company ordinance 1984,

Before declaring dividends the directors have powers to make such reserves as they may think proper.












Concept of Profit

Like the term "value" in economics accountants have used the word. "Profit" for many years without assigning a definite meaning to it. This state affairs has given rise to much informed criticism of accountants and their work added to this is the difficulty caused by the divergence that exists in the concept of the profit between the economist and an accountant for the purpose of settlement of claims of parties to their shares in the profit of a business.










Principles of Divisible Profit

1. Articles of Association

The articles of associations are the rules of the company for managing the business activities. The articles prescribe the rules for divisible profit. The directors are entitled to distribute the profits under the rules. The cannot exceed the prescribed limits.


2. Companies Ordinance

The companies ordinance 1984 states the rules and regulation for distribution of the profits to the shareholders. The dividend can be paid out of revenue profit. The directors must follow the rules of companies for distributing profits. They cannot violate the law.


3. Accountancy Principle

The accountancy principles must be followed for calculating the divisible profits. The going concern, consistency, conservation matching concepts is applied. These principles must be applied other wise the reliable result cannot be expected from the accounting books and records.


4. Legal Decision

The legal decision must be kept in mind which calculating the divisible profits. The court cases relating to auditing must be followed if applicable to the conditions of business. The auditor must know the decision announced by the courts from time to time.


5. Capital Maintenance

The principles of capital maintenance must be applied. The capital cannot be used to pay dividend. The revenue profits can be utilized for payments of dividend. The capital account must remain intact. It is illegal it the directors pay dividend out of capital during any year.


6. Shareholders Approval

The divisible profits can be used to pay as dividend after approval of shareholders. The annual general meeting is called and the shareholders approve rate recommended by directors. The rate of dividend proposed cannot be increased at all.


7. Capital Profit

The capital profit can be used to pay dividend under certain conditions. The capital profit should be realized. All the assets should be revalued and even then there is surplus. The articles of association allow the distribution of capital profit as dividend. The depreciation on the revalued assets has been recorded in the books of accounts.


8. Directors Proposal

The directors have the right to propose the rate of dividend under certain conditions. The capital profit should be realized. All the assets should be revalued and even then there is surplus. The articles of association allow the distribution of capital profit as dividend. The depreciation on the revalued assets has been recorded in the books of accounts.


9. Capital Loss

The dividend can be paid out of revenue profits even there is capital loss. There is no need to adjust old capital loss before payment of dividends. The current year revenue profit can used to pay dividend. The capital profit must be used to eliminate capital loss finest and then surplus can be used to pay dividend.


10. Depreciation

The dividend can be paid out revenue profits. The depreciation on fixed assets must be charge to profit and loss before declaring revenue profits. In case of manufacturing company it is compulsory to charge depreciation before declaration of profit or dividend.


11. Past Losses

The company may sustain a loss in one year. It can earn profit in the next year. The company may adjust loss of previous year. The remaining profit of current year can be pay dividends. In 1918, Ammonia Soda Co. V Chamberlain case the court decided that under the articles of association the directors can pay dividend out of current year profit with out adjustment past losses.


12. Transfer to Reserve

The dividend can be paid of revenue profit remaining after transfer to reserves. The articles of association empower the directors to create at a certain rate. In case of banks and financial institutions it is obligatory to set up statutory reserves.


13. Secret Reserves

Management creates the secret reserves by various techniques. The financial institutions need such reserves to develop the confidence of customers and owners. The reserves can be created and used to pay dividend if allowed under the articles. The misuse of such reserves must not be allowed.


14. Undistributed Profit

The directors for declaring dividend can use undistributed profit or profit and loss appropriation balance. It is revenue of the previous years. It is a right of the directors to used such profit for payment of dividend at the end of the year.


15. Profit Prior to Incorporation

The profit prior to incorporation is a capital profit. It cannot be used for payment of dividend. It is a profit earned before the registration of the company. It can be used to write off capital loss or issue of bonus share by the company management.


16. Asset Revaluation

The management can revalue the assets. The surplus on revaluation of assets can be started on liability side of balance sheet. It can be used after realization. The assets may be sold and profit may be realized.


17. Solvency of Company

The solvency of the business is very important than payment of dividend. The management must determine cash needs of the company. If cash is surplus than business requirements then dividend then can be paid is cash. In cash of storage of funds dividend should not be paid in cash.


18. Creditors Protection

It is a principle of divisible profits that dividend must be paid out of revenue profits. The correct calculation is essential for all who depend upon business. The overstatement can disturb one section of investors while understatement can upset another group.
 

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Importance of Correct Profit

1. True Disclosure

The accounting principle requires true disclosure of profit. The purpose of audit is also same. The auditor can form and opinion of the financial statement when true disclosure is there. The true disclosure may lead to show correct profits.


2. Consistency

The importance of correct profit is felt to settle the dispute among various sections of society. The owners need high profits. The debentures holders demand low profits. The principle of consistency can solve the problem by declaring true and correct profit instead of high or low profits for the year.


3. Follow Law

The calculation of correct profit is essential for the business. The calculation of profit depends upon law. When the law is followed there is true profit available for the shareholders. The memorandum, articles of association and companies ordinance must be followed to arrive at correct profit.


4. Protect Creditors

The calculation of true profit is necessary for protection of creditors. The true profit does not reduce the value of assets. The creditors can collect their amount of loan and interest in goods and services.


5. Correct Valuation

The fair value of assets and liabilities is recorded. The correct valuation is desirable for other parties who want to buy such business. The admission of new partner is possible. The amalgamation and merger can take place on the basis of correct valuation of business concern.


6. Stable Share Prices

The benefit of correct profit is available in the shape of stable prices. The investigators in shares can depend on the policies of the company. The management can attract large funds for expansion of business activities. The auditors must try to calculate true profit every year.


7. Manager Remuneration

The benefit of correct profit is available in the shape of true remuneration of management. The manager's commission may be based on profits. The correct profit can pay correct commission to the managers. They can review their progress through their remuneration received.


8. No Undue Favour

The correct profit is useful for all sections of society. There is conflicting interest of shareholders manager, creditors, lenders, investigators and debenture holders. The correct profit favours all parties according to their interest in business.


9. No Dividend Out of Anticipated Profit

The anticipated profit cannot be used for dividends. The profit means profit realized. The unrealized profits are excluded for calculation of correct profit. The shareholders can be allowed dividends out of true realized profits only.











Secret Reserves

A secret reserve is a reserve that is created but not started in the balance sheet. There are various ways secret reserves. The banks, insurance companies and other financial institutions want to win public confidence for their successful working. These business concerns can create secret reserves. It is a technique to show poor financial position to rivals and in case of need such reserves are available to meet crisis. There are merits and demerits of such reserves. The auditor can examine the existence of such a situation. The amount may not be high. The director's intention may be good. The auditor may not disclose such reserves in the audit report. When the amount is high and directors misuse such reserves the auditor must inform the shareholders through his report.













How Secret Reserves is Created

1. Under Valuation of Fixed Assets

The management can create secret reserves by under valuation of fixed assets. In fact the value of fixed assets is much higher but it started at less value. The reserves of the same amount are created. There reserves do not appear in balance sheet.


2. Eliminating Fixed Assets

The management may decide to eliminate any fixed asset. In preparing balance sheet such assets are not stated. The value fixed assets can be used to create secret reserve of the same amount. As the reserves are secret there is no need to show it.


3. Under Valuation of Current Assets

The current assets may be recorded in balance sheet at less value. In this way under valuation of current assets helps the management to conceal profits and reserves from liabilities. The management can be such reserves in times of financial needs.


