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Auditing full notes

Bachelors of Business Administration (Guru Gobind Singh Indraprastha University)

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B.Com 5th Sem. (Hons.) Subject- Auditing

SYLLABUS

Class – B.Com. V Sem. (Hons.)

Subject – Auditing

UNIT – I Introduction, Meaning & Objectives, Fraud Errors Basic

Principles and Techniques. Classification of Audit.

UNIT – II Audit programme: Audit programme, audit books, auditor’s

working books. Test checking routine checking.

UNIT – III Auditing planning: internal control, internal check & internal
audit. Vouching & Verification of assets and liabilities.

UNIT – IV Company auditors: Qualifications and disqualifications,

appointment, removal, remuneration, right duties & liabilities.

UNIT – V Recent trends in auditing, basic consideration of audit in EDP

environment.

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UNIT-I
INTRODUCTION TO AUDITING
Meaning and Objectives Of Auditing - According to AAS-1 An audit is an independent examination of
financial information, of any entity, whether profit oriented or not, and irrespective of its size or legal
form, when such an examination is conducted with a view to, expressing an opinion thereon.
The person conducting audit is known as the auditor, he makes a report to the person appointing him
after due examination of the accounting records and the accounting statement in the form of an opinion
on the financial statements. The opinion that he is called upon to express is whether the financial
statement reflects a true and fair view.
A complete and comprehensive definition : “Auditing is a critical examination of the books of accounts
of an organization, which is conducted by an independent individual skillfully on the basis of vouchers
and other information, with an object to reporting that the profit and loss account prepared for a
certain period expresses the true and fair profit or loss of the organization and the balance sheet of the
organization, prepared on a certain date, depicts a true and fair picture of the financial position of the
organization on the particular day”.

Advantages of an Audit:
(a) Safeguards the financial interest of persons who is not under management of the entity, i.e.,
partners or shareholders.
(b) Acts as a moral check on the employees from committing frauds and errors.
(c) Helpful in setting liability for taxes, negotiating loans and determining the purchase
consideration for a business.
(d) Useful for setting trade disputes whether it is a matter of performance bonus or increment or it
is claim for the damages due to fire or other accident.
(e) Discover the areas of wastages and losses occurring due to the absence or inadequacy of
internal checks or internal control measures.
(f) Audit report generally state the fact that whether proper books of account and related records
have been properly kept so as to make the deficiencies or inadequacies good in this respect.
(g) As an appraisal function, audit reviews the existence effectiveness and continuity of various
controls in the organizations and reports weaknesses, inadequacies, etc., in them.
(h) Audited accounts are of great help in the settlement of accounts at the time of admission or
dissolution or death or retirement of partner.

Distinction between book keeping and Auditing

Point of Book keeping Auditing
Difference
1. Nature It includes actual recording of It is analytical in nature. It is relating to
transactions. verification of accounting records.
2. It starts when business transactions take It starts when accounts writing is over.
Commencement place.
3. Object The object is to record all the facts of The object is to opine about truthfulness
business. and fairness of financial statement.
4. Qualifications No formal qualifications are required for An auditor must possess formal
a book keeper. professional qualifications.
5. Reporting A Bookkeeper is not required to submit An auditor has to submit a report to the
a report unless specially called for. concerned authority in routine.
6. Status A Book keeper is an employee of an An auditor is not an employee of an
organization. organization.
7.Scope Recording of all the facts of business are How much transaction should be verified
necessary for the purpose. is a matter decided by the legislation and
pronouncement of the institute.

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Distinction between Accounting and Auditing:

Point of Accounting Auditing
Difference
1. Meaning It includes recording of all the day It is critical examination of the
to day transactions in the books of transactions recorded in the books of
accounts leading to preparation of accounts.
financial statements to get
meaningful information.
2. Nature It is concerned with finalization of It is concerned with verification of true
final accounts. and fair view of financial statement.
3. Objects The object is to ascertain the The object is to opine about truthfulness
operational results. and fairness of financial statements.
4. Commencement Accounting begins when book Auditing begins when accounting ends.
keeping ends.
5. Scope It involves maintenance of books of It depends upon the agreement or upon
accounts. It does not go beyond the provisions of law and may go beyond
books of accounts. books of accounts.
6. Qualifications An accountant needs no formal An auditor needs prescribed
qualifications. qualifications.
7. Reporting An accountant does not submit any An auditor has to submit report in the
report. prescribed form.
8. Status An accountant is an employee of an An auditor is not an employee of an
organization. organization.
9. Errors and Accountant may commit errors and Auditor cannot afford to commit errors
Frauds frauds. and frauds.

