III B.

Com (CA)
PRINCIPLES OF AUDITING

ORIGIN OF AUDIT
INTRODUCTION
Though the concept of auditing has been existing since for a very long period but the
traces of actual audit happening has been found or it would be related only to the middle age
period. The present day auditing system came into existence during the 18th century, the
auditing system during this period underwent a major change and the basic reason for this
change was caused by large scale industrial revolution.
The present day setup though based on 18th century setup has undergone some major
changes, the present day auditing system not only helps the auditor to prepare correct statement
of affairs but also the system has been devised in such a manner that it prevents any errors and
also deducts fraud or cheating. The basic objective of the present day auditing system is to
provide a true and correct trial balance. Profit & loss a/c and B/S of an company.
Definition of the term Auditing.
The term auditing has been derived from the Latin word. “Audire” – means to hear. In
olden days the accountants used to read the accounts at the court of the kings. The Noble men
heard it therefore the term ‘auditing’ means to hear was derived.
The concept of auditing was for the first time published by Italian Luca Pacialo. He
published the concept of auditing through a double entry system of book keeping in 1494. In
this book, for the first time the author clearly brought out the duties and responsibilities of an
auditor. Since then lot of things have undergone for a major change but the basis or foundation
of auditing remains the same.
According to Spicer and Pegler. Who have defined, “an audit as such as examinations
of the books, accounts and vouchers of a business as will enable the auditor to satisfy himself
that the balance sheet is properly drawn up, so as to give a true and a fair view of the state of
the affairs of the business and whatever the profit and loss account give a true and fair view of
the profit or loss for the financial period, according to the best of the information and
explanation given to him and as shown by the books and if not, in what respect he is not
satisfied”.
According to Montgomery, a reading American accountant defines auditing as,
“auditing is a systematic examination of the books and records of a business or organization,
in order to as
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certain or verify and to report upon the facts regarding its financial operations and the results
thereof”.
Difference between Book keeping/ Accountancy and auditing
1. Book keeping is art of recording the business transactions in the books of original entry
and the ledger. In this case no basic accounting knowledge or no principles of
accountancy knowledge is required. Normally in western counties this work is done by
junior clerks.
Accountancy refers to the compiling of accounts in cash a way that one can know the
state of affairs of a business. Here the job is done by an accountant, this is done in order
to prepare future policies of business.
2. Auditing means verification of books and entries and accounting concepts to get
accuracy. It is not book keeping or accounting. The work of an auditor is to show the
correct position of the business at the end of the year.
S.No Book keeping Accountancy & Auditing
1. Book keeping is an art of recording the Accountancy means compiling of the
business transactions in the books of accounts in a proper way in order to
original entry and in the ledgers. find out the state of affairs of the
business. Auditing is nothing but
verifying or checking the accounting
aspects.
2. Book keeping is the starting work with Auditing is the ending position or final
regard to accounting procedure. position with regard to accounting
aspect.
3. Book keeper or an accountant record Auditor always verifies the recorded
the transactions. statements.
4. Book keeper need not prepare Balance Auditor has to prepare balance sheet,
sheet, profit and loss a/c or any Profit and loss a/c and any device so
verification system to check the that he can check the accounts.
accounts.
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AUDITING AND INVESTIGATION

Introduction
Though the terms auditing and investigation look like the same aspect, but both are
totally different, both bring out different meaning when interrupted or said or used.
Auditing is examination of books, accounts and vouchers of a business, to find out
whether balance sheet is drawn up properly and it provides a fair view of the business for a
period.
Investigation means a searching enquiry into the profit earning capacity or financial
position of a concern or to find out the extent of the fraud of there is suspicion.

Difference between Auditing and Investigation

S.No Auditing Investigation
1 Auditing is done to verify whether Investigation is done to find out whether
balance sheet is properly drawn up and there is any fraud cheating, with regard to
true and fair information is only the financial statements published.
published.
2. Auditing is normally done for only one Investigation is done for more than one
year. year.
e.g., Three years, five year, 10 years & so
on.
3. Auditing is done by the proprietor to It is done on behalf of the outsiders to
find out the profit and to remove any find out whether the details given by the
fraud if any. proprietors and true in extra ordinary
cases, owners can also ask for
investigation if they suspect any fraud or
cheating by the employees.

Qualities of an Auditor – Part D

1. Auditor should be well-versed in the fundamental principles and in all theories of all all
branches of accounting.
e.g., General account, cost account, income tax, economics etc.
He should be aware of the latest development and the latest techniques in
accounting so that he can modify his work according to time.
2. He should not pass any transactions unless he knows that it is correct.
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3. He should be able to grasp quickly the technical details of the business whose account
he is auditing.
4. He should prepare the accounts in such a way that no doubt arises and by chance if any
such doubt arises during the course of work or during any presentation, auditor must
seek classification or clarify the doubt without any fear or false pride.
5. Auditor must be will versed in company law, mercantile law, business laws and in
auditing concepts.
6. Auditor must be always honest tactful and skillful in his duty.
7. Auditor should not be influenced at any point of time directly or indirectly by any other
person which may cause any bad name to the discharge of the duties.
8. Auditor must carry out his duty not only sincerely and faithfully but also he must help
the client in a tight position and the helping should be as per the law.
9. Auditor must always ask his client to produce only correct and proper information by
chance if the auditor is forced to sign an wrong balance sheet or profit and loss a/c he
must be ready to sign immediately.
10. Auditor should not disclose the secrets of his clients at any point of time to third parties
(if required by raw, he should be opened).
11. Auditor must be intelligent so that he can ask maximum questions in always to get
maximum correct information from the client.
12. Auditor should but see each and every aspect without a doubt or suspicion.
13. Auditor must be always ready to hear the arguments and must be always reasonable.
14. Auditor must be always vigilant, accurate, cautious and methodical.
15. Auditor must gave the ability to write the report correctly, clearly, shortly and
forcefully.
16. Auditor must have proper training in the area of business organization and finance.
17. Auditor must have common sense.
Qualification of an auditor
The auditor must be a charted Account within the meaning of Charter Accountant act
1949. He is required to pass the examination conducted by the institute of Charted Accountants
of India (established in 1949). He is also required to secure a certificate from the institutes to
take up the public practice of accountancy.
Other than the above mentioned category, people who are holding a certificate under
the name “Restricted Auditors certificate”. Part – B states rules 1956, he is also qualify to be
appointed as an auditor the government has also permitted people practicing auditing prior to
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1949 who are qualifying or any person holding any degree equivalent to the above qualification
is also permitted to practice as an auditor.
The central government may by notification in the official gazette may make the rules
in order to grant, renew, suspend or cancel any such certificate and the prescribed conditions
and restrictions as and when required as per section 226 (2) (b) of the Act.
Definition with regard to qualities of an auditor.
According to Lord Justice L.G.Lobes, “an auditor is not bound to be a deductive or to
approach his work with suspicion, or with forgon of conclusion that there is something wrong.
He is a watch-dog, not a blood hood. He is justified in believing the tried servants of the
company, and is entitled to relay upon the representation provided he takes reasonable care”.
According to Lord Alver Stone, “an auditor is not bound to assume when he comes to
do his duty that he is dealing with fraudulent and dishonest people, if circumstances of
suspicion arises, It is his duty to prove them to the bottom”.
According to Lord Justice Lindley, “He is not an insures he does not guarantee that the
books do correctly how the true position of the company’s affairs”.
Objects or objectives of an creditor.
Introduction
The main objective of an audit and of an auditor is to find out whether the looks of
accounts, balance sheet and the profit and loss a/c have been properly drawn out according to
the companies Act 1956. He must make sure that it is fair and proper while performing his
duty, the auditor has to carefully analyze and examine in order to discover any error to fraud
the following are the basic concept, which all also the main objectives of an audit.
1.Detection and prevention of errors.
2. Detection and prevention of frauds.
1. Detection and prevention of errors sometimes while analyzing the statements the
auditor may find certain errors. If they are innocent errors or errors committed
mistakenly auditor must take steps to prevent such type of errors in the future. But at
time some errors may look like innocent ones but they have been wontedly created to
do some fraud or creating.
Therefore the auditor must carefully analyze all such errors. The following are the
different types of error which normally occur
(a) Clerical errors.
(b) Errors of principle
(c) Compensating errors.
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(d) Errors of duplication

a. Clerical errors.
These errors normally arise because of wrong posting totaling or balancing. This could
be divided into two categories.
(i) Error of omission
(ii) Error of commission
(i)Errors of omission
Here, the transaction is not fully recorded or partly recorded or some parts are omitted.
e.g Rent of 12 months received only 11 months recorded.
Purchase or sales entry totally omitted.
(ii) Error of commission
In this category, the transactions are wrongly entered.
Eg: Purchase invoice of Rs. 1250 entered in the purchase book as Rs. 1520.
b. Error of Principles.
These errors arise whenever the entries are not recorded according to the fundamentals
principles of accountancy.
e.g:- Wrong allocation of expenditure between capital and revenue, ignoring outstanding assets
and liabilities, valuation of assets against the principles of book keeping.
These errors are done wontedly or unknowingly wantedly means to cheat or fraud.
c. Compensating errors or off setting errors.
In this category where one error is counter balanced by any other error or errors. E.g
Mr. A’s account was to be debited for Rs. 100, but debited for Rs. 10. Mr. B’s account was to
be debited for Rs. 10, but it is debited for Rs. 100. both accounts have been counter balanced
because the total sum tarries exactly Rs. 110.
Again an overcastting of an account may be counter balanced by under casting of
another account to the same extent. These are dangerous and difficult to guard. These errors
don’t affect trail balance or profit and Loss a/c, therefore detection or finding out of such errors
is difficult.
d. Error of duplication
Such errors arise whenever an entry in a book of original entry has been made twice
and has also been posted twice.
Location of errors or identifying the errors.
1. Check the totals of the trial balance.
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2. Compare the names of the accounts in the ledger with the names of accounts recorded
in the trial balance.
3. Total the list of debtors and the list of creditors which has to be compared with the trial
balance.
4. If the books are maintained according to the self balancing system, we must make sure
that the totals of different accounts agree with the totals of the ledger, trial balance etc.
5. Compare the items of the trial balance with the items of the trial balance of the previous
year because omissions might have taken place in the previous year itself.
6. Whenever the difference in the trial balance is half of its value we must check whether
there is any item of this value. This is done to find out the correct balances.
7. We must check the totals of the subsidiary books.
eg., cash book, sales book, purchase book and so on.

2. DETECTION AND PREVENTION OF FRAUD

INTRODUCTION
Fraud means false representation or entry which has been made wantedly or
intentionally in order to defraud or chat some people. Detection of fraud is concerned to be
one of the
important function of an auditor. The organizations can setup an internal check system which
aims to prevent fraud, even after this if the auditor is not satisfied with the system and also
doubts any from of cheating then auditor must go in for a thorough checking of accounts.
Auditor must bring out any new device or a new system in order to prevent such cheating in
future.
The following are the common ways by which fraud can take place.
1. Embezzlement of cash.
2. Misappropriation of goods.
3. Fraudulent manipulation of accounts.
1. Embezzlement of cash.
Cash can be taken away or misappropriated by the employees by using any one of the
following methods.
(a) omitting to inter any cash which has been received.
(b) Entering less amount than the actual amount which has been received
Eg., Rs. 1000 received but only Rs. 800 recorded.
(c) Making imaginary entries or ficitious entries on the payment side.
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(d) Entering more amount of payment on cash book than actually what is paid
e.g., Rs. 1000 paid but entry shows Rs. 1500 as paid.
2. Misappropriation of goods.
This commonly takes place whenever the organization maintains a huge stock or
whenever it is quite difficult to correctly assess the total value of the goods: then in these cases.
The employees of the organization take advantage which read to misappropriation of goods.
Misappropriation can be prevented by the organization only if they maintain a proper
accounting system to the satisfaction of auditor internal check system should be strong to
prevent misappropriation.
3. Fraudulent of fraud is of a complex nature. This is normally done by people at the top level
like the directors or superior officers, such type of fraud is done in order to show,
(a) More profit to the company when it is actually very low or nil.
(b) In order to maintain the share value of the company in the market
(c) In order to get more financial assistance from banks or financial institution.
(d) To attract more subscribers to subscribe for the shares or to purchase debentures.
(e) To maintain goodwill among the public
The above are the found out in any organization when the company is making less
profit.
In certain cases when a company is making very good profit, the company may show less
income, according to law this is also treated as fraud, this is done in order to
(i) Purchaser the shares of the company in the market at a lower price.
(ii) In order to reduce the income tax payment.
(iii) In order to provide a wrong information to the competeting companies whenever
competetion is high.
Note:- For errors
Inspite of the above steps, still the error could not be detected or found out, then we can
state that the error may be because if the following reasons.
1. An error can arise when Rs.1 or Rs. 10 or Rs. 100 is rounded off (very frequently) this
may automatically lead to a wrong total. If by chance the different is in rupees or in
paise, error may be because of wrong postings.
2. An error can also take place where a number is divisible by numbers like
Eg: Instead of writing 54, we could written as 52. this could be misplacement errors.
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Methods or resorting to the false accounts or methods of frauding.