4. Excess Provision For Bad Debts

The excess provision for bad debts means decrease in the value of debtors below the real value. Stating excess provision for bad and doubtful debts creates the secret reserves. It is only possible when management is selling goods on credit.


5. Charging Capital Expenditure to Revenue

The management can play trick for creating secret reserves. The capital expenditure can be treated as revenue. The profits will be understated. The secret reserves are created to meet the demand of the business management.


6. Overstating Liabilities

The management can over state the value of any liability. This action leads to creation of secret reserves. The profit and reserves are reduced by equal amount.


7. Grouping Dissimilar Items

The different items appearing on liability side may be grouped. The creditors, reserves and provisions may be stated under the heading Sunday creditors and other credit balance.


8. Contingent Liabilities

The management can show contingent liability as actual liability in order to create secret reserves. In fact contingent liability is stated as footnote. But its inclusion in balance sheet met the objective of the management.


9. Including Fictitious Liabilities

The management can show fictitious liabilities as actual liabilities. In this way the reserves and profits can be eliminated for the same amount. The secret reserves are creating in order to obtain certain objectives.


10. Showing Good Will At Nominal Value

The goods will have high value. It may state at nominal value. The secret reserve is created equal to the difference between actual value and nominal value. The directors can create secret in order to meet business objectives.


 

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Advantages of Secret Reserves

1. Increase Working Capital

The purpose of creating secret reserves may be increasing working capital. The shortage of working capital may be lead to failure of business. But use of secret reserves help to improve the financial strength in order to make the business successful.


2. Dividend Equalization

It is a benefit of secret reserve that dividend can be paid at equal rate. When there is sufficient profit there is no need to use secret reserve. In case of low profit or loss the secret reserves can be used to pay dividend. Thus fluctuating profit cannot affect dividend rate.


3. Face Competition

The benefit of secret reserves is available to the management. It can face competition in the market. In order to eliminate or shrink the size other business concern it can become loss leader. The use of secret reserves is helpful to remain in market for long period.


4. Keep Rivals Away

The benefit of secret reserves is that management can keep rival away. The financial position does not look attractive. The new entrants are discouraged. They decide not to enter the field.


5. Meet Financial Exists

The benefit of secret reserves is that management can meet financial crisis in case of emergency. The loan facility may not be available but such reserves are useful for meeting crisis.


6. Win Public Confidence

The management is in a position to win the public confidence. The equal rate of dividend provides confidence to the shareholders. The general public is happy over the reserves.


7. Low Profit Years

The management can use secret reserves in low profit years. Due to poor business activities there may be no profit. Such reserves helps the management to follow the same policies of dividend.
 

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Chapter 9 - Audit Standards

* Audit Standards

* International Auditing Standards

* Principles of Auditing

* Auditing Standards and Auditing Procedures

* Audit Techniques

* Functions of Audit

Audit Standards

A standard is quality of work, which can be used to measure the performance of auditors. The audit staff can follow the stated principle and practice in the conduct of an audit. The business world is ever changing. In order to meet the business needs the professional accountants are busy in improving the rule of business audit. The audit standard applied in the early period is not acceptable at present. The introduction of computer in accounting separation of management from ownership, the establishment of big companies has increased the responsibilities of auditors. The association of professional accountants has framed rules for the guidance of their members. The International Federation of Accountants issues international auditing guidelines. The Chartered Accountants have also framed rules at national level. Anyhow with the passage of time further improvements will be made to meet the new challenges of auditing work.

International Auditing Standards (ISA)

1. Objectives and Scope of the Audit of Financial Statement
This standard state that objective of audit is to express an opinion. The management is responsible is responsible for preparing financial statement. The scope of audit is determined by an audit in according with the requirements of legislation regulation or relevant professional bodies.

2. Audit Engagement Letters
This standard relates to audit engagement letter, which is written by an auditor to his client for acceptance of the appointment. This letter confirms the objectives and scope of audit. This standard also states the possible contents of audit engagement letter. An example of audit engagement letter is also given at the end of it.

3. Basic Principle Governing An Audit
This standard describes the basic principle, which govern auditor's responsibilities. The auditor is bound to follow their principle during audit work. These principles include integrity, objectivity, independence, confidentiality skills and competence, work performed by others, documentation planning, audit evidence, accounting system and internal control, audit conclusion reporting.

4. Planning
This standard deals with the planning of audit work. Work auditor planning must be helpful to complete an audit work in an efficiency and timely manner. The plans should include accounting system, policies and internal control procedure, degree of reliance on internal control, the nature timing and extent of audit procedures to be performed and coordination of audit work.

5. Using the Work of an Other Auditor
This standard states procedures for using the work of other independent auditors with respect to the financial statements of one or more divisions, branches, subsidiaries or associated companies included in financial statements of one or more divisions, branches, subsidiaries or associated companies included in financial statements of an entity. This guideline also applies where the principle auditor report on other financial information.

6. Studies and Evaluation of Accounting System
The standard deals with accounting system and internal control. The management is responsible for proper accounting system and related internal control. The auditor require assurance system is reasonable and all accounting information has been recorded internal control contributes to the assurance.

7. Control of the Qualities of Audit Work
The high standard of audit profession requires high quality of audit work. The guideline states the individual audit and general quality control. There is relationship between these two. The general control facilitates control over individual audit. The delegation of work to assistants is stated. In order to control quality of work assistance is given to audit firm.

8. Audit Evidence
The audit evidence standard deals with information collected by the auditor. He can form an opinion about financial statements. The nature and sources of audit evidence are described. The methods used are stated. He can state whether it is sufficient and appropriate.

9. Documentation
The audit standard deals with documents. Guidance is provided about the contents and form of working papers. The example of working is also stated. The auditor can know how to prepare working papers. The ownership and custody of working paper remains with auditor.

 

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10. Using the Work of Internal Auditor
Business employees who have skill and experience conduct the internal audit work. The internal auditor can check whether internal control is proper and effective. The independent auditor can use the work of internal auditor. The procedure for assessment of internal auditor work is stated in this standard.

11. Frauds and Error
This standard states the definition of fraud and errors. The responsibility of fraud and error is linked with management. The plan of the auditor must be effective to trace frauds and errors. When the auditor smells fraud and errors the procedures have been suggested. The condition and events are stated when risk of fraud and error increases.

12. Analytical Review
This standard provides detail of the nature of analytical review procedure. The purpose, timing and extent of reliance to be placed is stated in it. The auditor can check the unusual fluctuations.

13. Auditor's Report on Financial Statements
The guideline deals with the form and content of auditor report relating to independent audit of financial statement of a business concern. The wording for clean and qualified opinion is suggested. The examples state the unqualified, qualified, adverse and disclaimer of opinion.

14. Other Information in Documents
The guideline provides guidance as to the auditor's consideration of other information on which he has no obligation to report. When an auditor has an obligation to report specially on other information, his responsibilities are determined by the nature of his engagement. The other information may be financial or non-financial. It may include report of management on operations, financial summaries employment data. Planned capital expenditure, financial ratios name of officers and directors.

15. Auditing in an EDP Environment
The guideline deals with the auditing through computers. The skill and competence needed by the auditor is stated. He is responsible for delegating the work to assistants. he is not free from liability where he uses the work of others.

16. Computer Assisted Audit Techniques
The guidelines provides information to audit for using computer assisted techniques especially software and test data. The instances are stated when such techniques are to be used. The application in small business is also possible.

17. Related Parties
The standard deals with audit evidence to be collected from relating parties. The transactions can take place with debtors and creditors. The auditors can guidance to see whether management has properly disclosed the related party relation ship and transactions with such parties.

18. Using the Work of an Expert
The guideline provides guidance to the auditor for using the work of an expert engaged by the client or auditor. The examples of cases are stated when an auditor may depend upon experts. Guidance is also providing relating to expert's skills, competence and objectivity. The way of evaluation of work of expert is stated.