The objectives of audit:

1. Examination of the Truth and Fairness of Final Accounts
2. Discovery of Errors
3. Detection of Fraud
4. Prevention of Frauds and Errors
5. Advice to Management
6. Ascertaining true Financial Position of Business
7. Objectives determined by International Auditing Practices Committee

Basic Principles Governing an Audit

1. Integrity, objectivity and independence
2. Confidentiality
3. Skill and Competence
4. Work Performed by Others
5. Documentation
6. Planning
7. Audit Evidence
8. Accounting System and Internal Control
9. Audit Conclusions and Reporting

Types of Audit
(1) On the basis of need of audit
a. External Need b. Internal Need
(2) On the basis of period of audit
(a) Continuous Audit (b) Interim Audit (c) Final/Annual Audit
1. On the basis of Need

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a. The auditor appointed to satisfy the internal or managerial needs of the organization is
known as INTERNAL AUDITOR. According to AAS-7 The internal audit function constitutes
a separate component of internal control established with the objective of determining
whether other internal controls are well designed and properly operated.
b. The auditor appointed to satisfy the External Needs of the organization is known as
EXTERNAL AUDITOR.
c. If external need is a statutory need the same external auditor is known as STATUTORY
AUDITOR. For example :

2. On the basis of Period of Audit

A continuous audit is one where the auditor or his staff is constantly engaged in checking the accounts
during the whole period or where the auditor or his staff attends at regular or irregular intervals
during the period.
The following features of continuous audit come to light on analysis of the above definition.
(a) It is carried throughout the year.
(b) It is conducted at regular or irregular intervals depending on auditors professional
judgment.
(c) The accounts are taken for scrutiny as and when prepared.
(d) Final accounts i.e. trial balance, profit and loss account and balance sheet are audited at the
end of the year.
Advantages of Continuous Audit
(i) Exhaustive and intensive.
(ii) Greater possibility of exposure of errors and frauds.
(iii) Early detection of errors & Frauds.
(iv) Moral impact on employees.
(v) Quick preparation of final accounts.
(vi) Early planning for future.
(vii) Proper advice of auditor
(viii) Early rectifications of errors.
(ix) Facility for interim accounts.

Disadvantages of Continuous Audit

(i) Possibility of change in audited accounts.
(ii) Snags in routine work.
(iii) Adverse moral impact
(iv) More expensive
(v) Dislocation of sequence of work.
(vi) Mechanization of work
(vii) Sloth in work.

Annual Audit : Annual audit is one which is carried out only at the end of an accounting period, spicer
and pegler have defined it as an audit which is not commenced until after end of the financial period
and is then carried on until completed. Annual audit is also called periodical, final or completed audit.

Characteristics: The main Characteristics of annual audit are as follows :

(a) It is done at the close of the financial year books of account have been closed and final
accounts drawn by the management of the entity.
(b) The audit work is completed at a stretch i.e. in a single continuous session.
(c) Generally this type of audit suitable to small organizations.

Interim Audit : An audit conducted between two annual audits is called interim audit. More commonly
it is known in case of banks as half yearly review. Interim audit helps management to take timely and

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appropriate decisions for example declaration of interim dividend or valuation of shares to decide swap
ratio in case of a merger. Interim audit is gaining statutory status now a days various regulating
authorities like SEBI and RBI requires periodic audited financial statements in between the two annual
audited financial statements. However, it is generally carried out by professionally qualified auditors.