1. By not providing any depreciation or providing less depreciation or providing more
depreciation.
2. By under valuation or overvaluation of assets and liabilities.
3. by showing fictitious (imaginary) sales or purchase or returns in order to show more or
less profit-this method is very rarely used.
4. By using the secret reserves during the period when there is no profits or whenever
there is less profit, the reserve is utilized in such a way without disclosing the truth to
the shareholders.
5. By sharing revenue expenditure to capital account or sharing the capital expenditure to
revenue account.
6. By crediting revenue a/c with the income which will be received only in next year or in
future.
Advantages of an audit.
The following concepts are considered to be some of the important advantages of an
audit. Following are some of it.
1. Errors and frauds are located at an carry date, so in future such mistakes could be
avoided. Audit helps quick and easy discovery of mistake or error.
2. Whenever auditing is done regularly and properly, it makes the accountant, clerk etc.
to be regular and vigilant in their work because they have to submit an upto date
information to the auditor.
3. Money can be easily borrowed from banks or financial institution only if the company
maintains a proper audited statement of accounts.
4. Whenever a company want to claim or want to make any insurance claim, the insurance
company will required audited statement from the company for the purpose of
settlement of the insurance claim.
5. If by chance the business has to be sold out, it is very much difficult to be sold without
a proper auditing statement, whenever the purchaser or the seller wants to know the
correct value of assets and liabilities company has to submit proper audited statement.
6. For the purpose of paying tax or for submission of any statement like profit and loss a/c
or balance sheet, it must be audited by an qualified auditor for tax submission
7. Auditor also provides technical advices to the management if the management requests
it, the auditor can also provide advice for developmental purposes, though it is not a
duty of an auditor.
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8. The sales tax authorities accept only the audited statements for the purpose of setling
sales tax.
9. A properly audited statement of accounts is very much useful for the company to
compare the details of the previous years with the details of the current year and if there
is any mistake that could also be checked in by referring old statement and thereby
rectifying the error.
10. Incase of a partnership business, audited statement of accounts play a vital role in
settling the accounts of a deceased partner.
11. whenever the company goes to the courts of law (applicable all over the world) to solve
any problem, the court will accept only a properly audited statements for the purpose
of settlement of a case.
Disadvantages of an audit
1. Conceptual restriction.
2. Post mortem of prepared accounts
3. Dependents on inside information
4. Inadequate or faulty external evidence.
5. Application of faulty techniques.
6. Formation of faulty judgement
1. Conceptual restriction
Auditor has to follow the laid out rules and regulations whenever he prepares
accounting statements, he is not permitted to violate or go against the laid out rules.
e.g., the rules like principles of accountancy, economics, business management rules
Though it can act as a guideline for the auditor but in preparation certain modifications
may be required but the law does not permit such modification. So he is forced to accept the
concept as it is which may not be suitable at that point.
2. Post mortem of prepared accounts auditing can be compared to a post mortem because the
auditor prepares the statement of affairs only on the spent out amount or on the expenditure
only. Therefore, even if any expenditure is illegal or unacceptable the organization cannot
recover because it has been spent out. Therefore, auditing is like examining the dead expenses
or used money.
3.Dependents on inside information whenever auditor has to prepare any statement or needs
any information or explanation or classification the auditor has to totals depend only on the
organization or on the members of the organization, this makes auditor dependent on his staff
members of the client.
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4.Inadequate or faulty external evidence.

The major problem faced by any auditor is that whenever any information is provided
or given to him at times can be in adequate or wrong: it can be done voluntarily by the members
of the company or at times without the knowledge any wrong information can be passed on to
the auditor, this may lead to preparation of wrong statements.
e.g Forged hotel bells, forged expense voucher or bills etc.
5. Application of faulty techniques Because of restricted rules and regulations, the auditor may
be forced to adopt certain principles which may not be required at that point of time or may no
be necessary at all. In such a situation, the statement prepared also might become incorrect or
improper. Thus, bringing up wrong statement.
6. Formation of faulty judgement whenever any wrong information is provided to the auditor
and he also without knowing the mistake utilizes it in the preparation of accounts and submits
a statement, that statement will be wrong and the judgement or solution is also wrong.
Difference between the audit of a joint stock company and a partnership.
S.No JOINT STOCK COMPANY PARTNERSHIP
1 Audit is compulsory in case of joint stock In case of partnership, audit is not
company as per the companies Act 1956. compulsory.
2 The Companies Act which makes auditing The partnership act does not speak
compulsory clearly defines the powers, the anything about auditing therefore in
duties and the rights of an auditor. this category the agreement whichis
entered between the partners and
auditor will be the basis of working.
3. In case of a joint stock company, the In case of partnership Act 1932, does
companies Act clearly specifies that the not specify any qualification for the
auditor or must be a qualified person auditor.
according to section 26 of the Companies
Act.
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Difference between government and commercial audit.

S.No Government Audit Commercial Audit
1. A Government audit is a transaction done A Commercial audit is done by a
in and outside India through the Audit and qualified auditor and it is submitted to
Accounts department of the government. the shareholders or to the tax
It is an independent & autonomous body department.
submitted to the legislature or parliament.
2. In government audit, the concerned audit In commercial audit the expenses are
officer will not have any idea about the very less because the internal auditor
work done, goods supplied, quality or help the external auditor with the
quantity of work. Therefore expenses is prepared statement or help in preparing
more in govt. audit. statements quickly.
3. In government audit, the treasury officer In commercial organizations though the
who clears the bills, is not aware of the payment is done by the cashier, the bills
expenses or the work done because the are at first cleared by the accounts
treasury officer is not the member of the department.
auditing department.
4. A government audit is a continuous audit Commercial audit is a periodical audit.
because it involves large number of It is not a continuous one.
transactions and also it is concerned with
the personal claims of the government
officers and others so it is a continuing
process.

Different classes of audit and their advantages.

1. Sole trader or proprietor ship and firm
2. Audit of a firm or partnership.
3. Joint stock companies.
4. Trusts.
1. Sole proprietorship – advantages
(i) Accounts are properly maintained.
(ii) Properly audited books of accounts help to pay the estate duty of the dead
person properly.
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(iii) Agents are appointed means, by the sole proprietorship to check their
account it is difficult for one person to carryout. So, if an auditor is appointed
he can verify the accounts and in case of doubt he can clarify it directly from
the agent.
(iv) Wealth tax can be easily calculated.
Disadvantages.
(i) it is a costly affair for a small business concern
(ii) In case of sole proprietor transactions may be very less which means no need
of auditor. If auditor is appointed means the concern has to keep different
sets of book which is a waste.
(iii) In case of sole proprietor, law does not speaks about qualified auditor to
audit his account. Therefore, remuneration paid to qualified auditor is an
extra burden.
2. Partnership firm or audit of a firm- advantages.
a. Fraud and misappropriation of accounts can be avoided by following the audit
procedure in the firm.
b. Partners cannot hide or misappropriate the accounts without the knowledge of other
partners.
c. Accounts are properly maintained by the concerned clerks.
d.Payment of tax becomes very easy.
Disadvantages
(a) Very costly affair for a small partnership business.
(b) Law does not requires a qualified auditor, the partnership Act is also silent about the
auditor’s qualification. Therefore, if a qualified auditor is appointed remuneration paid
eats away the profit.
(c) for small partnership concerns. Unnecessary bookkeeping has to be done.
3. Joint stock company – As per the companies Act 1956,an qualified auditor has to be
appointed by every joint stock company in order to audit the financial accounts of the
company every year section 226of (2) (b) of the companies Act clearly says that a
qualified auditor is a person who has passed the institute of chartered Accounts
Examination or with any equivalent qualification.
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Advantages
(a)Share holders are benefited.
(b)It acts as a check upon the
(c)Accounts are properly and clearly maintained.
(d)Payment of tax becomes quick and easy.
(e) It helps in drawing up future policies and old data is used for comparing the present
position of the company.
It acts as a silent ambassador in attracting future shareholders creditors and third parties
towards the company.

Disadvantages
(a) Falsification of accounts is possible.
(b)Black income or secret reserve can be created by the directors
(c) Errors and mistakes if not found out are carried on in the future years also because
auditors report once accepted becomes a qualified statement of truth.
4. Trust s – advantages
(a) Whether benefits received from public are properly used.
(b) To avoid misappropriation of accounts
(c) To find out whether account are properly maintained as per the law.
(d) To find out whether the beneficious received the benefits totally and properly.
Disadvantages
(a) It is a costly affair, money received from public which originally has to go to the
poor are diverted for the payment of auditors fees.
(b) Unnecessary book maintenance has to be done which is wastage of funds.
Limitations of Auditing
Though auditing plays a vital role in helping the businessmen and the organization to
prepare proper statement of account, Profit and Loss statement and balansheet still the same
auditing has its own deficiencies. Though auditing is termed as an instrument in controlling the
financial activities the limitations are,
1. An audit statement cannot be 100% guarantee that everything in the accounts are true
and correct.
2. An auditing statement through prepared and certified by an auditor, secret reserves are
hidden factors could not be discovered through the auditing procedure.
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3. The auditor is only a overall supervisor who just check the books of accounts an the
vouchers whether they are right or wrong, basically within a short period of time the
work has to completed. Therefore, unexpected mistakes or if errors can take place.
4. Any full-fledged auditing normally involves huge cost therefore many people prefer to
cut down the expenses which may add to wrong statements or accounts.
5. Basically an auditing is a post mortem affair because the auditor checks only all the
finished accounting concepts, therefore he cannot control or change but he can only
report so that mistake is not repeated in the future.
An audit report cannot be accepted as a complete statement of the business concern because
every year auditing takes place and at the end of each year. New report is given, in many
Limitations of Auditing
Though auditing plays a vital role in helping the businessmen and the organization to
prepare proper statement of account, profit and loss statement and balance sheet. Still the same
auditing has its own deficiencies. Though auditing is termed as an instrument in controlling the
financial activities.
The limitations are:
1. An audit statement cannot be 100% guarantee that everything in the accounts are true
and correct.
2. An auditing statement though prepared and certified by an auditor, secret reserves are
hidden factors could not be discovered through the auditing procedure.
3. The auditor is only a overall supervisor who just checks the books of accounts and the
vouchers whether they are right or wrong, basically within a short period of time the
work has to completed. Therefore, unexpected mistakes or if errors can take place.
4. Any full-fledged auditing normally involves huge cost. Therefore many expenses which
may lead to wrong statements or accounts.
5. Basically an auditing is a post-mortem affair because the auditor or checks only all the
finished accounting concepts, therefore he cannot control or change but he can only
report so that mistake is not repeated in the future.
6. An audit report cannot be accepted as a complete statement of the business concern
because every year auditing takes place and at the end of each year, new report is given,
in many cases old report and new report differ a lot.
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Audit Program:
After a division of work between the clerks, the auditor will draw out the program how
to carry out the work between him and his clerks, they also decide the time by which the work
has to be completed. This is laid out in audit program.
Definition:
According to Walter.B.Megis, “an audit program is a detailed plan of the auditing work
to be performed specifying the procedures to be followed in verification of each item in the
financial statements and giving the estimated time required.
An audit program consist of the procedures undertaken or the particular work done by
an accountant in carrying on an audit.
It is a description, memorandum or an outline of the work to be done, prepared by an
auditor, for the guidance and control of the assistance. It provides a guide in arranging and
distributing the work and in checking against the possibility of omission”.
Advantages of Audit programme:
It ensures that all necessary work, has been done and nothing has been omitted.
The auditor is in a position to know about the progress of the work done by his assistants.
A uniformity of the work can be attained as the same type of the programme will be followed
at subsequent audits (relating to that company).
Work of the audit can be divided among the different junior clerks who will be responsible for
the work.
It simplifies the allocation of the work to various grades of articled and audit clerks.
In case of charge of negligence against the auditor for not having done some work, the auditor
can protect himself that the work had been done by his assistance or by him and who have
signed the audit programme properly.
An audit programme acts as a guidance to the audit clerk for the work which he has to perform.
In case of any fraud or error, which has not been deducted, the responsibility for negligence
can be fixed on the clerk who had performed that work because the audit programme would
have been signed by that clerk.
It helps to make a final go through before the report is signed by the auditor.
An audit programme can serve as a guide for new audit clerks to find out duties to be performed.
It is a useful method in order to plan the programme for subsequent years.
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Disadvantages of Audit programme:

Though there are many such advantages through the audit programme, it also has its
own disadvantages. They are,
An efficient clerk will loose interest in his work because he has to follow a fixed timetable or
a fixed audit programme method. In such cases, the clerk cannot suggest any opinion even
though it may simplify the working procedure.
An audit programme though it is an will planned programme, still it may not cover all the
concepts which may come during the auditing work.
The audit programme may be followed mechanically year after year though some changes in
the routine or internal check may be introduced by the clerk or by the client or by the auditor,
the audit programme will not be able to match the new requirements.
Audit programme is normally a preplanned programme. The problems which arise in business
differ from business to business and from time to time within same business, therefore such
pre-planned programme cannot be effected or utilized easily.
In case of a small business concern, an audit programme is unnecessary. Audit programme
normally suits only for large level companies.
The audit clerk may consider the work given to him, according to the programme as maximum
work, which has to be done by him.

SUGGESTED QUESTIONS
Short Answer Questions:
1. Define Auditing? Bring out the basic objectives of Auditing in detail?
2. Differentiate between Book keeping and Accountancy and Auditing?
3. Bring out the difference between Auditing and Investigation?
4. What do you mean by fraud? How can a fraud can take place?
5. Discuss the various limitations of Auditing?
6. What is the basic qualification of an auditor?

Long Answer Questions:

7. Discuss the various qualities of an Auditor in detail?
8. Write a detailed note on the following –
(a) Clerical Error.
(b) Error of Principle.
(c) Compensation Errors.
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(d) Errors of Duplication.