19. Audit Sampling
The auditing guideline states the factors when an auditor can design and select and audit sample. The evaluation of audit procedures is stated. The statistical and non-statistical sampling methods are provided. The elementary guidance is provided about sampling risk, stratification selection methods and projection of errors.

20. Date of Auditor's Report
The guidelines states guidance on date of auditor's report. The events may occur after balance sheet date. The facts may be discovered after the issue of financial statements. The auditor can take steps to identify subsequent events. The auditor can issue revised report about the audited financial statements after their revised by management.

21. Going Concern
The financial statement are prepare under the accounting assumption as going concern. When such assumption does not seem good the entity is unable to realize assets at recorded costs. The guideline provides example when going concern assumption should be questioned. The collection of audit evidence, following audit procedure and reporting about going concern is stated.

22. Materiality and Audit Risk
The auditing guideline states the concept of materiality and risk and their relationship. The auditor can use these concepts in planning and conducting audit and evaluating the result of his procedures. The definition of materiality and audit risk is given. The components of audit risk are explained. The interrelationship is also stated.

23. Special Purpose Reports
The guideline state the issue of report other then issued in routing matters. The report may be issued on compulsive basis other than accepted standards, specified accounts or any item of financial statements, compliance with agreement and summarized financial statements. The examples are given at the end of it.

24. Audit of Accounting Estimates
The auditing guideline provides guidance to auditors on the audit procedures that should be performed in order to obtain reasonable assurance as to the appropriateness of the accounting estimates contained in financial information. An accounting estimate is an approximation of the amount of an item in the absence of a precise means of management.


Principles of Auditing

1. Integrity
Integrity is a principle of auditing. The auditor is straightforward, honest and sincere in his approach. He must be fair towards his work. The auditors are known for their discretion and tactfulness. The loyalty toward his work and profession must be beyond doubt.

2. Objectivity
Objectivity is a principle of auditing. The auditor maintains an impartial attitude. He cannot allow prejudice or bias to avoid the purpose of audit. He can protect the right of shareholders through this principle.

3. Independence
Independence is a principle of audit. The auditor maintains an impartial attitude. He should be an appear to be free of any interest. No doubt he receive fee from his client even then independence is essential. His personal views must not be included in his report.

4. Confidentiality
Confidentiality is a principle of auditing. The auditors can maintain secrecy of information acquired in the course of his work. He can not disclosed any information to a third party without specific authority. He can provide facts and figures to other under legal or professional duty.

5. Skill
Skill is a principle of auditing. The auditors must acquire skill of doing audit work. He must get training from his principle. The experience of all audit steps must be obtained. It is a stage of learning by doing. This skill will help him when becomes independent auditor.


 

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6. Competence
Competence is a principle of auditing. There is a need of best training in the field of audit. The competent person has the right to sign the report. The practical knowledge and training with expert firm of auditors can make the trainee as competent.

7. Work Performed By Others
Work performed by other is a principle of auditing. The auditor can rely on the work of other auditors. The sole duty lies on the head of principle auditor who is depending upon of others. The information is available for reliance on others.

8. Planning
Planning is a principle of auditing. The auditing should plan his work in an efficient manner. The audit planning includes accounting system, internal control procedure and degree of reliance on internal control. The nature timing and extent of audit procedures to be performed are part of planning.

9. Documentation
Documentation is principles of auditing. The auditor can document matters, which are important in providing evidence that the audit was carried out in according with the basis principles. The working papers are prepared at the time of audit. The auditor as proof of audit work can keep these papers.

10. Audit Evidence
Audit evidence is a principle of auditing. The auditor can collect audit evidence through working papers. He can frame an opinion based on the audit evidence. The principle states the nature and sources of audit evidence. The methods to be used are also stated.

11. Accounting System
According system is a principle of auditing. It is a series of tasks in an entity by which transaction are processed for maintaining financial record. This system should recognize, calculate, clarify, post summarized and report transactions.

12. Internal Control
Internal control is a principle of auditing. Internal control means all measures used with in an organization to assure management that the organization is operating in accordance with planes and policies of management.

13. Audit Conclusion
A conclusion is a principle of auditing. The auditing can draw conclusion based on the evidence obtained from the books and records. He can note that accounting policies have been followed, financial information relates to legal requirements, the financial statement show the affairs of business, the disclosure has been made as required.

14. Reporting
Reporting is a principle of auditing. The auditing can report on the matters relating to business functions. A report may be short or detailed. It may be conditional or unconditional. There may be disclaimer or adverse opinion relating to business activities.

15. Disclosure
Disclosure is a principle of auditing. The facts and figures are disclosed for general information. The auditor can note that financial information has been presented in full all disclosure formalities are complete. The auditor must provide full information to the shareholders.

16. Capitals Or Revenue
The capital or revenue is a principle of auditing. According to the nature of business the accounting staff can record the item as capital or revenue. The wrong allocation cannot provide true information. The auditor must know the real position of each item in order to report the matter.

17. Compliance with Legal Formalities
The follow up of legal formalities is an auditing principle. The rules and regulation must be applied in order to protect the rights of interested parties. The business activities can run on lines through compliance with law.

18. Consistency
The consistency is an auditing principle. The accountant has the right to select the rate of depreciation, provision for bad debts and valuation of stock. He must follow these rates for the year to come. The changes are not acceptable at all.

Auditing Standards and Auditing Procedures

Auditing Standards

An auditing standard is a measurement of performance set up by professional authority and consent. A standard is a measuring device of applied procedures resulting in general acceptability of the result of the performance.


Audit Procedures

Auditing procedures are acts to be performed during the course of an examination. By applying perfect technique, procedure lead to proof of accuracy of the accounts and financial statements. Audit procedures constitute the course of acting available in determining the validity of standards and principles. In every audit, there must be review and observation, inspection and count, evidence, proof, accuracy of proof and reconciliation.

 

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Audit Techniques

1. Inspection
Inspection is concerned with review or examination of records, documents or tangible assets. The auditors can check many documents in order to examine the business transactions. Vouchers support every entry. Inspection of record is made note recording, authority and validity of data. The auditors commonly use this technique.

2. Observation
Observation means looking at an operation or procedure being performed by others in order to determine the manner of its performance. The auditor can observe the physical stock taking by management. He can that accounting principles are applied in preparing accounting recorded. The audit staff commonly uses observation.

3. Inquiry
Inquiry means obtaining relevant information either written or oral from resource persons within or outside the enterprise through formal or informal manner. The auditor can collect data from management through representation letter. He can inquire from debtors, creditors, bankers and other experts in the field to form an opinion.

4. Confirmation
Confirmation is a reasonable to an inquiry to prove certain data recorded in the books of business concern. The auditor can ask the management to inform the debtors for confirmation of their accounts balance. The auditor can collect information from debtors to ensure the accuracy of data. He can write letters to bank for supply of account balance kept by the bank.

5. Computation
Computation is concerned with checking the arithmetical accuracy of accounting records or doing independent calculations. An auditor may follow the accounting procedure to check the accuracy of data. The journal entry, position and balancing accounts can be compared with the vouchers to test the reliability of data.

6. Sampling
Sampling is concerned with selecting few items from whole accounting information. Audit sampling is the application of a compliance or substantive procedure to less than 100 percent of the items within an account balance or class of transactions to enable the auditor to obtain and evaluate evidence of some characteristics of the balance or class and to from or assist informing a conclusion concerning that characteristics.

7. Compliance Test
Compliance tests are designed to obtain reasonable assurance that those internal controls on which audit reliance is being placed are in affect. In obtaining audit evidence auditor is concerned with existence of internal control, effectiveness and continuity of internal control.