Particulars Interim audit Concurrent audit

Meaning An audit that is taken up Refers to verification of
between two annual audits is transactions of on a
called an interim audit. continuous basis at various
points of time during the
same year.
Time period A specific date, as per the The period of verification is
client or regulatory professional judgement of the
authority’s requirement is auditor and sometimes
taken into account, e.g. 30 determined by the auditee e.g.
Sept., 31 Dec. concurrent audits in public
sector banks.
Financial statements Financial statements are Financial statements are not
prepared and authenticated prepared for the period of
for the interim audit period. concurrent audit.
Asset verification Assets and liabilities are Assets and liabilities are
required to be verified for generally verified only at year
interim balance sheet end.
purposes.

Point of Internal audit Statutory Audit/external

Difference audit
l. Appointment Internal auditor is appointed by External auditor is appointed
the management. by the shareholders or the
Government and also by
management if prescribed in
statute.
2. Independence As appointed by and working for Is fundamental personal
management cannot be said as characteristic required to
independent. discharge the duty.
3. Qualification There are no prescribed The auditor must possess
qualification as such for internal qualifications as prescribed by
audit. the law. For example CA in
companies act and income tax
act.
4. Responsibility He is responsible to the He is responsible to the
management. shareholders or the
Government.
5. Period It may cover any period. It covers normally one
accounting period.
6.Object To improve the existing system of To comment upon reliability of
operation. the financial statements.
7. Rights scope It is determined by the It is determined by the law,
management terms of engagement and
pronouncement of institute.
8. Test Check He usually not relies on test He can rely on test check.
check.

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9. Internal check He usually not depends on He can depend on internal

internal check rather he targets to check if it is satisfactory.
verify the same.
10. Termination It is as per the agreement It is as per the law.
11. Remuneration It is fixed up by the management. It is fixed up by the
shareholders or the
Government as per statute.

Efficiency Audit
The efficiency audit examines all the aspects of the business activities and their propriety. It is to be
found out as to what modification or changes are required to enhance the overall efficiency. In this
type of audit, the auditor not only examines the accounts and other activities of business but also
tenders valuable advice so that the plans of the business may be implemented more effectively and
economically with the object to achieving more success. Its objective is not to discover and detect
errors and frauds but to find out ways and means to motivate each and every employee to work
with sincerity, honesty and trust.

Propriety Audit : The auditor must look into whether the management has acted wisely or not. The
auditor must see whether the decisions were taken in good faith or not. It is quite possible that some
factors like nepotism, recommendations, bribe etc., might have overwhelmed the management and in
spite of prudence, the management might have tilted to some degree by such extraneous
considerations. The auditor must examine the decisions in the light of expenditure involved in
implementing them. If the decisions, notwithstanding wisdom and faithfulness, have involved
extravaganza, they cannot be justified.

Performance Audit : Performance audit implies the performance of the business or any component of
it in the light of pre determined targets and cost involved. The present business structure is so complex
that no single man can perform all the activities. Naturally, the management has to depend on his
assistants and different jobs have to be entrusted to them. As a corollary, they are endowed with
certain powers and their responsibilities are to be fixed. In the circumstance, it becomes necessary to
examine and appraise as to what extent the individuals have discharged their duties.

Limitations of Audit
1. Auditing does not guarantee 100% correctness.
2. All frauds are not necessarily disclosed by audit.
3. The auditor expresses only his opinion.
4. Auditing is not a credential of the perfect honesty of employees.
5. Auditing does not certify the commercial prudence of transactions.
6. Auditing does not pay attentions to trivial.
7. Auditing is not supported by practical independence.

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UNIT-II
The Audit Process
The steps in audit process are:
1. Appointment of auditor
2. Determination of Objective and Scope of audit
3. Obtaining Knowledge of Clients business
4. Evaluating accounting system, Internal control and Audit risk.
5. Audit Planning and programming, Determining the nature timing and extent of audit
procedure and co-ordination of work.
6. Collection of audit evidence
7. Drawing conclusions and making report.

Preparation of Audit Programme

Audit programme is a description, memorandum or outline of the work to be done in an audit and often
of the time allotted and personnel assignments, prepared by a Principal as a definition of audit scope, or
by an auditor for the guidance and control of assistants. It is the auditors plan of action, specifying the
procedures to be followed.