9. What are the common ways by which fraud can take place? Discuss in detail?
10. Bring out the difference between Joint Stock Company and Partnership in detail? Also bring out
the difference between Government audit and Commercial audit?
11. Discuss the various advantages and disadvantages of an audit in detail?
 19

CONDUCT OF AN AUDIT
An audit may be classified into the following groups or categories they are,
Continuous audit – Government audit.
Periodical audit or final audit or complete audit – Joint stock companies, banks.
Interim audit – Joint stock companies once in 6 months to know the profit.
Occasional audit – done once in a week.
Partial audit – only part of the accounts audited helps to create unaccounted money.
Standard audit – it does complete check and analysis of few items. It has effective internal
check proper test check on items.
Balancesheet audit – common in U.S.A, used to verify assets and liabilities, profit or loss of
the firm.
1. Continuous audit
A continuous audit is also called as government audit or a detailed audit, because this
audit involves a detailed examination of the books of account at regular intervals of one month
or almost maximum within 3 months. In continuous audit, auditing is carried on throughout the
year. The auditor visits the client regularly or at fixed intervals during the financial year, he
also checks and verifies each and every transaction. The auditor at the end checks the profit
and loss a/c and the balance sheet continuous audit is useful only for large concerns.
2. Continuous audit is useful or applicable or suitable in
Where it is desired to present the accounts immediately after the close of financial year.
Where huge transactions are maintained.
Where the statement of accounts has to be presented every fortnight or monthly or quarterly so
on. Where no satisfactory system of internal check is in operation.
Advantages of continuous audit
Easy and quick recovery of errors.
Knowledge of technical details can be learned easily by the auditor because of constant touch
with business.
Quick presentation of accounts
Keeps the clients’s staff regular or keeps the company busy and regular.
Continuous audit helps to maintain a moral check on the client’s staff.
Continuous audit brings in very good efficiency.
Continuous audit helps in quick preparation of interim accounts whenever interim dividend has
to be declared.
Continuous audit always keeps the members of the audit department very busy.
 20

Disadvantages of Continuous audit.

Alteration of number or figures is possible because the accounts are already cheked. Therefore,
the clerk can change the numbers very easily and no doubt will arise because the statement has
already been singed.
Eg. Signed amount Rs. 8,000, the clerk alters it to Rs. 8,600.
Dislocation of client’s work- Because the auditor visits frequently the work of the internal staff
can be affected to a great extent.
Continuous audit is expensive.
Because of continuous audit, even the enquiry from important people can be kept pending.
Extensive note taking becomes necessary in order to avoid alternation of number.
The workers of the company may become totally dependent on the auditor or on his staff
because the auditors verifies each and every detail work learning by internals staff is neglected.
The disadvantages and danger are theoretical than real. These disadvantages can be removed
by undertaking the following precautions.
No alternations should be made after the entries have been checked by the auditor without his
permissions.
If any alteration has to be done then, it should be made after rectifying the journals.
Checking of the books should be completed within one visit itself or if that is one possible, he
should finish up checking upto a particular date which should be noted down in his diary
clearly.
A well drawn up program should be undertaken by the auditor to prevent any loopholes
A role should be made in the audit note book regarding any enquiry made by the auditor for
which no satisfactory reply was received by him.
If any figure has been altered without the knowledge of the auditor. Then the auditor should
make a secret mark so that he can check out and verify in the later on stage.
Before drawing up the balance sheet or profit and loss a/c, the auditor should make sure that
no alteration is there or no secret marking is there.
The audit of impersonal, and general or private ledgers should be conducted at the time of final
audit only in order to prevent any malpractice.
The audit should make surprise visit to the customer’s office to check the details and find out
any fraudulent activity if any periodical audit or final audit or complete audit.
Periodical audit or final audit or complete audit:
Is one which is taken up at the time of closing of the financial year or at the end of
trading period. In this case. All the accounts will be balanced trading and profit and low a/c
 21

and balance sheet etc. will be prepared this will also help the organisaiton to get in proper and
correct information. The audit may also begin even before the final accounts are prepared and
it can continue till the audit is completed. The main concept of this audit is that the audit is
completed in one continuous session. This helps the auditor to check all the books, ledger
balances etc, without any alteration by the staff. But the major disadvantage of periodical audit
is that the auditor sees the books only once in a year, secondly the auditor cannot finish the
work within one day.
The major advantage is that alteration of numbers cannot be done very easily. This is
most probably used by small business concerns.
In this audit, interim dividend cannot be declared easily because the final audit is done
only to the end of the year.
Interim audit.
Whenever an audit is conducted in between the tow annual audits, with a view to find
out interim profit to enable allow the company to declare an interim dividend, such typs of
audit (Interim audit is done in between tow final audits).
Interim audit has the following advantages.
This type of audit is very much helpful in order to publish the interim accounts of the company
(Quarterly half yearly etc).
The final audit can be carried out and completed very easily and quickly if interim audit has
been done.
months or 6 mont6hs which would also atmost try to put an end to any malpractice.
Disadvantages:
Items may be altered in the accounts which has been already audited by the auditor.
Interim audit means the audit staff members will have to prepare audit notes whenever they
finish the interim audit.
Interim audit would automatically increase the work of the organization
Difference between Continuous audit and Interim audit:
S. No Continuous audit Interim audit
1 It is one which is carried out throughout In interim audit the work is done on a
the year. In continuous audit, the accounts definite date and according to the
are tallied every day and the work is done instructions of the client.
according to the convenience of the auditor
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2. In continuous audit the assets and In interim audit the assets and
liabilities are verified after the balance liabilities are verified when the audit is
sheet has been prepared at the end of the conducted.
accounting year
3. In continuous audit, no trial balance is In interim audit, the trial balance is
prepared, but totals of such accounts are prepared and it is checked out.
verified or noted down.
4. In continuous audit the main objective is Interim audit is conducted with an
not to know the profit or loss. objective to find out the profit and loss.
5. It is a complete set of records for the It is a record only for a specified
financial year. period.

Occasional audit:
Occasional audit is not a regular audit. It is done whenever the need arises and whenever
the need arises and whenever the client prefers the audit is done. Such types of occasional audit
basically an audit done by sole proprietors or by small partnership concerns.
Partial audit:
In this type of audit, where the work of the auditor is basically restricted or certain. The
auditor checks in only a few books, he may be asked to check the receipts side and may be
asked not to check the payments side. Same way the auditor might be asked to check the cash
book, purchase book etc., if the proprietor suspects any fraud we can clearly state that partial
audit is not acceptable to the companies Act. It cab be practiced only but sole proprietors or
partnership concerns.
Standard audit:
Standard audit was defined by Mr. Irish, an accounting expert from Australia.
According to him. “this embraces a complete check and analysis of certain items, contingent
upon effective internal check, appropriate test checks on remaining items: the whole of the
work being in accord with general auditing standards quite adequate to justify and unqualified
opinion”.
From the above definition, we could clearly make out that the item of accounts relating
to certain categories are checked thoroughly analysed and applied in order to bring in an
effective internal check system into operation but this also accepts the concept of continuous,
complete and interim audit are perfect ones it is acceptable as per law.
 23

Balance sheet Audit:

Balance sheet audit is a recent development, this audit is more popular in U.S. A than
in any part of the work. This balance sheet audit is most useful for the industries, business
concerns, economic units. The balance sheet audit will become an important concept in the
years to come.
The term balance sheet audit refers to the verification of the values of assets and
liabilities. Balance of reserves and provisions, amount of profit or loss earned or suffered by
the organisaiton. Balance sheet audit concentrates of various important aspects or on the
important expenditures. This audit helps to differentiate between capital expenditure. And
revenue expenditure and also if any item is put in profit and loss a/c where as it should have
been entered only in Balance sheet, then such errors or mistakes could be corrected by balance
sheet audit.
Difference between balance sheet audit and Post & Vouch audit:
S. No BALANCE SHEET AUDIT POST & VOUCH AUDIT
1. Balancesheet audit is conducted with the In case of Post & Couch audit, the
procedural test. auditor takes the important items to the
balancesheet and the work is reduced to
a great extent.
2. Balancesheet audit at times any not have There is no chance of missing any
some important items, which have to be important item in the Post & Vouch
present. audit.
Procedure or method to conduct balance sheet audit:
1. The auditor should examine the minute book of the company especially the items which
relate to accounts.
2. He should examine and compare the Profit and Loss a/c of the previous year to find out
whether there is any difference between the tow years.
3. He should compare the increase or declare in the expenses between the two periods with
the turnover in order to make adjustments relating to allowance, sales tax etc.,
4. If there is any difference in the gross profit and if so he should investigate, he should also
calculate the value of the stocks.
5. He should find out whether there is any change in the rate of depreciation in the current year.
If so, then he should examine the change with effect to the revenue a/c.
6. He should investigate into the items of non-recurring nature.
eg: Repairs – painting of building etc
 24

7. He should carefully analyse whether there is any substantial change in the value of any fixed
asset when compared with the previous year.
8. He should find out the value of current assets and compare it with the previous year, to find
out if there is any difference.
9. The auditor should analyse whether there is any alteration in the pre-payments and
in the accruals. If so, he should find out the cause for the difference.
10. He should study the balancesheet fully in order to find out whether there is any
variation in the balansheet items.
11. He should carefully determine the value of assets and liabilities of the company.
12. He should find out whether there is any capital commitment for the company (within
1 year), If so, find out the reason and whether because of such commitments, the company will
suffer any loss, must be determined by the auditor.
Position of an auditor with regard to balance sheet audit:
Whenever an auditor checks only the balance sheet to prepare an auditing report, he
should submit the report which clearly states the work dine by him according to sec., 227(3).
The report will contain the method undertaken by the auditor, to conduct balancesheet audit
and the duties and responsibilities which were discharged by the auditor at the time of
conducting such audit must be put in the report. The report must provide only true or fair
information.
Vouch and Post audit:
Meaning/ Definition:
“Vouch and post audit is that where the auditor check each and every transaction right
from its origin in the books of prime entries till they are posted”.
The system of audit has become obsolent in case of large firms where the number of
transactions are numerous, with a good internal check system or mechanized system being
brought into use in the present day system. The auditor basically uses the scientific methods to
test check the items by choosing random samples.
Internal check or control:
“According to L.R. Dicksee, “Internal check is such an arrangement of book keeping
routine that errors and frauds are likely to be prevented or discovered by varying operation of
the book keeping itself”.
According to F.R.M Depaula, “Internal check means practically a continuous internal
audit carried on by the staff itself by means of which the work of each individual is
independently checked by other members of the staff”.
 25

Meaning of internal check system:

Internal check system is a method of organizing the accounting systems of a business
concern or a factory where the duties of different clerks are arranged in such a way that the
work of one person is automatically checked by another and thus the possibility of fraud or
error or any irregularity is minimized or reduced. This minimization makes the employees to
be alert and careful in their work.
Internal audit:
Definition:
According to Professor Walter.B.Meigs of U.S.A., “Internal auditing consists of a
continuous, critical review of financial and operating activities by a staff of auditors functioning
as full time salaried employees”.
According to Institute of Internal Auditors, New York, “Internal audit is an independent
appraisal activity within an organization for the review of accounting, financial and other
operations as a basis for service to the management”.
Meaning of Internal audit:
The concept internal check and internal audit should not be confused together. Internal
audit is the independent appraisal (report) of the activity within an organization in order to
review the accounting, financial and other business practices as a protective and constructive
arm of management. It is a type of control which functions by measuring and evaluating the
effectiveness of other types of controls”.
Operational auditing:
Operational auditing is a recent concept. This was basically developed by the internal
auditors. They instead of calling their work as internal audit, they started to call it as operational
auditing. By the term operation, they mean the transaction of a business.
Operational auditing is nothing but internal audit because such an audit covers all the
transactions of a business. This type of auditing can be used in any organization or institution
where there are large number of transactions are carried out. This is not suitable for small
business concerns. The objectives of operational audit are more or less same like that of internal
audit.
Objectives of internal audit:
Examination of the control structure.
Use of auditor’s general knowledge in the company’s operation in order to examine the
departmental controls and general company policies.
Difference between Internal check and Internal audit.
 26

Internal Check Internal Audit

1. In case of internal check, entries are passed 1. Internal audit in this case, the work of clerk
in such a way that the work of one check is is checked by another after the former has
automatically checked by another at a same finished the work.
time.
2. In case of internal check, the system is 2. Internal audit is a device or method which
devised in such a way that the chances of is used to find out the error or fraud which
committing theft, error and frauds is has been committed or done already. It is a
minimized. detective method.
3. Internal check system is a systematic 3. This is a system to find out any fraudulent
device and guarantees protection against any activity.
fraudulent activity.
Objectives of internal checks:
• Proper division of work.
• Fixation of responsibility.
• Minimisation of errors and frauds.
• Easily detection of errors and frauds.
• Reliability of the books of accounts.
• Easily preparation of final accounts.
Advantages of internal check:
• Proper division of work.
• Efficiency and economy.
• Prevention of errors and frauds due to moral check.
• Easily preparation of financial statements.
• Increase in profitability for the owners.
• Convenient to the auditor to carry out work easily.
Disadvantages of internal check system:
• Cheating may be done by high officials or complication can be done by high officials.
• Costly for small business concern.
• Risky for the auditor.
Principles of an effective internal check system:
• Authority, duties and responsibilities of each member of staff should be clearly defined.
 27