8. Substantive Test
Substantive test are designed to obtain evidence as to the completeness accuracy and validity of the data procedure by accounting system. They are of two types

  • test of details of transaction and balance
  • analysis of significant ratio and trends including the resulting investing of unusual fluctuation and items.

9. Analytical Review
The analytical review consists of studying significant ratios and trends and investigation unusual fluctuations and items. The application of analytical review procedures is based on the expectation that relationship among data exists and continues in the absence of known conditions to the contrary.

10. Computer Assisted Audit
Computer assisted audit techniques include audit software test packs embedded audit facilities, system software data analysis, application programme, examination, teaching, flow charting and mapping. These techniques show how the computer has various uses in accounting.

11. Reliance on Auditors
Reliance on auditors is an audit technique. The independent auditor can rely on internal auditors or other auditors for completing the work of his own audit.

12. Reliance on Experts
Reliance on experts is an audit technique. The auditor is no expert in every field. Basically he knows accounting and audit work. He is not an engineer, architect, lawyer and valuers. He has relied on auditors for seeking their expert opinion about business matters.


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Functions of Audit

1. Accounting System
The function of audit is to study accounting system. It can be stated as a series of tacks in an entity by which transaction ahere processed as a means of maintaining financial records. Such a system should recognize, calculate, clarify post summarize and report transactions. The auditor should understand the accounting system in operation in order to determine the nature timing and extent of other audit procedures.

2. Internal Control
Internal control is a function of auditing. Internal control is a process, which determine that management policies are carried out and accounting principles are followed. This functions helps to safeguards assets, location and prevention of errors and frauds. Moreover the management is able to prepare reliable financial statements in time. When the auditor notes that he can rely on internal control, the audit procedure may be less extensive. The effectiveness of internal control is to be determined by an auditor.

3. Vouching
Vouching is the function of auditing. An auditor can inspect the document, which support and prove the business transactions. The data amount and other details are checked. All entries in books of accounts are made on the basis of relevant vouchers. This function is essential to determine the accuracy of accounting records.

4. Arithmetical Accuracy
I is a function of auditing to check the arithmetic accuracy of account books and books and other papers. The audit staff verifies the figures. The errors and fraud are discovered. The management can take steps to rectify the mistakes. The responsibility of fraud can be fixed. This function helps the auditors to show true and fair view of accounting statements.

5. Capitals and Revenue
It is a function of auditing to make different between capital and revenue items. The revenue items are compared to determine income. The capital items are compared to note the financial position of any business. The income and expense relating to many years can be divided into current and coming years.

6. Verification As Assets
The verification of assets is a function of auditing. Verification is concerned with determination of value, ownership, possession and any charge on the assets of any business. The auditor can check the existence of asset. The documents and books can show the purchase price. If any loan is taken on security of an asset, such information can be collected. It is duty of an auditor to verify these assets.

7. Verification of Liabilities
The verification of liabilities is a function of auditing. The auditor can verify the liabilities from the books of accounts. The auditors must receive a certificate from management that all liabilities are included in the balance sheet. The auditors can write letters to creditors for verification of liabilities.

8. Valuation of Assets
The valuation of assets is a function of auditing. The auditors can apply accounting conventions and principles to examine and test the values of assets. The management calculates the value to assets. The auditor must critically check the assigned values. He can get help from technical personnel.

9. Valuation of Liabilities
The valuation of liabilities is a function of auditing. The value of liabilities is stated in the balance sheet. The management can examine the value on the basis of dealing made. The auditor can examine the value of liabilities from books of accounts and other papers. The auditor can confirm the value from outside sources. Independent experts should determine the value of contingent.

10. Legal Requirements
The functions of auditing are to follow the legal requirements. There are various laws like companies ordinance 1984. Income tax ordinance 1979 and stock exchange rules 1971. It is the duty of auditor to check that financial statement are prepared under the legal requirements. The auditor can note this point in the report that management has followed the legal formalities.

11. Reporting
The reporting is a function of auditing. It is the duty of auditor to submit his opinion in writing. The report may be clean or conditional. An auditor is an independent person. If he is satisfied about true and fair view, he can present clean report in case of some weakness he can give qualified report.
 

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Chapter 10 - Audit of Various Organization

* Textile Mill

* Sugar Mill


Textile Mill

Auditor should give special attention to the following points while auditing the Textile Mill.


Textile mills is a concern where cloth is knit with the help of thread.


In any Textile Mill the cotton is the basic material. Trend is prepared from cotton. Then the thread is rolled on cones. These are used in knitting the clothes. In a textile mill there are many departments as spinning department, dying department, printing department and etc.


Books of Accounts

The following are the main books, which are used to textile mills.

* Sales Books

* Sales Return Book

* Petty Cash Book

* Salary Books

* Stock Register

* Purchase Book

* Purchase Return Book

* Journey Day Book etc

Special Points

The following are the special points, which are used to audit in the textile mills.


1. Internal Control

The auditor can examine the internal control of the mills. If internal control is effective the auditor can easily complete his work of accounted. In case of unaffected control. There is difficulty in the completion of work of an auditor.


2. Raw Material

The auditor can examine in different ways, the all material that is purchased and consumed. The auditor can check the ledger of the material to verify that the figures are fact or not.


3. Fixed Assets

The auditor can also ask the management for the fixed assets. The date is different for purchase the assets. The purchase and sale of the assets is also possible. The auditor has to find out the actual value of the assets.


4. Expense of Purchase

The expenses, which are related to the purchases are added in he material cost. So, the auditor has to check that either these expense are related with the purchase or the nature of the business or not.


5. Closing Stock

The auditor during his audit has an authority to ask for the closing certificates so that the actual value of the closing stock can be find out. He can also physically, examine the store or the place where the stock is kept.


6. Written Down Stock

The auditor has to check also that the stock is in its full reality and the damaged material is also recorded at its minimum sale price.


7. Cash

The auditor should also check the cash in hand and in office. The cashier is responsible for the shortage of cash balance.


8. Depreciation

The auditor has to check that the depreciation is correctly charged. The depreciation is charged on the fixed assets for the prescribe rate. The principle of consistency must also be followed.


9. Prepaid Expense

The auditor has also be noted that the expense which are paid in advance are properly recorded in the books of accounts. The current year expense are actual expense but remaining will be treated as the assets in the balance sheet.


10. Outstanding Expense

The auditor can also check the outstanding expense. He can also check that the management has treated the outstanding expense properly and according to the rules and regulations.


11. Balance in Bank

The auditor can also check the balance in bank. He can get the statement from the bank. The bank reconciliation statement can also be prepared to find errors and frauds.


12. Valuation of Assets

The auditor can also check that the assets are to be valued as per law. The management usually fixes the valuation. If assets, which are circulating and price of fixed assets are their cost price. The auditor in this way can judge that either the management has determine the cost value accordingly by or not.


13. Plant and Machinery

The auditor can also receive the schedule of plant and machinery. The auditor has to check that either the plant or machinery is in safe hands and used for the business purpose only. The auditor has also to check the purchase and sale procedure of the plant and machinery.


14. Verification

The auditor has an authority to check the goods personally to verify that the goods which exits in the balance sheet are also present in the store. Moreover he can also verify the assets personally.


15. Vouching

The auditor can also vouch the transaction relating to the receipt and payment of the cash. The term vouching is usually concern with the comparison of the entries with the vouching.


16. Cotton Purchase

The auditor should take the proper care in checking the inward documents. He should examine the purchase quality and price and also that the purchases are according to the need.


17. Sales

The auditor should also take care about the sale. The sale may be of the thread yarn, or also fabrics. If the goods are exporting, the auditor should also take care for it.