Objects of audit programme :

a. To obtain informations regarding the accounting system, policies and control techniques of
the client.
b. To ascertain the extent to which internal control techniques can be banked upon.
c. To lay down the nature, time and extent of audit techniques to be adopted.
d. To co-ordinate the total works.

Characteristics of good audit programme

i. Explicit and clarity of expression.
ii. Segmentation of work in the light of different aspects of accounting.
iii. Logical flow of accounting documents
iv. Elasticity
v. Review of work
vi. According to scope of audit
vii. Based on evidences
viii. Record of movements and accomplishments.

Advantages of audit programme : Disadvantages

i. Division of work as per ability i. Mechanization of work
ii. Determination of responsibilities ii. No motivation for free decision
iii. Progress of work iii. Want of constructive thinking
iv. Change of employees won’t affect work iv. Want of moral influence
v. Uniformity in work v. Planned frauds are undisclosed
vi. Protection in court of law vi. Disabilities remain concealed
vii. Complete examination vii. Plea against auditor
viii. Time saver
ix Facility of review
x. Pursuance of audit principles

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Audit Files
The maintenance of files is very important for the office of the auditor so as to enable him to
keep them for easy and ready reference.
There are two types of audit files : (i) permanent audit file, and (ii) Current audit file.
The contents of permanent audit file are:
1. The rules which govern the company under audit such as Memorandum and Articles of
Association in case of a company and partnership deed in case of a partnership firm.
2. Copies of minutes and extracts of agreements which are entered into between the client and
others for rendering/obtaining services.
3. A brief description of the business, its nature, address, area of operation, etc.
4. Particulars about the organization of the business along with a list of officials, branches and
departments under their charge.
5. Copy of instructions, if any, issued to the staff and of relevance to the auditor.
6. List of books and registers and names of persons dealing with them.
7. Important notes regarding the final accounts including the balance sheet and other financial
statements.

The contents of current audit file are;

1. Audit programme duly amended and modified in accordance with the system of internal control
in use.
2. Internal control questionnaires.
3. Flow chart covering the time budget.
4. All relevant notes properly filed and indexed.
5. Bank and petty cash reconciliations.
6. Brief notes for discussion with the client before completion of the work of audit.
7. Weaknesses inherent in the system of internal control.
8. The draft final accounts and balance sheet and their completed copies.

Advantages:
(a) Preparation of audit plan.
(b) Useful file for the use of auditor in forming an opinion.
(c) Provides materials in the field work in audit engagement.
(d) Provides information to suggest improvement in business operations and system of accounting.
(e) Maximizes efficiency in auditing procedures.

Audit working papers

Audit working papers are personal written materials which an Auditor prepares with regard to all
audits and contains techniques adopted by the auditors, his decisions and conclusions and relevant
information regarding financial statements.
Some papers included in Audit Working Papers;-
1. The agreement regarding the appointment if the auditor or letter of appointment
2. Technical Features of the audited business.
3. Audit Programme
4. Certificates of officials in regard to such important matters as bad debts, valuation of stock,
unpaid expenses, accrued income etc
5. Certificate issued by the banks in regard to the bank balance of the client certain date, safe
custody of documents etc.
6. Correspondence between the auditor and the debtors, creditors, etc. the client.
7. Rough trial balance.
8. Important extracts from the minute books
9. Particulars of investment.
10. Draft final accounts.

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11. A copy of the auditors book.

Objects of keeping Audit-Working Papers;-

1. Certification of the correctness of record and report
2. Use as references, during discussion with the employer.
3. Defensive position of the auditor in case of legal dispute and court proceedings.
4. Guide for Subsequent examinations.
5. To co-ordinate and organize the work of audit clerks.

Ownership of Audit-Working Papers :-

These are the property of the auditor, whether prepared by him or presented to him by the owner of
the business and therefore must be kept in safe custody.

Filing of Audit-Working Papers is a necessity. The auditor keeps these papers for his defense, reference,
future guidance and as a proof of his. According to section 209 of the Indian Companies Act 1956, the
books of accounts of a company must be kept safe up to 8 years after the relevant year.