• Division of work should be based on the capacity and capability of each individual
member.
• There should not be overlapping or duplication of work at any point of time.
• Division of work should be designed that no single individual is allowed to perform any
work single handed from beginning to end.
• Routing of work should be so arranged that the work performed by one individual is
automatically and in ordinary course is checked by another individual department.
• There should be regular rotation of employees from one work center to another in order
to ensure against errors and frauds and to broaden the work experience.
• Employees should be carefully selected and properly trained for the job to be done by
each of them.
• Employees should be given clear cut instructions whether oral or written so as to enable
them to perform their work in an orderly or ordinarily in efficient manner.
• At periodical intervals employees should be asked to go on any leave so that any errors
or frauds committed by any could be detected during the leave period.
• There should be self balancing system of accounting to provide for control of subsidiary
ledgers through an account in the general ledger.
• There should be a system of perpetual (continuous) inventory control providing for
continuous accountability.
• Use of mechanical and electronic equipment such as cash register, book keeping
machines, calculator, signature checking machine and computer should be encouraged.
• Filing of the vouchers should be done systematically according to the number or date.
• Incoming letters should be opened by a responsible official who should list all the
letters, cheques and money order receipts and pass them on to the clerk concerned after
securing individual acknowledgements.
• Cash receipts should be duly deposited in the bank, cash received after banking hours
and cheques, drafts share and security should be under the custody of a responsible
official.
• Major assignment like verification and valuation of wages etc. should be under the strict
control vigilence.
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Objectives of internal control relating to accounting system:

According to the institute of Charted Accountants of India, the following objectives are
brought out with regard to the accounting system.
• To ensure that transactions are executed in accordance with the managements general
or specific authorization.
• To ensure are transactions are promptly recorded.
• To ensure that assets are safeguarded from unauthorized people.
• Recorded assets are compared with the existing assets.
Characteristics of an effective internal control system:
• Proper planning in the organization.
• A proper system for authorization and record procedures.
• Proper practices in the performance of duties and functions.
• Proper quality of the employee is must.
Limitations of internal control use:
• Operation use of internal control system involves expenditure of both time and money.
• Internal controls are consistent with transaction of routine nature which may call for
greater attention.
• Potential for human error contributes its own share to the internal control system.
• Possible confusions can arise between persons operating the internal control and the
employee of the client enterprise may arise.
• Persons responsible for exercising control may themselves break the control procedure.
• Change in conditions may bring in unnecessary or inadequate control which may lead
to mistakes.
• Top management of the client enterprise may manipulate transactions, estimates and
judgements to bring a defective internal control system.
Internal audit and statutory audit:
Internal audit:
Internal audit is an independent checking of a work in an organization regarding
accounting financial or other activity. It is a protective and constructive step done within the
organization to protect any cheating or fraud and also it is a positive step to prevent errors and
mistakes. Internal audit is done by the auditors who are the employees of the company. A
proper internal audit helps the organization to finalize the accounts very quickly at the end of
the year. It can also act as a guide to the external auditor.
 29

Statutory audit:
Whenever an audit is conducted according to the rules and regulations of the Companies
Act 1956, by an external auditor then we term it as statutory audit. A statutory audit is normally
done by joint stock companies in order to present a proper set of accounting records to the
shareholders, income tax department, creditors and to the future members of the company
statutory audit is done only by the external auditor who is appointed by the share holders of the
organization in the AGM (Annual General Body Meeting).
Difference between Internal audit and Statutory audit:
Internal Audit Statutory Audit
1. Internal auditor is appointed by the 1. Statutory auditor is appointed by the
management of the company. shareholders of the company except in
certain cases he is appointed by the
Government or the directors of the company.
2. Internal auditor appointment is optional. 2. Statutory auditor must be compulsorily
appointed.
3. Internal auditor need not possess any 3. Statutory auditor must be a qualified
particular qualification according to Sec.226. person according to Section. 226 of the
Companies Act.
4. Internal auditor is an employee of the 4. Statutory auditor is an independent person.
company.
5. The work of internal auditor is determined 5. Work and responsibilities of statutory
by the management. auditor is prescribed by the law.
6. Internal audit is a continuous process. 6. Statutory audit is normally done after the
preparation of final accounts.
7. Internal auditors main duty or objective is 7. Statutory auditor main duty or objective is
to find out whether there is any error or fraud. to find out whether the B/S and P&L a/c are
correct and are acceptable to the law.
8. The powers and duties of an internal 8. The powers and duties of a statutory
auditor can be reduced. auditor cannot be reduced. It is laid down by
the law.
9. Internal auditor can suggest steps to avoid 9. Statutory auditor does not give any advice
wastage, run business efficiently etc. unless otherwise specifically asked.
 30

10. Internal auditor need not submit any 10. Statutory auditor must submit the report
report to the shareholders. to the shareholders.
11. Internal audit has to check all the 11. Statutory auditor may apply test check.
transactions.
12. Internal auditor cannot be prosecuted or 12. Statutory auditor will be automatically
held for any professional misconduct unless prosecuted for misconduct of work.
he is a chattered accountant.
13. Internal auditor can be removed by the 13. Statutory auditor can be removed only by
management or the directors. the shareholders.
14. Internal auditor acts as a watch dog or 14. Statutory auditor normally protects the
protector for the directors or management of interest of the shareholders.
the company.
15. Internal auditor has to prepare accounts 15. Statutory auditor has to prepare the
or internal audit statements in order to the auditing statement to the satisfaction of the
satisfaction of management. shareholders or to the third parties who
utilizes the financial data.
16. The remuneration of internal auditors are 16. Remuneration of statutory auditor is fixed
fixed by management. by shareholders.
17. Internal auditors have no right to attend 17. Statutory auditors are allowed to attend
the meeting of the shareholders. shareholders meeting. It is their right.
18. The activities of an internal auditor is 18. The work of the statutory auditor is
continuous. periodical.
19. Internal auditor is appointed till the 19. Statutory auditor is appointed every year
attainment of retirement age or till the or denominated every year.
management prefers.
Status of an Internal Auditor:
• Internal auditor is an advisor to the company.
• Internal auditor has no right to set up procedures or policies.
• Internal auditor cannot direct work to anyone.
• Internal auditor can only advise, he cannot force things on the management.
• Internal auditor has to prepare accounts efficiently. He will not find out or report any
inefficiency or short comings of an accountant.
 31

• Internal auditor must get the co-operation of all the members of the company and must
be firm and fair in reporting good and bad events.
• Internal auditor should always report to the finance director of the company so that the
independence of internal audit is maintained.
Audit Procedure:
An auditor should have with him an audit notebook, working papers etc in order to
note down the important points to be clarified with the client. The last information or accounts
with which he has audited should also be noted down in the audit book properly. These things
have to be maintained in order to prevent any mishappening. Cheques should be crossed, any
fraud or misappropriation of accounts in the previous audits are found out means they should
be noted down in the book carefully.
Procedure:
• Different tick marks of different colours must be used for addition, posting, for ledger,
for balances and carry forwards etc.
• The importance of the tick marks should not be made known to the client or it should
be kept secret.
• The same kind of tick marked should not be used for every firm and for the same kind
of transactions for all the visits, they should be different each time.
• One book checking should be completed in one setting.
• Some fraudulent alterations may be made by the clerks after the audit clerk has left the
office, in order to avoid such alterations. Different types of tick marks should be done.
• On the next visit, the auditor should see and make sure that there is no scratch marks or
cut down marks in the previous audited files, if such marks are found out, he should get
proper explanation from the officials of the company and must also check wherever it
is necessary.
• Whenever any alteration is necessary, it should be altered from the journal entry.
• Special ticks should be utilized for items which has area by been crashed.
• The auditor should write the correct item with this own ink, just close to the erased one
and the tick should be put properly or a circle mark should be made.
• The auditor should refuse to commence his work until the items are properly written,
audit clerk should not balance the books of accounts before auditors verification.
• The auditor must begin the audit work even before the balancing of the books, so that
the audit may be completed very soon.
 32

• The auditor should certify the true and correct statement of affairs only.
• The auditor should not discuss various tick marks made by him in the ledger with the
client or with the members of the client’s company.
• Voucher checking should be carried out by two clerks, by the senior examining the
voucher by calling out and comparing the amount placing the special tick mark by the
junior clerk in the cash book.
Auditing in depth:
• According to Taylor and Perry who defines auditing in depth as, “it implies the
examination of system applicant within the business, entailing the tracing of certain
transactions from their origin to their conclusion, investigating at each stage the records
created and their appropriate authorization”. E.g: audit in depth in normally followed
for purchase of steps to be followed.
• Auditor should enquire whether there was a demand for the goods from the store keeper
or from the godown administrative officer or from purchase department that such goods
have reached the minimum level or ordering level.
• Whether the tender were invited for the purchase of the goods.
• Whether the order was placed by an authorized person.
• Auditor should examine the delivery note.
• Auditor should examine the inspection report given by the technical supervisor that the
goods are according to the order placed and the invoice from the suppliers of the goods.
• Auditor should examine the invoice.
• Auditor should see whether the goods were entered in the stock register and in the bin
cards by the store keeping or godown keeper.
• He should examine the necessary entry regarding the purchase in the purchase ledger,
journal and other such relative vouchers.
• He should see whether the account of the supplier has been credited with the correct
amount according to the invoice.
Planning of Auditing:
Planning of audit means deciding or programming or budgeting systematic work which
has to be executed while auditing.
A systematic rules, regulations and policies and procedures to be followed while
auditing the accounts of the company is done in order to prepare a proper set of records, this is
known as audit planning.
 33

Audit Note Book:

An audit note book is a book which is maintained by the audit clerk. During the course
of audit, the clerk comes across several difficulties or new points which he has to discuss with
his senior or with the auditor. He makes several enquiries, which, he feels has not being
answered or not done properly. In order make sure that all these things are treated properly. In
order to verify without forgetting all the concepts the audit clerk notes them down carefully in
the audit note book or audit memorandum. Note book may be of a great help to the auditor in
preparing the audit report. A separate note book has to be maintained for different concerns.
Contents of an audit Note Book:
Some of important concepts which are normally found in an audit note book are,
• A list of books maintained by the client.
• The names of principal officers, their powers, duties and responsibilities.
• The technical terms used in the business.
• The points which require further explanation and clarification.
• The particulars of the missing vouchers, the duplicates of which have to be obtained.
• The mistakes and errors discovered.
• Total or balances of certain books of accounts, bank reconciliation statement etc.
• Notes and queries which might be required at a subsequent audit.
• The points which have to be registered in the audit report.
• Any matter which requires discussion with senior clerk or with the auditor.
• Accounting method followed in business.
• Dates of commencement and completion of the audit.
• Provisions in the articles and the memorandum of association affecting the accounts
and audit.
Value of an audit note book:
An audit note book when properly maintained will be of great help to the auditor in the
future days. If audit note book is properly maintained with all the entries clearly posted, it can
become an effective record which could be submitted in any court of law, if any case of
negligence is filed against the audit or, the book will be of documentary evidence in favour of
the auditor even after several years and the concepts might have even lapsed from the memory
of the auditor.
An audit note book may be clear, concise and complete so that it can be used as a guide
for future reference.
 34

Working Papers:
Meaning:
• Working papers are those papers which contain the essential facts about accounts so
that the auditor may not have again to go over the account of his clients. In case he
wants to refer them later on during the course of his audit.
• Audit programme duly completed, showing the nature of work, the extent of checking
and the initials of the person who have done the work.
• Working trial balance.
• The schedules of debtors and creditors, fixed assets, investments etc.
• Correspondence between the auditors and the debtors and the creditors, banks etc.
• Certificate from the management that all the assets and liabilities have been included in
the accounts.
• Adjusting journal entries.
• Abstracts from minute books.
• Particulars of investments.
• Particulars of depreciation.
• Details of the enquiries made during the course of audit and the explanation given.
Objectives and aims of working papers:
• In order to support the auditor’s report, these papers show in detail the actual work
performed by the audit clerks.
• The auditor can get an opinion about the efficiency of the audit clerks.
• Working papers are always retained by the auditors, therefore these papers becomes a
permanent record, to help the auditor whenever any case of negligence is filed against
him in any court of law.
• The working papers basically help and train the audit clerks to summarise their work
clearly.
• The working papers help the auditor to point out to the client the weakness of the
internal control system which is in operation and inefficiency if any in the accounting
system. This may help the auditor to point out the mistakes to the client.
• Working papers help the auditors to plan for the future years.
• Working papers help the auditor to prepare the report without waste of time.
• It helps the auditor to find out whether his assistants have followed his instructions
properly.
 35

• Working papers help the auditors and the clerk to carry out the functions easily without
any problem even in the case the clerks are transferred or quit the job.
• Working papers help as a basis for carrying out future audit programmes easily.
• Items which has been outstanding in the previous years can be given attention atleast in
the future period.
Essentials of good working paper:
• Completeness.
• Organisation and arrangement.
• Clearness.
• Easily readable with explanation.
• Good stationery or quality of the stationery – paper, ink etc. should be proper.
• Paper used should be of uniform size or same size.
• Papers should be clearly arranged together in logical order, properly and adequately in
order to refer in future.
• Proper space should be left for the auditor to note down any concept or decision taken
by him.
Responsibilities, Protection and Preservation of working papers:
Working papers should be always kept in safe custody by a responsible person
(normally working papers are maintained or kept by the auditor, in some cases the client retains
the working papers), the working papers should not be shown to the third parties at any point
of time except with the permission of the client.
After the preparation of the audit report, and the report being submitted to Income tax.
Shareholders and Directors, the working papers should be carefully preserved for a period of 5
or 10 years or even more at times.
Test Check:
Definition:
According to Professor Walter.B.Megis, “Testing and test checking means to select and
examine a representative sample from a large number of similar items”.
Meaning of Test Check:
In large business houses, where there are numerous transactions, it is very difficult to
check each and every transaction and the auditor is also having little time to do individual
checking, therefore the auditor chooses a method to check few transactions at random. Such
types of random checking is called as test check or test checking.
 36

Precautions to be taken while applying test check:

• Entries of every description should be checked.
• Selection of entries to be checked at random.
• Periods and entries selected for test checks should be different in each audit.
• Large number of the entries of the first and last month of audit period should be
checked.
• The test check should be arranged in such a way that the work of each clerk is checked.
• Test check concept should not be applied to cash book where every transaction is
checked.
• Steps to be undertaken by an Auditor when internal check system is adopted.
• Whenever internal check system is used in a organization, the first and the foremost
important concept is that the entries of the organization must be numerous or huge
whenever the system is used and the auditor feels the answers derived are correct, he
can proceed with the system, by chance if the results are negative, then the auditor
should discard test check system and check all the transactions.
• He should check the work of all the clerks, period should be different and department
works should be analysed.
• Work to be undertaken or steps to be considered by an auditor whenever he starts a new
audit.
• When he is appointed in a joint stock company, he should make sure that his
appointment is acceptable by law. If he is appointed on the place of an old retiring
auditor, the new auditor should ask the reason why the old auditor was retired.
• He should find out his work and duty from his client, he should also find out the last
date for work completion and his salary.
• He should study the accounting system used by the client. If the system is weak, he
should take steps to correct it.
• He should get the list of all the books maintained by the company with the name and
signature of the persons who maintain the book. The overall list must be signed by a
responsible officer of the company.
• If the company has branches, the profit and loss and the balance sheet of the branches
must be received by the auditor for preparation of final accounts.
• If internal check system is there, then he should get a written statement to check the
system.
 37

• He should get the name and specimen signature of all the officers of the company
together with duties and responsibilities.
• If the business is of technical nature, he should get the technical knowledge before
starting the work.
• He should ask his client to prepare final accounts, balance sheet, balance of books etc.
together with the vouchers and prepare the schedule of debtors, creditors, doubtful bad
debts, legal papers contracts, security list etc, if they have not been checked already, he
should not start work before the books have been balanced properly.
• He should obtain the previous years audited balance sheet and make sure that the
accounts during the current year are opened with those balances which appeared in the
previous year balance sheet.
• He should get the report of the auditor if any about the previous year’s information
regarding the company’s position. (Report can be obtained from the previous auditor or
old auditor).
• He must read the memorandum of association and articles of association of the
company to make sure with the details and find out whether any concepts are related to
the accounts.
• If the company is to be audited for the first time, he must go through or study the
prospectus, contracts to the vendors and to the promoters.
Division of work between senior and junior clerks:
After preparing the programme or the method of working, the next important duty of
the auditor is to divide the work between his assistants. This is done in order to make the work
easy. After the division of the work between his assistants, the auditor takes up the role of
supervisor.
Vouching of cash transactions:
Definition of Vouching:
According to Ronald.A.Irish, of Australia, “Vouching is a technical term which refers
to the inspection by the auditor of documentary evidence supporting and substantiating a
transaction”.
Meaning of Voucher:
A voucher is a documentary evidence in support of a transaction in the books of
accounts.
Meaning of Vouching:
 38

A voucher is a documentary evidence which supports a transaction which has been

made in the books of accounts. The act of establishing the accuracy (correctness) and
authenticity (proper or perfect) of entries in the accounting books is called as vouching.
A vouching means to substantiate an entry in the books of accounts not only with any
documentary evidence but also to see that the transaction has been properly authorized,
recorded and entered in the books of account.
(Documentary evidence means agreements, receipts, counterfoils, receipts or paying in
books and contracts can be documentary evidence).
Vouching means testing the truth of the items which appear in the books of original
entry. Recent trend credit cards.
Vouching of cash transactions:
The main objectives of auditing the cash are as follows:
• To make sure that all the receipts are properly presented or accounted.
• To make sure that no fraudulent payment has been made.
• To know that all receipts and payments have been properly recorded.
• To verify cash in hand.
• To verify cash at bank.
• Whenever an auditor examines the vouchers, he must remember the following concepts:
• (duty of an auditor with regard to the voucher)
• He should see that all the vouchers are consequently numbered and arranged properly.
• He must see that the date of the voucher and the day in respect of that entry in the
ledgers correctly tally.
• He should make sure the name of the persons and the amount paid with regard to each
voucher and tally it with the respective books.
• Vouchers verified must be cancelled by a seal or a stamp.
• Special attention must be given to the vouchers which are in the personal name. E.g.,
director, partner etc.
• He should make sure that all the vouchers are passed by responsible officers.
• He should make sure whether a revenue stamp is affixed whenever the amount is more
than Rs. 500 (previously it was Rs.20). Revenue stamp must be signed.
• He should make sure whether the payment made relates to the business.
• He should make sure to which account the payment is posted, revenue or capital
account, because any wrong posting will affect balance sheet and profit and loss a/c.
 39

• He should make sure that the amount paid is correctly entered in numbers and in words.
• He should make sure that the proper notice made with regard to partnership deed,
contracts, articles of association, minute book, lease book etc.
• If a duplicate voucher is produced, then the auditor must make sure that this voucher
will be in place of original voucher and if original voucher is found, it must be cancelled
to prevent any fraud or double entry.
• The audit clerk should not take the help of any member of the staff of the client to give
explanation for the voucher.
• Any receipted invoice should not be accepted as a voucher because double payment can
take place.
• Any type of own printed receipts signed by the payee in place of a voucher should not
be accepted, this should be totally discouraged.
• Whenever the auditor examines the voucher with regard to insurance, rent or tax, the
auditor or the clerk should see that the payment has been made only for current period,
if done for a previous period, the entry should be adjusted in the previous accounting
statements.
Internal check regarding cash:
• In case of internal check system, with regard to the receipt and payment method of cash,
the following points are to be noted:
• Whenever cash is received, the receipt should be properly acknowledged by a printed
receipt which must have counter foils. It should be signed by the cashier and
continuously numbered. Any spoiled receipt must be cancelled and no blank
counterfoils must not be accepted.
• As soon as cash is received, it should be entered in a rough cash book or diary.
• /3/
• Remittances should be opened by the cashier in presence of responsible officials, who
must not be a member of the cashier’s office.
• All cheques received should be crossed by account payee.
• Whenever mechanical devices or cash registers are used means we should make sure
that all the receipts are properly recorded and only then a receipt is issued.
• All the receipts of a particular day should be deposited in the bank at the end of the day
or next morning.
• Bank reconciliation statement should be prepared and make sure that all is correct.
 40

• The cashier must not have any control on any ledger.

• Petty cash should be organized under the “Imprest system”.
• Whenever the cheque is issued, it should be signed by a responsible officer, crossed and
if there is any unused cheque books or cheque leaves should be kept under safe custody.
• Any entries in the cash book should be checked independently.
• Internal control over the preparation of wage sheets to prevent fraud and manipulation
should be kept under proper system to bring in effective result.
• All payments should be made by cheque only except petty cash.
• If travellers (salesman) are permitted to collect money on behalf of the company, they
should see that a proper receipt is issued by them on behalf of the company, the money
so collected must be deposited in the bank. The total system must be under the close
supervision of the company.
• The method of recording cash sales has to be dealt in a proper way because the chance
of fraud or cheating can take place easily.
• In case of special payments, the cashier must not sign but must ask the director to sign
such special payments.

Procedure in regard to the vouching the debit side of cash book:

The main duty of the auditor is to make sure that is a good internal check system
operating in the organization with regard to the receipt and payments of cash, the audit clerk
should proceed to carry on the duty of vouching the debit side of the cash book.
To check or vouch the receipt of cash is a very difficult process because some entries
might be totally omitted and there can be some entries for which only some indirect evidence
is avoidable. He should check few items at random and he should make sure that they are in
order, he must also make sure that all the other items are correct by just comparing them with
the rough cash book or with the diary in which cash entries are recorded. This is to be done
because if any item is left out and a mistake arises or fraud is detected, the auditor will be held
responsible.
If the auditor finds that there is time lack or lag (difference between two days), the
auditor should go deeper into the issue as it is possible that the money might have been received
in between the two days but later on misappropriation has taken place.
The auditor is sometimes not responsible if he does not check the rough cash book or
the diary because at times the company may not include such book or diary into the list of
books of account. Therefore the auditor can clearly prove that he is innocent, but in cases where
 41

the book ordinarily is a part of the list of books, he should make sure that he compares both the
books before making the final entry. The duty of the auditor not only ends in examining the
books of account but also to go beyond the books of account, he should make sure that he
examines the memorandum of books and all other evidences which are very much important
to find out the correctness of the books of account.
Some of the important concepts or the terms which should normally appear on the debit
side or debtors side of the cash book are following.
• Opening balance.
• Cash sales.
• Receipt from debtors.
• Income from interest and dividends.
• Loan
• Rent received.
• Bills receivable.
• Commission.
• Sale of investment.
• Bad debt dividend.
• Subscription
• Insurance claim money
• Share Capital
• Sale of fixed asset
• Income from hire purchase agreement.
• Miscellaneous receipts.
1. Opening Balance:
This item must be properly and carefully entered in the book by the auditor, he should
make sure that the balance (closing balance) is duly and properly audited in the balance sheet
of the previous year and it correctly brought into current and by bringing down the closing
balance must be proper without any difference in the two periods.
2. Cash Sales:
In this category, the chances of cheating or frauding are greater. The auditor has to make
sure that all the cash sales are properly entered in the books of account. Normally in cash sales,
the sales person may sell the goods or may not and after selling may forget or avoid entering
 42

the cash receipt, thereby cheating the company. Therefore any sales person must be asked to
prepare
3 copies of cash receipt so that one could be given to the customer, the other two copies could
be sent to the company.
Whenever the cashier receives cash, he should make sure that cash paid seal is put on
the bill. In some cases, four copies of cash memo or bills are prepared. First for customer,
second to be retained by the company, third and fourth must be sent to the gate keeper could
compare the bill with the customer copy so that fraud or cheating is prevented.
3. Receipt from debtors:
The auditor should vouch cash received from debtors, to whom goods had been sold on
credit in the past. The major evidence available on account of this item is the counterfoils of
the receipts issued to the debtors. This is evidence is not 100% reliable because a lesser amount
might have been inserted in the counterfoil than what had actually been received. Eg.,
Rs.10,000 received but counter foil shows for Rs.8000.
4. Income from Interest, dividends & warrants:
Whenever interest is received from a fixed deposit in a bank, the amount so received in
the pass book must be vouched, in case of dividend received, the counterfoil of the dividend
warrant or the covering letter must be vouched, in case of interest received from securities,
vouching should be done on the security itself or on the tax deduction certificate with respect
to such interest. If interest has been received on account of loan granted, the agreement must
be inspected to find out the rate of interest. If the above mentioned security are deposited in a
bank, the pass book must be vouched. The auditor must also find out whether there is proper
allocation made between the revenue and the capital.
5. Loans:
Whenever loan is given or taken, the loan receipt, with the agreement must be vouched
with regard to the lender. The auditor must make sure whether the loan has been raised for his
client only. He should examine the interest payable, the terms of repayment, security offered
must be checked. The auditor should make sure that the security given is shown in the balance
sheet.
6. Rent received:
In this case, the auditor must examine the lease deed, agreement or any such specific
document in order to find out the amount of rent payable, the due date and the provision for
repairs etc. He must compare the rent rolls if maintained by the owner in case of huge
 43

properties. If receipt are issued to the tenant by the client, that counter foil must be collected or
checked.
7. Bills receivable:
In this case, the auditor should compare the bills receivable book with cash book and
the pass book in order to find out whether the amount has been received on the due date. He
should also make sure that matured bills and the amount are cancelled and sealed. In case of
dishonouring of a bill or in any other such cases the auditor must find out the proper reasons
for
the above mentioned aspects. By chance if there is any fraud, the auditor should examine the
bill, if the bill has been paid, the amount will not be outstanding. If there is any contingent
liability, it must be shown in the balance sheet.
8. Commission:
In this case, the auditor must check the commission account with the account of parties
from whom the commission has been received. The auditor must check the agreements
regarding rates of commission etc. The counter foils of the receipts should be checked and
made sure with the cash book.
9. Sale of investments:
The auditor must check the amount received with regard to the sale of an asset or
investments, he should vouch the sold notebook. If the sale has been done through a broker. If
by chance the sale has been done through a bank, he should examine the bank advice. The
auditor must make sure in case of investments carrying dividends that the investments has been
sold with ex-interest and cum-interest. If any investment is sold on, the auditor should examine
the reasons for such a sale.
10. Bad Debt Dividend:
The amount received from debtors who have been declared as bankrupt, the auditor
must vouch the dividend warrant received by such insolvent person with the official receiver
or assignee in order to find out the rate per rupee from dividend payable to the debt, he must
also find out other such important aspect of the dividend or the dividends from the assignee.
11. Subscription:
The auditor should check the subscription received by clerk or the school, club,
association etc. It should be checked with the register or with the subscriber’s list and the
counter foils of the receipts issued.
12. Insurance claim money:
 44

With regard to the insurance claim money received from an insurance company by his
client tallies with the account given in the company’s book.
13. Share Capital:
The auditors should examine the deed or agreement between the company and the
shareholders to find out the investment made by the public in the company. In case of
partnership concern, the auditor should examine the partnership deed and must also make sure
the share of each partner in the business.
14. Sale of fixed assets:
The auditor must thoroughly vouch the sale contract, auction account, minute book of
the directors or any other evidence in order to find out the value of the assets and the price, if
there is a profit must be credited in the Capital Reserve a/c. so that shareholders cannot claim
any share. If any expenses that have been repaid, eg., Insurance Premium etc., that amount
should be
credited only to that respective account. The auditor should make sure whether the sale has
been properly authorized. If sold in loss auditor should examine the reasons for such selling.
15. Income from hire purchase agreement:
In this case, the auditor must carefully go through the accounts relating to the
instalments in order to find out whether the goods have been sold on hire purchase agreement,
he should make sure the rate of interest and should properly find out the cash received in
advance and the instalments paid. Instalement amount should not be credited to the sales
account.
16. Miscellaneous receipts:
The auditor should vouch all the transactions, contracts, correspondences or any other
document in order to avoid any future mistakes.
Teeming and lading - Methods of Frauds:
Another method of committing fraud in connection with the receipt of cash from
debtors is termed as teeming and lading or lapping.
According to Professor. Megis lapping or lading can be defined as a, “concealment of
a shortage by delaying the recording of the cash receipt” whenever the cashier receives money
from Mr. A, he does not credit it to his account but he credits it after receiving money from B
and B’s account is credited after receiving money from C as this goes on when cashier receives
money he settles the account properly. Thereby the misappropriation is cemented neatly
without any doubt.
 45