18. Sales Tax

The auditor has to check also that the company has correctly recorded the amount of sale tax and that the sale tax is paid properly.


19. Export Quota

The textile mills are provided the allocated export quota. The auditor has to check that the company has operated within the export limits or not.


20. Financial Charges

In our country, the textile mills are usually, provided the borrowing facilities from the bank. The auditor has to check that either the interest or mark up etc is paid or classified properly or not.


21. Provision for Tax

The auditor should also take care about provision of tax. He can take help from the tax advisor of the company.


22. Foreign Exchange Earning

The auditor has to check the utilization of foreign exchange earning for business will be acquired into any possible misuse will be prepared to the qualified.


23. Excise Duty

The payment was properly made and any aversion to be qualified production schedule prepared in an explanatory manner.


24. Sale of Scrap

The auditor should see that the sale of the scrap is properly maintained or not.


25. Wages and Salaries

The auditor has also to check that the wages or salaries are properly paid to the workers or not and verify them.

 

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Sugar Mill

The auditor should keep in mind the following points while auditing the accounts of a sugar mill or company.


Books of Accounts

The following are the main books of accounts, which are used in the industries.

  • Day Book
  • Sales Book
  • Journal Ledger
  • Purchase Book
  • Sales Return
  • Purchase Return
  • Cash Book
  • Petty Cash
  • Stock Register
  • Form Register


Special Points

1. Internal Control
The auditor has to check the internal control system of the mill. If the internal control system is properly maintained the auditor can easily fulfil his work. On the other hand he has to work greatly.

2. Purchases
The auditor has to check the purchases, which are made by the management. The sugarcane is the main product, which is purchased for the industry. There is need to be checked the auditor all the detail about the purchase to know the nature of the purchases

3. Cash Balance
The auditor can also examine the cash balance in the office and can also note the usage of petty cash book.

4. Sales
The auditor can also examine the sales of the mills from the sales ledgers. Usually the main item of sales is the sugar but the molasses candies chipboard and also the mills management sells the wine.

5. Vouching
The auditor can verify the entries with the actual vouching. This is done to check the accuracy of the accounts.

6. Loans
The auditor has to check also either the management of sugar mill has provided loan to the sugarcane suppliers. And if so then the loan either is adjusted against the payment to cultivators. The auditor has also an authority to check the vouchers for loan.

7. Depreciation
The auditor can also vouch the depreciation on the fixed assets. Their rates and also the way of calculating the depreciation. The depreciation is charged the same rate from year to year.

8. Carriages of Railway
The auditor can also examine the expense, which are to paid or still payable to the railway company.

9. Farming
Sometimes, the sugar mills may have their own agriculture farms. In this case the auditor can check and verify the income and expense of that farms.

10. Prepaid Expense
The auditor has to check also the expense, which is paid in advance by the management. The auditor has to verify that either these expenses are paid accordingly or not.

11. Unpaid Expense
The auditor has to check also if there are some unpaid expenses. The auditor should be pointed out that the adjusted entries are made and the amount can be verified from the financial statement.

12. Accrued Income
The auditor has to see if there is some accrued income. He can vouch the income statement and balance sheet for this purpose.

13. Unearned Income
The auditor can also point out the income, which is not earn still. For this purpose he can check the financial statements. The account books are also helpful for this purpose.

14. Costing
The auditor can also check the totals, sub totals, cost and carry forward of the balances. It is done to check that the figures are fact and according to the documents.

15. Research and Developments
Some sugar mills have better development and research on the seeds and plantation of the sugarcane. The scientist discovers new types of the seeds and also the better varieties of sugar cane. The auditor checks and verifies that expense and their adjustment.

16. Sales of By Product
The molasses is the main by product of the sugar cane. The auditor can check and verify the sale and its treatment in the accounts.

17. Seasonal Workers
A sugar mill operates on seasonal basis. Only in the seasonal period workers are employed. The auditor can check the record for attendance etc.

18. Fair Price Shop
In usually the sugar mills have the fair shops. In these shops the sugar is sold at the subsides rate. The auditor checks the sale of the year and stock at the end of the year.

19. Excise Duty
First of all it will be checked where these sales were understand. The auditor can evasion of excise duty on the part of the management is discovered.

20. Exports
The auditor can point out if there are some exports. He can be judged them by the valid letter of credit.
 

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Chapter 14 - Investigation

* Meaning of Investigation

* Kinds of Investigation

* Objects of Investigation








Meaning of Investigation

Investigation implies an inquiry into the accounts and records of a business concern. It is an examination of accounts and records of an undertaking with some special purpose in view. The main purpose of such inquiry is to ascertain the true financial position of the business concern or its normal profit earning capacity or the extent of fraud, if any or to inquire about the suspected mismanagement etc. So, the investigation is a sort of special audit with a particular job in view.


 

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Chapter 15 - Auditor's Report

* Audit Report

* Essentials of Audit Report

* Qualified Report

* Auditor's Duties


Audit Report

Auditor's report is the expert's opinion expressed by the auditor as to the fairness of financial statements.
The audit report is the end product of every audit. It is the medium through which an auditor expresses his opinion on the financial statements. Audit report is an important part of audit process since it summarize the results of the examination work conducted by the auditor. The report shows the scope of the work done and the responsibility assumed by the auditor regarding the fairness or otherwise of hte financial statements. The auditor draws appropriate conclusions by examining the various statements and accounts, which he conveys through the audit report. It is a formal communication by the auditor to the shareholders throwing light on the state of affairs of the company. Audit report is addressed to the members of the company and is considered at the Annual General meeting of the company. Audit reports should be so drafted that they remain simple and intelligible to a common man. The audit report should be explicit so as to provide greater information and protection to the interest of shareholders and others.

Essentials of Audit Report

1. Title
An auditor report must have appropriate title, such as "Auditor's Report". It is helpful for the reader to identify the auditor's report. It is easy to distinguish it from other reports. The management can issue any report about the business performance. The title o the report is essential.
2. Addressee
The addressee may be shareholder or board of director of a company. The auditor can audit financial statements of any business unit as per agreement. The report should be appropriately addressed as required by engagement letter and legal requirements. The report is usually addresses to the shareholders or the board of directors.

3. Identification
The audit report should identify the financial statement that have audited. The financial statement may include trading profit and loss accounts, balance sheet and statement of changes in financial position and sources and application of frauds statement. The report should include the name of the entity. Moreover the data and period covered by the financial statement are also stated in it.

4. Reference to Auditing Standards
The audit report should indicate the auditing standard or practice followed in conducting the audit. The international auditing guidelines need assurance that the audit has been conducted as per set standards.

5. Opinion
The auditor's report should clearly state the auditor's opinion on the presentation in the financial statement of the entity's financial position and the result of its operations. The statement give a true and fair view is an auditor's opinion. This opinion is usually based on national standard or international accounting standards.

6. Signature
The audit report should be signed in the name of the audit firm, the personal name of the auditor or both as appropriate.

7. Auditor's Address
The address of auditor is stated in the audit report. The name of city is stated in the report for information of the readers.

8. Date of Report
The report should be dated. It informs the reader that the auditor considered the effect on the financial statements and in his report of events or transactions about which he become aware the occurred up to that date.
 

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Qualified Report

A qualified opinion is given when the auditor fells the he cannot issue an unqualified opinion. The effect of disagreement or limitation on scope is not so material as to require an advance opinion or a disclaimer of opinion. A qualified opinion should be expressed as being except to the effects of the matter to which the qualification relates.

1. No Proper Books
A qualified repeat is issued when proper books of accounts have not kept by the business concern. The law estates the number of books to be maintained by the companies by the companies. The failure to keep necessary books of accounts induces the auditor to mention the fact in the reports.