Audit Note Book;-

An important component of Audit-Working papers is audit note- book basically maintained by the audit
clerk in which he notes down the important points and enquires which he has to refer to officials clients
or to discuss with his senior or the auditor himself.
Contents of audit note book:
1. Technical details about the business.
2. Queries for which explanations and information have to be demanded.
3. Missing vouchers and invoices whose duplicates have to be obtained.
4. Fraud and errors found in the books during the course of audit.
5. Details to be included in audit report.
6. Notes regarding system of maintaining accounts.
7. Information to be needed in future.
8. Names of officials who certify bad debts, depreciation, etc.
9. Record of all important correspondence.
10. Total of important ledger accounts.
11. Progress of audit work.
12. Record of suggestions made by the audit staff.

Advantages:-
1. Defense in court of law.
2. Yard-stick of the efficiency and diligence and skill of the auditor,
3. Guide for future.
4. Future references,
5. Permanent certificate of audit.

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UNIT-III
VOUCHING

Vouching is the examination of transactions of a business together with documentary and other
evidence of sufficient validity to satisfy an auditor that such transactions are in order, have been
properly authorized and are correctly recorded in books.

Objects of Vouching
1. Authentication of accuracy and truth of book keeping entries.
2. Satisfaction of entries of business transactions.
3. Knowing the transactions unrelated with business.
4. Authentication of transactions.
5. Essence of auditing.

The auditor must take care of following while vouching.

1. Proper filing of vouchers in serial order.
2. Adoption of test check methodology for examining vouchers.
3. Comparison of evidences with accounting entries.
4. Voucher must be in name of the person or business whose account is audited.
5. It must be related with business transactions.
6. Voucher should relate to period under audit.
7. It must be in printed form.
8. The amount and calculations in voucher must be checked.
9. Voucher must be signed, authenticated and duly stamped.

Vouching of Cash Book

Cash Receipts :
(i) Internal check should be examined.
(ii) Issue of receipts and use of receipt books should be checked.
(iii) System of depositing the receipts into bank should be checked.
(iv) Auditor must obtain the list of all memorandum books like cash diary, Kuchi Rokar Bahi,
Pucci Rokar Bahi, etc.
(v) Vouchers must be serially numbered and the name, amount date in vouchers must tally
with the accounting records.
(vi) Accounting records unsupported by vouchers must be probed.
(vii) Soiled, unissued or cancelled receipts should not be torn but checked along with
counterfoils.

Important points while vouching Cash Payments.

1. Actuality of payment.
2. Payment relates to audit year.
3. Payment for business
4. Payment to right person
5. Right amount to be paid.
6. Payment must be due with regard to date.
7. Authorization of payment.
8. No payment for ultravires acts
9. Legitimacy of payment
10. Correct accounting.

Vouching Sales Book

1. On the basis of copies of sales invoices.

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2. Help from other books like orders received book, goods outward book, correspondence, etc.
3. Intensive examination of goods sold of the end of the year and beginning of new year.
4. Recording of only actual sales.
5. Help from statements of accounts of debtors.
6. Audit of totals and postings of sales book.

Vouching of Sales Returns Book

1. Vouching the records on the basis of copies of credit notes.
2. Checking of goods inward book and correspondence.
3. Examination of the records at the commencement of the next year.
4. Totals and ledger posting of sales returns to be carefully examined.

Vouching Purchases
1. Examination of purchase book on the basis of invoices.
2. Record of lost vouchers.
3. Help from goods inward book, challan form and packing notes.
4. Checking of totals & postings on the basis of invoices goods inward books, purchase order,
challan form, goods receipt notes.

Vouching of Purchases Returns Book

1. Checking entries of purchases returns book on the basis of credit notes.
2. Tallying with goods outward book.
3. Checking the totals and postings in ledger.

Vouching of Journal
1. Opening entries shall be vouched with the balance sheet of previous year.
2. Closing entries to be vouched by checking the ledger postings.
3. Rectification entries must be checked thoroughly and must be countersigned.
4. Adjustment entries relating to outstanding and prepaid expenses, unearned income and
accrued income must be vouched on the basis of relevant documents.
5. Transfer entries must be backed by proper authority.
6. Bad debts must be vouched on the basis of authorization and relevant correspondence with
the debtors.
7. Consignment transactions must be checked by the account sale received from the agent.