How to detect such Fraud:

• The auditor should scrutinize the debtors account especially those accounts which show
part payments from time to time although such debtors have been making full payment
in settling the account in past.
• If there is any suspicion that fraud has been committed, the auditor should compare the
amount deposited in the bank with the entries made in the counterfoil of the pay-in-slip
to see whether or make sure whether full payment has been deposited.
• He should compare the carbon copies of the receipts or the counterfoils of the receipt
book with the entries in the cash book and he should pay special attention to the amount
date of receipt and date of deposit.
• If there is any suspicion about a particular account, auditor should get the balances of
the customers confirmed by direct meeting or through a responsible officials.
• Before checking starts, the auditor must make sure that the internal check regarding
receipt of cash from customers and its deposit into the bank and BRS statements are
prepared regularly.
Procedure for vouching the credit side or payment side of the cash book.
Introduction:
• After vouching the debit side of the cash book and being satisfied that there is
appropriate or correct internal check system, the auditor should vouch all the cash
payments so that he can make sure that the payment has been made only to
• Right person or to the right party.
• For the business or himself.
• Has been sanctioned by the person who holds responsible post.
• All the payments have been properly recorded.
• Some of the important items which normally appeal on the credit side of the cash book
are,
• Payment to creditor.
• Wages.
• Capital expenditure.
• Loans.
• Salaries.
• Agents and traveller’s commission.
• Travelling allowance.
 46

• Insurance premium.
• Bills payable.
• Bills receivable and discounted or dishonoured.
• Freight, carriage and customs duty.
• Bank charges.
• Partner’s drawings.
• Postage.
• Petty cash.
• Director’s fees.
• Miscellaneous expenses like rent, taxes, rates, advertising, lighting etc.
• Bank account.
1. Payment to Creditor:
• Auditor should check the receipt issued to the creditor.
• He should compare the accounts with the books and invoices.
• He should check the periodical statement given by the creditor.
• With regard to cash purchase, he should check cash memo, goods inward book etc.
• He should pay special attention for discount.
• In case voucher is missing, duplicate to be brought well.
2. Wages:
• Auditor must vouch the wages items carefully because of numerous transactions. If
there is any fraud or mistake he must disown.
• Dummy names.
• Error or fraud in time or piece work record.
• Clerical error.
• Retired, resigned and dead persons name continuing in the register.
• Overstating the wages.
• Overstating the working hours or days of work.
• Converting and wages.
• Overfooting the payroll wages.
• Understanding deductions.
The auditor should check the following records with regard to wages.
Time record
Piece work record.
 47

Preparation of the wage sheet.

Payment of wages.
3. Preparation of wage sheet:
• Worker number, name, occupation and rate of wages per day or per month or per unit.
• Time-ordinary or overtime.
• Gross amount payable.
• Deductions on account of fine, contributions to the provident fund, employee state
insurance.
• Any advance wages
• Net wages payable.
• Signature or thumb impression of the worker.
4. Payment of wages:
Wage sheet must be given to the cashier, with all details, before payment, signature to
be obtained. If unpaid wages are there, list should be prepared and handed over to the authority.
Auditors duty regarding wages
• He should make sure whether the internal check system is correct.
• He should check the wage sheet or the wage book for the entries.
• He should make a random check to find out whether the calculations are correct, if
anything is wrong it must be corrected.
• He must check the total amount of wages payable with the amount of to find out there
is nothing more or less is withdrawn.
• If wages are unpaid, it must be deposited in the bank.
• He should check the name of workers as mentioned in the wage sheet with the job card
and the gate keeper and foreman register to prevent any fraud. This is also called as
padding.
• He should make sure whether the wage sheet has be initiated by proper authority.
• Auditor must make surprise visit to check the wage sheet preparation, make sure it is
as per the rule.
• Auditor should compare the sanctioned strength of workers with the wage sheet. If
more, he must check with the personnel department.
• Auditor must make sure that number of workers in the wage sheet is equal with the
employees, state insurance card, provident fund card etc.
• Wage sheet of previous months must be compared, if any increase it must be enquired.
 48

• Total wages of each department must be compared with the original estimate made by
the costing department.
• Auditor should see any receipt above Rs.500 is signed on a revenue stamp.
• Leave register to be checked to find out whether leave was granted with or without
salary.
• He should examine the signature on the stamp for 3 or four months to find out the
correctness.
• He should make sure that the name of the person appears only once.
• He should examine the details of casual labourers.
• He must test check the signature or thumb impression to find out whether correct person
only signs.
Capital Expenditures:
• Capital expenditure is the money spent to purchase fixed assets.
• Auditor should see whether payment is proper and correctly capitalized.
• He should ask for documentary evidence in case of doubt.
• Free hold and lease hold property and building. Title deed or lease deed – proof or
money payment – purchase through brokers names, his statement – amount sanctioned
by whom, his statement – Name of registration, details of the building etc. should be
examined – directors minute book check.
• Plant and machinery – same above things (rules) should be applied here.
• Patent (1958 enacted) – He should examine the purchase receipts and cause, expenses
capitalized, purchase for research or experiment – it should be also capitalized –
purchase through an agent his commission – renewal fee not to be capitalized.
• Investments (1) The auditor must check the broker’s bought note.
▪ (2) He should examine the investment pattern, find out whether cum
dividend or
▪ ex-dividend.
▪ (3) He should check the letter of allotment, bank pass book to find out
the method of
▪ payment.
o (4) He should go through the resolution of the board of directors, he should see
that
 49

▪ the managing agents are not interested in the company, should be

verified.
o (5) He should make sure that the investment is registered only in the name of
the
▪ company.
• Payments under hire purchase and instalments.
• He should examine the agreements.
• He should check the vouchers for every instalments.
• Instalments include interest also, principle to the capital a/c, interest to the revenue a/c
– to be checked.
Loans. (a) Should examine the receipts given by the borrower and the loan agreement –
carefully note down – rates of interest – date of receipt and repayment – principal to be paid
every month if any etc.
(b) Whether loan raising is correct, client authorized to do.
Property mortgage for raising loan, their details.
Loans to directors, managing directors, officers of the company – check the approval from
Central Government and Companies Act.
Salaries:
• Find out the total salary payable per month – cheque drawn or case means proper
checking.
• The date on which salary due to the employee – if variation or change reasons – because
of increment or allowances – check them carefully.
• Examine letter of appointment or minute book in order to find out whether the employee
is normally appointed.
• Deductions allowed, loans or advances given, to be checked.
• Salary concepts can be checked with the annual return submitted to the IT department.
Agents and traveller’s commission.
• He should check the agreement to find out the terms of appointment, rate of
commission.
• He should check the receipt given to the traveler or salesman compare with cash book.
• Auditor should check the commission paid correct by going through the orders.
 50

Travelling allowance:
• Auditor should verify the rules and regulations regarding travelling commission – find
out proper calculation – if no rule – suggest ideas to form rules.
• Examine the vouchers signed by the officials and the receiver.
• Extra ordinary travelling expenses authorized by borad of directors. Board of Directors
cannot get TA for attending board meeting unless articles of association permit.
Examine directors attendance register to find out the persons who attended the
meetings.
• Where fixed TA allowed, no calculation is necessary.
Insurance Premium:
• Examine the policy – in case of renewal – renewal receipt for the premium to be
examined.
If there are numerous policies means – examine them individuals to find out the number of
policies – the amount and the maturity value – Premium payable and if policy has lapsed the
reasons for it.
Bills Payable
• Cancelled bills ahs to be examined properly.
• A clear reference has to be made in the bank pass book and in the bills payable book
has to be made.
Bills Receivable discounted and dishonoured
• Auditor should examine with which bank the bill has been discounted which have been
dishonoured check with the entries in the bank pass book.
• He should examine the account of the acceptor or previous endorser is debited with the
amount of the bill - nothing charges or any other expenses.
• If bill is sent for collection – not discounted – bank would credit clients account at first.
If presented and dishonoured banks will debit the account.
• Entries of these have to be checked in the bank pass book, bills payable book and in the
cash book etc.
Freight, carriage and customs duty
• The auditor must check the statement of accounts prepared and submitted by
shipping company, clearing or forwarding agent – together with the receipt issued
by them.
 51

• The auditor should make sure that the payment which has been made is properly
accounted if any rebate or allowance given they should be entered in.
Bank charges
• Auditor should check the items like bank charges such as commission, interest on
overdraft, loan etc. Make sure they are properly recorded by analyzing the bank pass
book.
• If any interest is on all due or if paid he should verify the calculations made in.
Partner’s drawings
• Auditor should examine the partnership deed – find out what could be the maximum
withdrawal by a partner.
• He should check the partnership deed to find out whether any interest on drawings will
be charged, if so the rate of interest and its calculations.
• Auditor should see that the entry regarding the above concept or the item in the partner’s
drawing book or account book – he should check the signature of such partner.
Postage
• Auditor should compare the postage book with the cash book or in the case with the
petty cash book to find out whether all purchases are balanced, stamped correctly.
• In case the company uses a frankling machine – he should see that the receipt issued by
the post office for the payments are correct and proper.
Petty cash:
• The auditor must be very careful while checking the petty cash – because maximum
cheating or fraud can take place only in petty cash because no vouchers are there for
very small petty payments and verification is very difficult namely the transactions are
numerous in petty cash book.
• The auditor should check the receipt of the money by the petty cash keeper with the
cash book and compare the days, if there is any advance payments, such payments is
normally done without the knowledge of cashier. So proper verification is compulsory.
• The auditor should make sure that whenever expenses under petty cash is more than
Rs.2 a voucher should be returned.
• The auditor should make sure that no loan or borrowing is done in petty cash.
• The auditor should make sure that the slip or document is prepared and it should be
counter & signed by a responsible officer so that no alteration can be made. In the slip,
the amount should be written both in number and words.
 52

• If a document cannot be prepared, a list of expenses should be prepared every day and
it should be signed by a responsible person – the reason for expenses must also be noted.
• Whenever petty cash is spent for postage – correct details should be kept in.
• The auditor should make sure that the petty cash items are properly entered in the proper
records.
Director’s fees
• The auditor should examine the articles of association to find out whether directors are
eligible for receipt of a fee.
• He should check the minute book or the attendance register to find out whether the
payment made tallies with the attendance register or book.
• (c) Whenever commission is paid to an director, the auditor should find out on what
reason the commission was paid, percentage, agreement if any and if on profit, find out
the proper calculation.
• (d)Whenever fees or commission is paid the item must be shown in the profit and loss
a/c separately.
• (e)The auditor must make sure that the remuneration paid to the directors by way of
fees or commission are shown separately in the profit and loss a/c.
Miscellaneous expenses – (like rent, taxes, rates, advertising and lighting etc.) Auditor should
examine the vouchers which are related to the expenditure mentioned above – find out whether
they are properly divided between the periods.
Bank account
• The auditor should check the various transactions in the cash book compare it with the
pass book check counter foils.
• Auditor should make sure the various cheques which are sent to the bank or deposited,
money collected and if withdrawn check that account.
• The auditor must check with regard to the payments into the banks by verifying the
counter foils of the cheque issued. In cases where counter foil is not available, the
auditor should accept the bank statement as a proof.
• In cases where cheque drawn are numerous, it could be better to apply test check so that
random checking may be done.
• The auditor must always verify the bank reconciliation statement prepared by the client
to verify the transactions.
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• The auditor must see that the items which are shown in the balance sheet are correctly
exhibited, he should find out this through bank pass book or bank book.
• Whenever loose leaf pass book is used by the banks, auditor must verify the statements
correctly because cheating or fraud can take place.
• Whenever the client has an account in a foreign bank at a foreign country, the bank
balance must be converted at the exchange rate existing at the date of balance sheet and
a certificate confirming it should be obtained.
Vouching of trading transactions:
Introduction:
After examining the cash book, the auditor must check the trading transactions namely
purchases, sales etc. which are the two major items which the auditor should analyse carefully.
The main objective of auditing these books is to prevent misappropriation of goods.
The auditor must make sure that the client pays only for the goods which has been ordered by
him and received by him. As usual the auditor must examine the internal check system
regarding the items.
Internal check with regard to purchase:
• All orders which are required by a department should be sent through purchase
requisition note. Which should show the quantity, quality and in certain cases
even the price and the time.
• All orders which are sent out must be recorded in the purchase order book with
two carbon copies – one for reference, second to the supplier of the goods.
• Whenever the goods are received, the gate keeper or the store keeper should
make a record in the goods inward book – verifying quantity, quality and
weight.
• The invoice must be checked by the storekeeper who maintains the inward book.
The delivery note if maintained to see that goods are received and properly
entered in the stock register.
• Invoice calculations and other entries with calculations must be checked.
• After checking invoice, it must be handed over to the department which placed
the order.
• Once invoice received, departmental head must verify the price, quality,
quantity and if satisfied enter it in the purchase book.
• The invoice should be initiated by all the people who dealt in it.
Auditor should pay attention for the following items:
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• Auditor must make sure whether the invoice is in the name of the client –
because in some cases, invoices are given for goods which have never been
purchased.
• Auditor must make sure who can place orders and make sure only the
responsible officer places the order.
• The date of the invoice should be checked, because in case of fraud, old invoices
can be reproduced for fresh payments.
• The auditor must make sure that the invoice with the order book has been
checked, to make sure that only the necessary goods have been ordered and
correctly received. The order should be signed.
• Auditor must see that goods which are put in the invoice are not capital goods
because capital goods must be taken only to the fixed assets account.
• The auditor should apply test checks to compare invoice with the gatekeeper
inward book, find out whether the goods are actually received.
• Auditor must make checking and cross checking of the purchase book.
• If there is a discount, it has to be deducted from the invoice before making the
entry in the purchase book.
• The auditor should compare goods inward book and the stock sheets with the
purchase book to make sure that all the books which are taken into the stock
have been entered in the purchase book.
• Auditor should cancel the invoice after comparing with the purchase book to
prevent reproduction.
• Auditor must make sure that the trade discount is properly entered in the books
of the company only.
• Whenever invoices are mentioned as duplicate or Xerox copies, auditor must
make sure that they are prepared to replace the original one.
• If the invoices are included by the client as a credit, the auditor should ask all
the creditors to send their statement of accounts.
• If invoice run several pages, the grand total must be checked.
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Purchase Return:
o In this case, the auditor must verify the details carefully.
o When goods are returned – because poor quality, not according to sample etc.,
- credit note must be got. If price has been paid already to be adjusted – note to
be sent to the cashier or cash department, if the payment is to be made in the
future.
o The auditor must compare the credit note with the purchase return journal or
return outward book and outward book, stores record etc.,
o Auditor must carefully register whenever there is heavy purchase return in
opening or closing period of the year.
Credit Sales:
With regard to the credit sales, auditor should check or vouch the day book or the sales
book which record only credit sales. Auditor must go in for documentary evidences and in
certain cases such documentary evidence itself may not be a total proof for the credit sales. The
auditor as usual must examine internal check system carefully.
Internal check system with relation to the credit sales involves the following concepts:
• As per the rule whenever an order is received, it should be recorded in the order
received book – with details regarding day, the name of the customer, details of
the goods, delivery date and method of transport all these things must be
included in the order received book.
• The copy of order which was received has to be sent to the despatch department.
• After packing the goods, the clerk in the department must compare the goods
despatched with the order. This has to be done in order to make sure only the
goods which are requested alone are sent in to the customer. Whenever the
comparison is over, a list regarding the goods in package has to be sent to the
counting house.
• In this case, a responsible officer has to mark the rate at which goods are to be
charged.
• In this case, the clerk of the department will make the necessary extensions like
required bills, notes etc., if any needed which will be sent to the accounts or the
finance department.