2. Informal Statement
The law states the formal for financial statement. The fourth schedule and fifth are given in the companies ordinance 1984. The companies must prepare their statement according to schedule otherwise the auditor can mention weakness in the report.

3. Disagreement Between Books and Statements
The financial statement figures must tally with figures recorded in journal and ledgers. The different in figures is not acceptable as it may lead to receive the shareholders. The auditor can qualified his report that figures of books and statement are different.

4. Inconsistent Accounting Policies
The accounting policies must remain the same from year to year. The changes in depreciation rate valuation of stock and provision for bad debts can disturb the financial statements. The auditor can state the inconsistency in accounting policies toward by the management.

5. Ultra Vires Payments
The management can misuse the power of doing the business. They may not followed articles of association or companies ordinance 1984. The payment of dividend out of capital is an example. The auditor must report to the shareholders about the misuse of powers.

6. Expenditure Incurred
The expenditure incurred during the year must be to the purpose of business of company. The expenses incurred objective may be state by the auditor in the report. The management is responsible to these wrong payments.

7. Business Conducted
The business conducted investment made and the expenditure incurred during the year may not meet the requirement of memorandum of association, articles of association and the companies ordinance. The auditor can inform the owners about the violation of law.

8. Scope Limitations
The management may have valued closing stock prior to date of appointment of auditors. There is a scope limitation as auditor was absence at the time of stock valuatio. The auditor can qualify his report as to the valuation of stack talking.

9. In Appropriate Accounting Method
The auditor may note that depreciation has not been charged on building. The depreciated on plant and machinery may be recorded at fewer rates. The difference in actual and recorded expenses may be stated in the report.

10. Inadequate disclosure
The management may have entered in to an agreement for issue of debentures for plant and expansion. The agreement may restrict the right to pay dividend to shareholders for next years. The auditor can disclose such agreement to the owners of the company.

11. Departure from Accounting Practice
The qualified report is issued when an auditor is not satisfied with the management policies. The company may not record the provision for loss on long-term contract. The disagreement with management can be recorded as adverse opinion in the report for the information.

12. Breakdown of Accounting System
The auditor can issue the qualified report when he is unable to form an opinion about the financial statements. There may be fire at computer center business office. The figures may be estimated so auditor can disclaim his opinion.

13. Failure To Prove Case Sales
The auditor can check the internal control system. The company may be dealing on cash basis. All sales may be in terms of cash. The poor internal control system may create hurdle to verify cash sales. The auditor can submit qualified report with out opinion.

14. Contingency
The auditor may qualify his report where there is contingency (tax dispute court case) which is significant to affect the financial statement of the company. The auditor has the right to report the matter to the shareholders. The items must be stated in the footnote as well as audit report.

15. No Zakat Deduction
The Zakat may be deductible at sources under the Zakat and usher ordinance 1980. The auditor may examine the relevant law. He can not the weakness of the management for deduction of Zakat. This weakness may be present in the audit report.

16. Incomplete Information
The auditor may not obtain complete and full information and explanation for the purpose of audit. The facts can be presented to the owners that he is unable to collect necessary information. He can submit qualified report in order to draw attention. He can submit qualified report in order to draw attention of owners.

17. No Access to Books
The auditor may be refused to have access to the books of accounts and other relevant record. In this case the auditor is unable to collect true information necessary for the purpose of audit. The qualified report can be presented to the shareholder due to non-availability of all or any book.


 

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Auditor's Duties in Respect of Statutory Report

1. Statutory Report
The report, which is submitted by the directors in the first general meeting of the shareholders is called statutory report. The auditors should duly verify it. The auditor will take following important steps before certifying the statutory report.

2. Study of Legal Documents
The company Memorandum and Articles as also the prospectus should be carefully studied and notes should be made of items affecting terms of share capital issue, minimum subscription, brokerage on shares or underwriting commission, acquisition of assets and liabilities from vendors, mode of satisfaction of purchase consideration etc.

3. Checking of Shares
A complete and exhaustive audit should be made of share capital and debentures issue, including checking of entries in the Register of members and he Register of Debenture holders.

4. Checking of Cash in Hand and Cash at Bank
In order to ascertain the correct balance of cash in hand and in bank, it would be necessary to include in the checking the revenue receipts and payments also.

5. Verify the Capital Receipts and Payments
A through vouching and checking of the cash book transactions for the purpose of verifying the capital receipts and payments will be necessary.

6. Checking of Commission
Auditor should check all types of commission paid or unpaid with the issue or sale of debentures to any one.

7. Verify the Borrowing Power
It should be seen that the limit, if any placed on the borrowing powers of the company is not exceeded.

8. Verify the Minimum Subscription
The auditor should ascertain that the requirements of the law as to minimum subscription have been duly complied with.

9. Checking of Bio Data
Auditor should also verify the names, addresses and descriptions of the directors manages agents and auditors.

10. Verify the Arrears
Auditor should verify the arrears due on calls from directors, managers and agents etc.

11. Scrutiny
Auditor should examine very carefully all the items, which are included in the preliminary expenses account.

12. Checking of Minutes
Director's minutes will have to be referred to in order to see that the allotment of shares and debentures is properly done and that all capital expenditure and loans borrowed are duly sanctioned.

13. Examine the Passbook
Auditor should examine the bank passbook and verify the receipts and payment with it.

14. Specimen of Auditor's Certificate
If the undersigned being the auditor of the company, hereby certify that so much of the report are relates to the shares allotted by the company and the cash received in respect of such shares and receipts and the payments of the company is correct.
 

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Chapter 16 - Audit Evidence

* Meaning of Audit Evidence

* Importance of Audit Evidence

* Objectives of Audit Evidence

* Procedure of Audit Evidence

* Key Points for Collecting Evidences


Meaning of Audit Evidence

Any document, piece of information, voucher written or oral statement of any procedure which assists an auditor in forming his opinion in regard to the accuracy of data under audit.

The role of the auditor is that of an independent professional critic who investigates, analyses and evaluates the information underlying the statement as a means of reaching a conclusion as to their fairness. Before and auditor can express an opinion on financial statements, he must have sufficient evidence that

  • The items in the financial statements are supported by the balances in the ledger accounts.
  • The balances in the ledger account summarize correctly the numerous debit and credit entries.
  • These debit and credit entries in the accounts represent proper accounting interpretation of all the transaction entered into be the business.
Importance of Audit Evidence

While accepting the appointment, an auditor accepts to discharge certain legal obligations and responsibilities. In discharging his responsibility, the auditor should convince himself, in the first instance, that the accounts, he is reporting upon, are correct and the financial transaction recorded are duly supported by the documentary evidence. If he is not satisfied with the accuracy of the accounts or the authenticity of evidence, there is no point in certifying the accounts as correct. The examination of evidence is therefore necessary, so that strength would be based for independent, impartial and expressed opinion of the auditor. On auditor's opinion, the Directors, Shareholders and other initiative action.

Objectives of Audit Evidence

The objects of verifying evidence are

  • To ensure that the errors, if any, in the data would be discovered by verifying the evidences.
  • To facilitate the completion of audit programme scheduled and undertaken.

I
 

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Procedure of Audit Evidence

The following procedure is generally followed for the verification of evidences

  • Verification of accounts of account balances shown in the financial statements or the accounting reports
  • To ensure that the procedure installed for control purposes is properly followed
Looking at the evidence for the balance amount shown in the ledger, the auditor has to work backwards in order to ensure that all those transactions responsible to give rise to that balance is also duly supported with evidences.
The auditor should also carefully ensure that procedures being followed by the organization are effective and do not have any room for leakages. In the area where the financial involvement is heavy, the auditor should carefully review internal control procedures and the implementation of procedures designed and installed for an effective control of function.