Vouching Ledger Postings

1. Methodology of vouching, i.e., checking the ledger postings on the basis of entries in books of
original entries.
2. Persons vouching the accounts.
3. Recording the errors.
4. Vouching the balances of accounts
5. Test checking of ledger postings.
6. Vouching of different ledgers – purchase ledger, sales ledger, etc.

Vouching of various receipts

1. Cash Sales & Credit Sales : Voucher, date, serial no., account head, sales invoices, charging of
sales tax and excise duty, copy of delivery order, sales order, rates, quantity and authorization
by sales/ marketing manager.
2. Receipt from debtor : Cash/Bank receipt voucher, date, serial no., account head, copy of invoice,
sales order, rates quantity party ledger, bank statement, sales register.

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3. Other Income (Interest dividend, etc) : Bank receipt voucher, date, serial no., account head copy
of dividend warrant, interest warrant. TDS certificate, rates paid up value, investment register,
bank book, bank statement.
4. Loan received : Receipt voucher, date, serial no., account head, (secured/unsecured) loan
agreement, hypothecation or pledge deed, rates of interest, principal amount, resolution of
board of directors, bank statement, ledger.
5. Rent Received : Cash/Bank receipt voucher, date, serial no., account head, rent agreement, rent
receipt, TDS certificate, prepaid or outstanding rent, bank statement, ledger.
6. Sale of Investment : Voucher, account head, broker’s note, copy of demat account, rate, quantity,
bank statement, investment ledger.
7. Bills Receivable Discounted : Voucher date, account head, discounting charges, copy of B/R,
bank advice, noting charges, bank statement/book, BR register.
8. Sale of Fixed Assets : Receipts voucher, sale agreement, sale value and wdv, authorization by
BOD, fixed assets register, bank statement.
9. Royalty Received : Receipt voucher, account head, copy of agreement, TDS certificate, rates and
quantity explored, produced or sold, royalty register, ban statement.
10. Insurance Claim : Receipt voucher, account head, copy of intimation of claim copy of sanction,
loss assessors report, verify the amount of claim, insurance claim register, bank statement.
11. Recovery of Bad Debts : Voucher, account head, debtors control account, commission to factor,
bank book, statement or list of bad debts written off in previous years.
12. Miscellaneous receipts (subscriptions amount received from, agents etc) : Voucher, counter fails
of receipts, bank pass book, membership register, statements of agents, etc.

Vouching of Payments :
1. Purchase of Goods : Payment voucher, purchase order, builty, material received note,
inspection report, bank statement, rates, quantity and terms of purchases, stores ledger,
goods inward register, authorization, cash purchase register.
2. Payment to Creditors : Receipt by customer, statement of account, invoice copy, discount
and allowances, and other deeds.
3. Salaries & Wages : Payment voucher, attendance register, salary sheet, wage roll, time
keeping record, bank statement, PF, ESIC, overtime sheets, cash book or bank book, ledger,
4. Payment for Acquisition of Assets : Payment voucher, account head, sale/purchase
agreement, title deed, bank statement, transfer deed, valuer certificate, stamp duty, broker’s
statement, auctioneer’s note, fixed asset register, cash/bank book, authorization by BOD,
Articles of association, etc.
5. Payment of Taxes (Income Tax, Sales Tax) : Computation of tax, copy of challan of
advance tax, TDS certificates, challan of self assessment tax, return, etc.
6. Travelling Expenses : Voucher tour program, schedule, TADA rules, expense voucher,
receipts,etc.
7. Preliminary Expenses : Memorandum & Articles of association, registry, Cheque no., bills
& receipts, rate of stamps, vouchers, etc.

Verification of Assets & Liabilities

Verification is the process of substantiation involved in proving that a statement account or
item is accurate and stated properly. It is an enquiry into the value, ownership & title, existence and
possession, and presence of any charge on the assets as stated in the balance sheet.