• The accounts or finance department will prepare the invoice in duplicate or

triplicate copies by using carbon sheets which is compulsory.
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• One of the carbon copies will be sent to the invoice clerk who will enter the
details in the sales book, the same copy has to be sent to the customer for his
payment, while the second copy will be sent to the gatekeeper who will record
in the goods outward book regarding the details of the book which has left the
organization. Third copy will be retained in the company for future references.
• Whenever the orders for the company are received through travelling agents or
sales representatives, the concerned sales representative must be given an order
book which can be used to prepare 3 copies which is compulsory – one copy of
this book will be given to the customer, second copy must be sent to the head
office, third copy is normally retained by the concerned sales representative for
the purpose of future reference or for collection.
• The duties of an auditor in connection with the credit sales done by the company
or the organization:
• The auditor should make sure that the internal check system is effective, if the
• system is not satisfactory he should disown the responsibility, if satisfied with
the
• system he should apply test check methods.
• The auditor must compare the date and data of invoice with the data of invoice
with the data and data in the sales book.
• The auditor should make sure that the sales are not omitted from being entered
in the sales book.
• Auditor should see that the sale of an asset is not treated as ordinary sale because
profit will be increased. The sale should be debited to the purchase a/c credited
to the asset account.
• The auditor must get the permission of the client. He must send statement of
• account to the customer in order to find out the correct balance to be paid or
received.
• Auditor should check the sales book for the last days or weeks of the financial
period and the return inward book for few days or weeks during the closing
period to find out any false or wrong entries have been made to create
profit.
• He should check the entries and makes cross checks of the sales book.
• Cancelled invoices should be checked with the duplicate copy of the invoice.
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• With regard to sales tax, insurance charges which are recoverable from the
customers should be debited to the customers account and credited to the proper
accounts.
• Sales made to the allied or sister concerns, close and careful checks has to be
done.If there is any difference of the trade discount allowed to 2 different
purchases,
• the auditor should enquire the reason of difference.
Sales Returns:
• When goods are returned back, for being defective – entry in gatekeeper
register, store register to be made.
• Credit note to be prepared and sent to the customer signed by a responsible
officer.
• The auditor must analyse the reason for return – because return can be proper
or can be for cheating.
• Year ending sales returns to be carefully watched.
• Auditor must be careful when goods are returned, when the demand for the
returned goods falls.
• Sister or allied concern returns to be verified carefully.
• Auditor must check the transaction with the gate keeper returns inward book
and with carbon copy of the credit note sent to the customers or received from
the customers.
Duty of an auditor with regard to sales ledger and bought ledger:
1. Bought Ledger:
Auditor should check the creditors account, opening balance of different
accounts
in the bought ledger with regard to the previous year audited balance sheet or schedule
of creditors to be properly checked by auditor.
2. Sales Ledger:
The auditor should check the sales ledger which contains the debtors a/c. The
opening debit balance has to be checked from the previous audited balance sheet or
schedule of debtors to be checked by the auditor.
Auditor should check the schedule, he must verify the list by applying the
following test to each account:
If the account is regularly settled, cash discount given debt is good.
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Debt is outstanding beyond a period, it may become a doubtful debt.

Where the payments are on account, balance will increase – this will mean a
doubtful payment.
Where the old balance is carried forward and the new goods are supplied for cash,
then debt has become doubtful.
When a check or bill is received against a debit balance which has been
dishonoured- the debt may become bad.
Auditor should examine remarks like non-payment, account stop, funds in the
hands of advocate or solicitor, bankrupt, disappeared, address not known – these are
bad debts or doubtful debts, the amount is returned and should be credited to the bad debts
account.
The law of limitation allows 3 years to recover a debt and if the debt is outstanding for a long
period, it becomes a bad debt.
If bills are renewed continuously, it is a weak party and it can become bad debt.
Payment irregular can also become bad debt. If there is any unusual discount or
allowance, it should be carefully checked.
Total account and sectional balancing:
This system is normally used in big business concerns where there are large
number of transactions, in order to find out the correct balances in the sales ledger and purchase
ledger, this system is used. In this system the total debtors and creditors account are prepared
so that they automatically tally. This system reduces the mistakes and the auditor while
applying test check method could verify very easily.
Mechanised Accounting:
Introduction:
This system has put an end to the conventional method of accounting. This
system also removes the duplication of work. This system came into use basically after the
second world war, the man power shortages, high wages and large transactions made
mechanized system to develop rapidly. This system gives upto date information accurately
within a short time. The system also helps to get a printed statement within seconds, thus
simplifying the working process. Eg., computer cash register etc.
Aims and advantages of mechanized accounting:
Increase speed.
Greater accuracy.
Greater economy.
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Neat and legible records.

Many copies of records.
Interim account.
Collection of accounts.
Avoid overtime payment.
Reduces physical effort.
Strengthens the system internal check.
Reduces the audit fee.
Makes decisioning process easy.
Statistical data could be combined easily.
New balanced and accounts will be automatically calculated by the machine.
Uniform system is possible.
These machine operators need not be a qualified accountant.
Less clerks are only needed in the accounts department.
Necessary entries can be made in many documents while reprinting and arranging
the document to reduce the work.
Disadvantages of Mechanised system of accounting:
Auditor may not check the internal system carefully because machines are used. There
can be a chance to fraud.
Loose sheets or cards used in machines must be numbered consecutively and kept
carefully by chance if destroyed details will be lost.
If original record has a mistake, if we fail to correct the mistake, mistake will be carried
on till the end.
People who don’t know the system, take time to understand the concepts.
Mistakes can be committed by the auditor or clerk if they don’t know the code number
properly.
Though the work of auditor in the beginning may be reduced but at the end he must
carefully check the final results.
Accounting machines may lead to unemployment.
Many records in loose sheets or cards. This may basically affect the originality and
normally the court may question the correctness of such papers.
As the knowledge of the machine operators is limited with regard to accounting aspects,
errors or mistakes can take place in the principles itself.
There is a chance of items being entered into wrong accounts.
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Books of account are not always upto date by chance if the machine is used only when
a page of necessity has to be processed then it is waste.
Limitations of mechanized accounting:
The cost of the rent of the machines are very high. Only large scale units can afford to
spend huge amount of money.
Small concerns have very transactions, they would prefer hand work or typing instead
of accounting machines.
Advantages of mechanized accounting (From auditor’s point of view)
Mechanised system helps the auditor to trust upon the internal system of internal
control.
Mechanised accounting reduces the burden or the work of checking, casting, posting,
totaling etc., only point the auditor has to make sure that no fraud has been committed.
The auditor an submit necessary information within a short period of time and the
writing work is reduced to great extent because any number of copies can be taken at any times.
Auditor and mechanized accounting:
Introduction:
The auditor must satisfy himself that the following things are there in the audit
work of a business concern. Whenever a company uses mechanized system of accounting.
Auditor should make sure that such a system should not make any change in his audit
programme in audit accounts. If there is going to be any change, he should find out reason for
the change and make sure that system of change does not affect his duty.
Auditor must make sure that the machines used by the organizations are totally
protection so no mistake can take place.
The auditor should have a knowledge to find out whether the machines can be checked
for the results which are given by the machines or they are themselves self proving.
The auditor must make sure that the machine used by the company is in perfect
condition, if there is any repair or mistake, auditor must make sure that such mistakes or repairs
are corrected properly and the result given by the machine is correct and proper.
Auditor must make sure that the machine used by the organization is totally protected
or is there any chance of manipulation by the worker or operators, if so he must make sure that
the result given by the machine is correct and proper.
Whenever the mechanised accounting system is involved, auditor must
make sure
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that the basic principles are not altered. The auditor has to make test checking and
normally believes upon the internal check system operating in the organization whenever he is
analyzing the transactions, he should adopt different methods for verifying. He msut thoroughly
know the code numbers used. He must adjust the programme and method of work so that he
satisfies the following concepts.
Whether all transactions have been correctly recorded.
Whether there is any possibility of mixing between staff members or clerk (contra
entries not allowed).
Whether all the transactions have been properly authorized. At last he should check the
internal check system and also see whether there is proper allocation of capital and
revenue expenditure because they are not done by machine. He should also check all
the preliminary documents, so correct information is only fed in. finally the auditor
must know the way to use the machine.
Auditor of Impersonal ledger:
Introduction:
Auditor after finishing the verification of the purchase and sales ledger, he
should verify the impersonal ledger or general ledger or nominal ledger. These ledgers contain
the accounts and entries which can be used to prepare trading, profit and loss a/c and balance
sheet.
Impersonal ledger is divided into two categories:

I. The nominal ledger – which relate to the trading and profit and loss a/c and real a/c
which record assets. By chance if the ledger gives incorrect information, the profit and loss a/c,
balance sheet etc., will become wrong and auditor will have to get help for the correction of
the mistake. The auditor must check each of the transactions carefully and cancel unnecessary
entries.
Method of checking or vouching Impersonal ledger:
The auditor should check the postings of such transactions to the impersonal ledger.
Eg., Cash transactions relating to profit and loss will be dealt in cash transaction. Therefore the
second entry must not be made in the impersonal ledger.
Important transactions like transfer and adjustment from on impersonal account to
another must be passed.
Whenever entry is passed, auditor must make sure that there is proof for the entry which
is made.
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He should carefully check such transactions which will affect the final accounts greatly.
Auditor should check the total of the subsidiary book. The balances in the impersonal
ledger should be checked and verified with the trial balance.
Outstanding assets and liabilities:
Introduction:
Balance in impersonal ledger may be mathematically correct, but the profit or
loss arrived can be wrong, because certain items which had to be entered or omitted has been
omitted or entered. The auditor therefore has to correct these mistakes in order to arrive at
correct profit or loss. Whenever there are adjusting entries, they must be passed through the
journal, certified by the responsible officer. The auditor must examine each and every item
before clearing.
1. Outstanding assets – outstanding assets are intangible assets as they are called may
be,
Income receivable.
(ii) Prepaid expenses.
On time basis. Eg., Prepaid insurance, prepaid rent etc.
On a revenue basis. Eg., Prepaid advertising, prepaid commission.
On inventory basis. Eg., Automobile supplies, factory supplies, office supplies, sales
department supplies etc.
(iii) Deferred revenue expenditure deferred changes are defined by Prof. Arnold
Johnson as, “not recurring expenditure which are expected to be of financial benefits to several
minate total length”.
Expenditure which though of revenue nature is spread over number of years
because benefit is received even after many years, which is termed or called as deferred revenue
expenditure. Eg., Advertisement, preliminary expenses, alteration or heavy repairs to the plant.
In some cases, heavy expenditures which are incurred by the

organization and the advantage or benefit of such expenditure is derived over the years.
They are
Expenditure incurred in launching and in advertisement campaign.
Development expenditure done in case of plantation and mines. Eg., Tea, coffee, rubber
plantations, coal, granite, mines etc.
Experimental expenditure eg., Trial of a product or new product.
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Research expenditure. Introduction of a new diversified product or bringing out trial

products.
Plant rearrangement and removing cost.
Extraordinary repairs which are of non-recurring nature eg., machine overhauling staff
training to obtain the knowledge to run a new plant.
Discount allowed on issue of debentures.
Outstanding Liabilities:
Introduction:
The auditor after analyzing the asset side, he should turn his attention to the
liabilities side and determine the liability and determine the liabilities correctly inorder to find
out whether all the items have been entered properly, if any entry in profit and loss a/c or any
other account is left out means, he should see that such left out item is brought into the account
because if it is not rectified, correct profit cannot be determined and dividend cannot be
declared properly to the shareholders.
The auditors must examine the following items carefully before analyzing the
profits.
1. Unearned incomes.
2. Unpaid expenses like,
Purchases
Rent, rates and taxes. Electricity charge. Water charge etc.
Wages and Salaries.
Audit fee.
Freight and carriage.
Traveller’s and agent’s commission.
Commission to sales manager.
The auditor should check the amount paid to the sales manager carefully. Find out the
rate of commission by going through the sales book. He should verify the calculations, receipts
given by the sales manager, counter foil of cheque book or cash book etc. If auditor suspects
fraud, he should take the following steps:
(i) He should compare the sales with the stock book and see whether the goods have
been despatched or whether it is a imaginary sales.