Key Points for Collecting Evidences

1. Physical existence of the assets
2. Authoritative documents
3. Statement by third parties
4. Calculation by the auditor
5. Satisfactory Internal Control
6. Subsidiary or detailed records
7. Subsequent action of the company
8. Formal statement by company's officers
9. Interrelationship with in the data examined.
 

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Chapter 13 - Auditor

* Qualification of an Auditor

* Appointment of an Auditor

* Removal of an Auditor

* Rights Or Power of an Auditor

* Qualities of a Professional Auditor

Qualification of an Auditor (Section 226 (1) and (2)

Following persons are qualified to be appointed as auditor of a company.

1. Practicing Chartered Accounts (Sec 226 (1)J)
A person shall not be qualified for appointment as auditor of a company unless he is a chartered accountant within the meaning of the chartered accountant act 1949.
A chartered accountant means a person who is the member of the institute of chartered accountant of Pakistan. He will be Deemed to be in practice. When individually or in partnership with other chartered accountants in practice he for consideration received or to be received.
Practice of Accountancy
He engages himself in the practice of accountancy.
Verification
He offers to perform or performs the services involving the auditing or verifications of the financial transactions, books of accounts or records or the preparation, verification or certification of financial accounting and related statement or holds himself out to the public as an accountant.
Professional Services
He renders the professional services or assistance in or about matters of principal or detail relating to accounting procedure to the recording, presentation or certification of financial facts or data.
Renders the Services
Renders the services as, in the opinion of the council are or may be renders by a chartered accountant in practice.

2. Certified Auditor (Sec 226 (2))
A part from practicing chartered accountants, a person holding a certificate under the restricted auditor's certificate rules, 1965 is also qualified to be appointed as auditor of a company. Such certified auditors are subject to the rules framed in this behalf by the central Government.
The object of the provisions as to qualified is to ensure that only persons of proven worth and standing and under the discipline of a statutory body, are appointed as auditor.


Disqualification {Sec 226 (3)(4)(5)}

The following person cannot become the auditor of the company according section 254.

  • A body corporate
  • An officer or employee of the company
  • A person who is the employment of an officer or employee of the company.
  • A person who is indebted to the company for an amount exceeding Rs. 1000 or who has given any guarantee of any third person to the company for an amount exceeding Rs. 1000.
  • The spouse of a director of the company.
  • A person who was a director other officer or employee of the company at any time during the preceding three years.
  • A person who is a partner of a director, officer or employee of a company

According to Section 226(4) a person shall not be qualified for appointment as auditor of any body corporate. Further if the auditor already holds the appointment as auditor in the specified number of companies as per Section {Section 224(1-13)}, he will be disqualified for further appointment as auditor in any other company.

Appointment

Section 252 throws light upon the appointment of an auditor:

Appointment of First Auditor By Directors
First Auditor
The co-operative law authority can appoint the first auditor of a company if the company in the general meeting does not appoint the first auditor within 120 days of the date of incorporation of a company.
Casual Vacancy
The board of directors is empowered to fill any casual vacancy in the office of an auditor except one, which is caused by prior resignation.

Appointment By Shareholders
In case the board of directors fails to appoint the auditor, the company can appoint the first auditor within 120 days of the date incorporation of the company.

Removal of an Auditor

According to Section 224(3)of the Companies Act, any auditor may be removed from the office before the expiry of his term but it can be done only by the company in it general meeting and with the previous approval of the control Government.
The auditor may be removed in the following cases.

1. Removal of First Auditor
The first auditor can be removed by the members in the general meeting of the company. It is immaterial whether the auditor has completed his term of appointment or not. Another person can be appointed in place of first auditor in the general meeting. Notice of nomination of such other person to be appointed, as auditor must be given at least 14 days prior to the general meeting.

2. Removal of Other Auditor
Other than the member in the general meeting of the company prior approval of the central Government to remove can remove the first auditor the auditor must be obtained in that behalf.
 

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Rights Or Power of an Auditor

Following are the important rights of the auditor

Access To Books
According to Section 227(1) the auditor of a company has a right of access, at all items to the books and accounts and voucher of the company, whether kept at the head office of the right of access to books etc is an absolute right and is not subject to any restriction exception or qualification. This means that the auditor can examine the books vouchers etc at any time during normal working hours.

Right of Inspection
It is a right of the auditor that he can inspect the record of the company at any time. He can visit without any notice and verify the cash or any document.

Right of Information
According to Section 227(1) the auditor has the right to obtain any information and explanation from the officers or directors of the company as he may think necessary for the performance of his duties as an auditor. If any information or explanation is refused on the ground that it is not necessary for the performance of his duties as auditor. He may report to the members accordingly.

Access to Branches
According to Section 228(2) the auditor has aright to visit the branch office of the company if any, if a duly qualified auditor has not audited the accounts of company branch and if he deems it necessary to do so for the performance of his duties as auditor.

Receiving Notices
According to Section 231 a company auditor has a right to receive all notices and other communications relating to any general meeting of the company, which any member of the company is either to have sent to him.

Right of Attending the Meeting
According to Section 231 the auditor has a right to attend any general meeting and to be heard there at any part of the business, which concerns him as auditor, however, the right to attend a general meeting and to speak there at in not mandatory.

Report to Member
According to Section 227(2) the auditor has a right to make a report to the members on the account examined by him and to state whether the said account give the information required by the companies act in the manner which is required.

Sign Audit Report
According to Section 229, the auditor has a right to sign the auditor's report or authenticate any other document of the company.

Seek Legal and Technical Advice
The auditor has a right to seek opinions of experts in different fields whenever he feels it necessary as he is not expert in all the areas.

Receive Remuneration
According to Section 224(8) the auditor has a right to receive remuneration for auditing the accounts of the company after he has completed the work of audit even if he is dismissed in the middle he has a right to get full remuneration of the year.

Speak
The auditor has a right that he can speak in the annual general meeting for the explanation of some matters, which are related, with the accounts of business.

Present in Meeting
For the safeguard of his right the auditor has a right to remain present in the meetings of the company. Sometimes the business accounts may not be presented before the shareholders for the approval. In this time the auditor can protect himself.

Opinion
The auditor has also a right to consult the experts for some matters. In order to clear the doubt he may get the help of the technical services. So the auditor has also a right of seek the opinion.

Correction
The auditor has also a right of correction. He can make correction in the written or spoken matters. Even that he can make a revised statement if he founds any written mistake in it.

Representation
The auditor has also a right to defend himself if he is asked to leave the office in the meeting. So he can make the representation in meeting. He has a right to remain in business for the full tenure.

Important Note
It is clear that the right of an auditor cannot be limited either by the articles of association or by the resolution of the members


 

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Essential Qualities of an Auditor

Following are the essential qualities of an auditor:


1. Professionally Competent

It is the basic quality of an auditor. He must have a complete and thorough knowledge of the accountancy. To understand the accounting details he can apply his knowledge and skill. It is only possible if he has a sound background in accountancy and he is professionally competent.


2. Honest

This is the personal quality of an auditor. He should have the high moral standard. It is his duty to report on the fact basis. The auditor must be honest and sincere with his profession. He is responsible not to sign any paper which is no correct under his observation.


3. Up to Date Knowledge

An auditor's knowledge of auditing must be up to date. He must know the techniques of auditing. He must have the knowledge of other subjects relating auditing.


4. Knowledge of Business/Mercantile Law

It is the professional quality of an auditor to aware of the mercantile law, he has a complete knowledge of Contract Act, Sales of Good Act, Agency, Negotiable instruments Act, Partnership Act etc.


5. Knowledge of Taxation Law

It is also a professional quality of an auditor. He is aware of income tax ordinance 1979, sales tax and excise act and wealth tax etc this is helpful in checking the correct return of income etc.