Objects of Verification
1. Picture of true position.
2. Correct valuation.
3. Not exceeding the actual.
4. Not less than actual.

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5. Existence and possession.

6. Ownership and title.
7. Without fraud or irregularity.
8. Arithmetical correctness.
9. Correct presentation in the balance sheet.

Position of Auditor as regards valuation of assets

An auditor is not a valuer or a technical expert. So he has to rely upon the valuation made by
directors, partners, technical experts, surveyors, etc. However he must ensure that the valuation is fair
and reasonable and based upon some accepted principles.

Verification of fixed assets

(i) Goodwill
(a) Existence : Whether purchased or acquired. Self generated goodwill is not said to be in
existence.
(b) Records : Check the fixed asset register.
(c) Right of Ownership : Check purchase agreement, purchase consideration and MOU
between the parties.
(d) Valuation and proper amortization as per AS-14, i.e. 5 years.
(e) Proper presentation and disclosure.
(ii) Freehold Properly :Which is in the name and title of owner.
(a) Ownership:Check the sale deed.
(b) Mortgage: Check the mortgage deed.
(c) Change in asset due to sale, purchase or construction work should be enquired and
duly recorded.
(d) Revenue expenses regarding repairs and maintenance should be written off in P &
L Account.
(e) The auditor must enquire into the existence, valuation and presentation in balance
sheet.
(iii) Leasehold Property : It has two owners and both have qualified rights over it. The following
points to be considered :
(a) Ownership : Lease deed should be examined.
(b) Mortgage : Relevant deed should be perused.
(c) Revenue expenses : To be charged to P & L.
(d) Existence, valuation and presentation B/S to be checked.
(iv) Plant & Machinery
(a) Existence : Physical verification to be conducted, additions and deductions to be
checked.
(b) Records : Check the fixed asset register.
(c) Ownership : Invoice receipt and purchase order to be checked.
(d) Revenue and capital expenditure should be properly accounted for.
(e) Proper presentation and disclosure under the schedule of fixed assets.
(v) Furniture, fixture and fittings
The auditor has to verify the existence, records, changes ,ownership, valuation, presentation
and disclosure in the balance sheet, along with depreciation.
(vi) Motor Vehicles
The auditor has to verify the existence, fixed asset register, log books, invoices, registration
book, incidental charges like insurance and road tax, depreciation, licences etc.
(vii) Copyrights, patents, trademarks, loose tools
Check the existence ownership, valuation, presentation in balance sheet, respective registers,
write off etc.
(viii) Investments

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Ownership: name of client, pledge or lien of investments, Classification: trade or non trade, long
term, short term, stock in trade.
Physical verification: obtain relevant certificates, etc.
Changes: broker’s purchase note or sale note should be checked.
Valuation and disclosure :Current investments should be valued at lower of cost or fair market
value. Long term investments should be valued at historical cost of acquisition.
(ix)Inventory
Classification of inventory : Stores and spare parts, loose tools, raw materials, material in
process, finished goods, waste or by products.
Existence and records in the stock register to be verified.
Right of ownership : Invoices, documentary evidence to be checked.
Valuation : According to AS-2, valuation is done on cost or NRV whichever is lower.Method is FIFO or
weighted average and method is not changed, unless required.
Presentation and disclosure in Balance Sheet.
(x)Debtors, Loans and Advances
List of debtors to be obtained.
Correspondence with debtors.
Inquiry into discount and bad debts, provision for bad debts.
Securities.
Presentation and disclosure in Balance Sheet.
Classification of debtors according to age, security and reliability, bad and doubtful.
Loans and Advances.
Names & Amounts involved.
Terms and Conditions of loan.
Regularity of repayment.
Steps for recovery/repayment of overdues.

Verification of Liabilities
Steps for verification
1. Examination of records .
2. Direct confirmation procedure.
3. Examination of disclosure.
4. Analytical review procedure.
5. Obtaining Management Representations.

The nature, timing and extent of substantive procedures to be performed is a matter of professional
judgement of the auditor which is based on the auditor’s evaluation of the effectiveness of the related
internal controls.

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