6. Intelligent

It is also important quality of an auditor that he should be intelligent.


7. Qualification

For a professional auditor it is necessary that he should be charted accountant. According the company's ordinance 1984 it is essential qualification for auditor.


8. Tactful

It is also the personal quality of an auditor. Technical information is required to comment and criticize the policies of management. In case of missing can collect it from the client.


9. Maintain Secrecy

It is another basis personal quality of an auditor. In the business world there is a keen competition and if the auditor does not care of the secrecy of the business, then the client of the auditor has to face a lot of difficulties. So, the auditor must maintain the cent percent secrecy among the clients.


10. Patience

It is also the personal quality of auditor when any document is received by him he cannot make hurry to sign it or express or implied promise to provide the proof later on. In spite of it he personality check the records to know the true views.


11. Critical Attitude

The attitude of an auditor must be positive. By this quality he can get the desirable results due to favourable thinking. If he is confused about some matters he can go into the details to clear it.


12. Bold and Courageous

Auditor should be bold and courageous person. Any authority should not influence him. He should possess the courage to face the difference of opinion between him and client on any issue.


13. Courteous

It is an important quality, which the auditor should possess. His attitude towards the staff of client should be very humble and polite. He should also stress on his own staff to be courteous with the client.


14. Budget Preparation

The auditor has a quality of preparing the budget. According to the facts and figures of the Previous year, the estimates are established for the next year. The auditor can check that these budgets are according to their facts and corrects.

Personal Qualities

15. Independence

Independence is the personal quality of an auditor. This quality is desirable for independent opinion on business activities. He cannot be influence directly or indirectly by other people. An auditor must be independent at the time of programming investigation and reporting. He cannot change his programme due to management interference.


16. Vigilance

This is also the quality of an auditor. By this quality the auditor can discover the errors arid frauds. The auditor can also watch and check that if accounting staff has made any fraud or error. Because he has to be alert minded so that he cannot avoid errors and work well.


17. Judgement

An auditor must have the qualities of judgement. Judgement is involved in selecting depreciation, provision for bad debts, inventory valuation. The auditor can apply professional knowledge; experience and ethics to make decisions, which have no, prescribe areas.


18. Common Sense

An auditor must have common sense. He can make difference between essential and non-essential information. An item, which can influence the decision of other people, is considered as material. The auditor can use common sense to declare it as important rather then application of principles.


19. Prudence

Prudence is the personal quality of an auditor he can be asked to give advise on financial matters. He can be allowed to suggest improvement in accounting methods and techniques. There is a need to use prudence for guiding the businessman when he is asked to do so.


20. Practical

An auditor must have practical training. He can seek training in the field of finance, management and business organization. An audit staff is able to pass through a comprehensive training. This practical training is part of this professional life.


21. Self Control

An auditor must have qualities of self-control. The balance work shows regular progress on the part of audit. There is no over work or less work every day. A discipline is created in every work. The quality of audit work is improved due to discipline.


22. Initiative

An auditor must have the quality of initiative. He can start and complete an audit work without any help. The auditor must have experience, qualification and courage to complete the auditor work. He has courage to deal with audit work even in difficult situations.


23. Leadership

An auditor must have leadership. He is the working under his leadership. He must have communication ability. He can motivate and control the audit staff. As a team leader he can guide the auditor through practical-demonstration.


24. General Knowledge

It is also a professional quality of an auditor. He is aware of the economic and political conditions. He is also aware of the latest knowledge, which affects the business concern.


25. Electronic Data Processing

The auditor should also aware of the use of computer in the business for getting the information. He is must also trained in handling the data through the computers
 

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Chapter 12 - Internal Audit & Internal Check

* Internal Audit

* Objectives of Internal Audit

* Essentials of Internal Audit

* Functions of Internal Audit

* Advantages of Internal Audit

* Limitations of Internal Audit

Internal Audit

Internal audit is an evaluation and analysis of the business operation conducted by the internal audit staff. (who are employee of the business). It is the part of over all system of internal control established in an organization.


Internal audit is the independent appraisal of activity with in an organization for the review of accounting, financial and other business practices as protective and constructive arms of management. It is a type of control which functions by measuring and evaluating the effectiveness of other type of controls.


Professor Walter B. Meigs define internal audit


Internal auditing consist of a continuous, critical review of financial and operating activities by a staff of auditors functioning as full time salaried employees.



1. Proper Control

The purpose of internal control is to keep proper control over business activities. When there is proper control there is maximum efficiency. The internal control can determine the degree of control over work.


2. Accounting System

The purpose of internal audit is to evaluate the accounting system. It is concerned with checking proper authority for transactions like purchase, retirement and disposal of fixed assets. The voucher can be compared with entries on order to determine that figures are facts.


3. Help Management

The purpose of internal audit is to help the management. Internal auditor can point out the weaknesses. The internal audit can be used as a tool to correct the situation. The management functions can be performed properly.


4. Working Review

The purpose of internal audit is to review the working of business. The working of current year can be reviewed in detail just the successful area of working. There is a need to locate the weak points. The corrective measures can be taken for proper working.


5. Asset Protection

The purpose of internal audit is to protect the assets. The proper record of assets must be there. Internal auditor can examine the valuation, verification and possession. The purchase and sale of assets must be made under properly authority.


6. Internal Check

The purpose of internal audit is to evaluate the internal check system. There is division of duties among the emp is to loyees. When all staff member are working properly it means there is effective internal check system. The work of an auditor is reduced. He can apply test checks to complete audit duty.


7. Fair Statements

The purpose of internal audit is to detect the error in the accounting records. The work of internal audit can help the management to see that accounting record is in order.


8. Check Error

The purpose of internal audit is to detect the errors in the accounting records. The work of internal auditor goes side by side there fore there are minimum chances of errors. The accounting staff can rectify mistake to prepare accounts at the end of year in order to help the external auditor.


9. Detect Fraud

The purpose of internal audit is to detect frauds in the books of accounting. As the work of accounting staff is over the internal audit is started. Accounting staff remains alert because there is no time gap between recording and checking. Thus detection of fraud is possible with it.


10. Determine Liability

The purpose of internal audit is to determine liabilities of employees. The duties are divided among the staff. It is easy to note the negligence on the part of employees. The internal audit can pin point the person responsible for carelessness.


11. Help in Independent Audit

The purpose of internal audit is to help an independent audit. The external auditor can rely on internal auditor and there is no need of cent percent checking. In this way there is saving of time and money due to internal audit.


12. Performance Appraisal

The purpose of internal audit is to check the performance appraisal. The management must achieve the targets fixed in budgets and plans. The internal audit is a tool to evaluate the working of each management function.


13. Provide Suggestions

The purpose of internal audit is to provide suggestions for improvement of business activities. The internal audit staff can suggest the ways and means to remove the difficulties. Anyhow the audit cannot compel the management to implement suggestions.


14. New Ideas

The purpose of internal audit is to seek new ideas relating to procedures, marketing, financing and other business matters. The internal audit staff can provide new ideas about various business matters. The viable ideas can be put in to practice for the benefit of business.


15. Use of Resources

The purpose of internal audit is to determine the proper use of resources. The misuse of resources can increase the cost of doing the business. The proper use of resources means there is efficiency on the part of management.


16. Accounting Policies

The purpose of internal audit is to examine the accounting policies. The understanding of accounting system and procedure is helpful to device the effective audit plans procedures. The internal auditor may find any weakness in the internal control. He can comment on the accounting policies.


17. Special Investigation

The purpose of internal audit may be to conduct special investigation about any business matter. Internal audit can be used as a tool to note the effectiveness of management function


 
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