(ii) He should compare the stock as shown by the balance sheet with the stock book at
the end of the year.
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(iii) He should physically check the closing stock.

(iv) He should examine the days of sale of goods and make sure that there is an entry
in regard to the return of goods after the sale has be affected.
(v) He should see that the sales in respect of which the goods have been returned either
before or after the close of the year, such sale should not be calculated for commission payable.
(h) Interest Payable:
The auditor must get a correct certificate signed by the responsible official of
the company that there are no expenses incurred without being included in the audit.
Allocation between the capital and the revenue expenditure:
Introduction:
The most important duty with regard to the expenses is to differentiate whether
the expenditure is a capital expenditure or a revenue expenditure. If no differentiation is shown
between these expenses, it would finally affect the profit and loss account statement and the
balance sheet of the organization. Therefore the auditor as well as the directors of the company
must carefully allocate the expenses to the concerned sector.
I. Capital expenditure:
Whenever any expenditure is done for purchasing new assets, which will automatically
increase the earnings of the company and value of the asset, we call it as capital
expenditure.
Any such type of expenditure is done to improve, enlarge, extend the business.
Capital expenditure is not necessity be a heavy expenditure, it can be also a small
expenditure, based on circumstances.
The auditor should carefully go through the expenditure and find out whether it is really
a capital expenditure before the allocation. Eg., of capital expenditures.
1. Heavy Expenditure:
Installation of new plant, purchase of new asset, expansion of business,
diversification of business, improving the technology etc. Construction of building.
2. Light expenses:
Installation of tube lights, installation of fans, exhaust fan etc.
Even acquisition of patent trade marks, copyright, design etc., can also be
treated as capital expenditure.
II. Revenue Expenditure:
Revenue expenditure is one which is periodically incurred to maintain the
revenue earning capacity of the business.
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1. Expenses incurred to maintain the value of any existing asset. Eg., White washing,
ordinary repairs etc.
2. Expenses which are incurred in the ordinary conduct of business administration. Eg.,
Rent, Salary, Advertisement charges etc.
3. Expenses which are incurred in connection with the administration and distribution
of the goods manufactured or sold. Eg., Commission, Travelling expenses.
4. Expenses which are incurred fully to earn the revenue of the particular accounting
year, which is totally consumed and written off during the year. Eg., Expenses done for
purchases, and resale of goods.
Difference between Capital and Revenue expenditure:
1. Capital and revenue expenditure have to be correctly allocated only to the respective
heads. Otherwise, it will affect the profit and loss a/c and balance sheet.
2. It is the duty of the auditor to carefully identify the expenses inorder to be allocated
to the respective heads.
3. When a new plant is purchased to replace the old one, expenses done to pull down
the old plant will be treated as revenue expenses, whereas installing a new plant will be capital
expenses.
4. By chance if capital expenditure is debited to the profit and loss a/c, particular asset
will not be debit with that amount. This will lead to undervaluation of assets and creation of
secret asset or reserve which is totally prohibited.
5. By chance, if revenue expenditure is debited to the capital account, profit will be
inflated, the dividend if paid on such profit has to be collected back from the shareholders.
6. The auditor must carefully allocate the expenses, he should get a certificate regarding
the allocation of expenditure between capital and revenue from a responsible officer and this
must be clearly mentioned in his report. If anything goes wrong after this, auditor can disown
his liability or responsibility.
Contingent Liability:
Introduction:
The first and the foremost important duty of an auditor is to make sure that all
the known and unknown liabilities are brought into the account of the balance sheet. There are
certain liabilities which may arise or may not arise after the preparation of the balance sheet.
Therefore it becomes necessary that a provision must be created for such unknown liability.
These liabilities are termed as contingent liabilities, meaning liabilities at a future date.
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Definition:
“A contingent liability in a balance sheet is a possible future liability arising
from one or more business acts preceding the date of balance sheet. Eg., Provision for bad
debts, provision for taxation, bills receivable discounted, may be dishonoured, calls on partly
called up shares, forward contract, guarantees etc.
According to montegomerry, “The term contingent liability should be used in
the accounting sense to designate a possible liability of presently determinable or
indeterminable amount which arises from the past action or circumstances which may or may
not become a legal
obligation in the future and which if paid, gives rise to a loss or an expense or an asset
of doubtful value”.
According to Wlater.B.Megis, “Contingent liabilities may be defined as
potential obligation which may in the future develop into actual liabilities or may dissolve
without necessating amount out lay”.
Kinds of contingent liabilities: Contingent liabilities may be divided into two kinds.
1. A liability involving an ultimate loss. Eg., A liability in a disputed case where
damages may have to be paid, forward contracts, speculative transactions on stock exchanges
etc.
2. A liability which will involve in the acquisition of an asset of corresponding value.
Eg., goods purchased for future delivery.
Auditor’s Duty:
1. The auditor should make sure that the contingent liability is normally given in the balance
sheet as a foot note.
2. Auditor has to go through carefully, consult books, client’s, advocates etc. to find out the
genuness or truthness of the liability.
3. Income of bills receivable discounted not matured, he must enquire the client and the bank.
4. Auditors must make sure whether clients stands as a guarantor for any loan or overdraft
granted to the company.
5. Auditor must get in writing from the advocate if the transactions appear illegal.
6. Auditor should make sure about the value of the liability.
The auditor should divide the contingent liabilities into two major categories:
According to part I of schedule VI of the Companies Act.
1. The liabilities in respect of which a provision has been made in the balance sheet.
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2. Liabilities in respect of which no provision has been made in the balance sheet but only a
note has been inserted at the foot note of the balance sheet. Eg., 1. A provision for
depreciation, taxation, dividend – these things must be shown as current liabilities and
provisions. 2. Bills receivable, accumulated dividend, promissory note etc. should be given
in the footnote of the balance sheet.
Contingent Asset:
Normally contingent asset are not mentioned in the foot note of the balance sheet on
the
asset side. Eg., Of such contingent assets incurred up share capital of the company.
Refund of octroi duty paid, money received on dishonoured bills etc. The contingent asset must
also be properly shown as the liability although the companies act is totally silent about
contingent asset representation in the balance sheet.

QUESTIONS:
1. What do you mean by Balance sheet Audit?
2. Bring out the differences between Internal Check and Internal Audit?
3. What do you mean by continuous Audit? Discuss is advantages and disadvantages
in detail.
4. Write a note on audit notebook.
5. What are the main aims of internal check? Discuss how far internal check gives security
to the auditor.
6. What are audit working papers? What are their uses?
7. Distinguish between Continuous audit & Periodical audit.
8. Explain th concept of vouching of cash transactions.
9. What is impersonal ledger?.
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VERIFICATION AND VALUATION

Verification and Valuation of assets and liabilities.
Meaning of Verification
Verification means proving the truth or confirmation. One of the major duty of an
auditor is to verify the value of the assets and liabilities which appear in the balance sheet. The
auditor not only has to verify the total but also see that the items recorded in the balance sheet
rally exist. The auditor must carefully calculate the value of each asset and liability and enter
them correctly in the balance sheet. He should make sure the date of purchase, the date of sale
of asset and date of arising and payment of liability, make sure that asset is not pledged, only
after making there entries carefully, he should prepare the balancesheet if anything goes wrong
in the balance sheet, auditor will be held responsible.
Definition
It is judgement According to Justice Alver Stone, “It is the duty of the auditor to verify
the existence of assets stated in the balancesheet and he will be liable for any damage suffered
by the client if he fails in his duty”.

The Verification of assets involves the following steps.

1. Comparing the ledger account with the balancesheet.
2. Verifying the existence of the assets on the date of balancesheet.
3. The auditor must satisfy that the assets are free from any charge or mortgage.
4. Checking the proper value of the assets.
5. Finding out whether the assets have been purchased only for business.

Problem in valuation of assets

1. Whenever the valuation of the assets are made by the proprietors or by the officials of
the company. The auditor has to apply certain tests to find out the value of the assets.

2. If the asset is valued by a proper valuer or a surveyor the auditor must accept the
certificate issued by a competent authority.
3. In case of assets like stock book assets etc., he should refer invoices or correct books to
find out the price or value.
4. whenever the asset is to be replaced the auditor should find out the value of the sale
price of the old asset and the money required for the purchase of new asset.
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5. In case of sale of asset, auditor should find out the scrap value or the brea-up vale of
the asset which is to be sold or sold already.
6. With regard to going or running concern, the auditor should take into consideration the
following points.
a. Original cost.
b. The working life of the asset.
c. Wear and tear of the asset.
d. Break-up value of the assets.
e. Chance of asset becoming out dated or out fashioned.
7. The auditor must make sure whether the assets are correctly shown in the balance sheet
because the assets can be classified as fixed assets and floating assets.
8. The auditor must make sure the correct expenses and the correct value are properly
entered in the balancesheet, whenever a new asset is purchased or new article is
invented.
Valuation of assets during inflationary period
A major problem which the auditor faces is how to value the assets during inflation
period.
1. The value of the stock is not sufficient to met the cost of replacing the same quantity of
stock.
2. The depreciation charges based on the historical cost of the fixed assets will not provide
sufficient money required to meet the cost of replacing those assets if they are needed
to be replaced later on.
3. Depreciation is provided on historical costs of the asset same way stock in tradeis
valued. Profit shown by the profit and low a/c will not show the increase or decrease in
the trms of purchasing power of the money.
To solve the above problems, the following solutions are made.
1. The replacement cost method of dealing with the fixed assets should be followed.
(i.e) fixed assets are to be valued at replacement cost.
2. The fixed assets should be written up according to the market price of the asset existing
on the balancesheet date.
3. The stock in trade should be valued at market price and depreciation should be provided
on the value of the stock so arrived.
4. The index method of adjusting the accounts to reflect the changes in the purchasing
power of money should be followed.
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FIXED ASSETS
Definitions
According to Institute of charted Accountants of India, “a convenient working rule is
to regard as fixed assets as those acquired for the purpose of use in the business with the object
of earning revenue and which are not intended for rebate at a profit and conversion into cash
in the ordinary cause of business”.
1. Fixed assets are not consumed for the process of manufacturing but they are of
permanent nature and normally used for earning profit.
2. Fixed assets which purchased of permanent use and will not be sold in the ordinary
course of business.
3. Fixed assets can be an asset which is used by the organisation to make money.
Definition
According to when, In England, fixed assets are defined “Assets not held for sale or
conversion into cash”.
Methods of valuation of fixed assets
Fixed assets must be valued at cost price les the total depreciation in the value by
constant use. Fixed assets must be valued at original or historical cost less total depreciation
which is written off upto the date of the balancesheet.
The are valued as a going concern value or conventional value or token value. The basic
reason for this principle is that these assets are purchased for running the business and not for
resale purpose. In this case price fluctuation will not affect the earning capacity of the asset of
the business normally they are valued at a utility point of view. They are valued at the estimated
present value of the business. They should not be valued at a prince which they would get on
the dare of the balancesheet.
Method of valuation of floating or current assets.
Floating or current assets are those which are acquired for resale, normally
manufactured for the purpose of converting them into cash.
e.g: Stock, B/R, cash, Normally these assets are in form of cash or acquired with the aim to
convert them into money. They are valued at the date of the balancesheet at original cost prices
or market prices whichever is least, they must not be valued at more price than the original cost
price, if done it will create fictitious or false profit at the time of sales, they may be sold for
lower prices.
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Wasting assets
Wasting assets are those assets which are of fixed nature and normally get depleted or
exhausted in the process of usage. E.g oil wealth, quarry, mine, e.g. granite, marble e.g Gold,
Copper, Coal.
Any asset which will be lost in usage can be termed as wasting asset. A different is to
be made between the decrease in the value of fixed asset and a wasting asset. A difference is
to be made between the decrease in the value of fixed asset and a wasting asset. Fixed asset
and a wasting asset. Fixed looses its value because of wear and tear whereas wasting asset is
due to the operating of extracting, selling or exhaustion or evaporation.
In case of a mine, it is very difficult for the auditor to find out whether the mine is totally
exhausted or where is the balance. Therefore, in valuation of this asset as prescribed by the
institute of charted Accounts of English and Wales. It has to be shown in the balance sheet at
its original cost and provision is to be made of depreciation is to be made for depletion,
according to the estimated use of the assets.
Intangible assets.
Intangible assets are those assets which cannot be seen or touches e.g: Goodwill,
Copyright, Patent, trademark etc. Whenever auditor determines the value of such asset, he
should determine the following points.
1. The basis on which such assets were originally valued.
2. The reasonableness or adequacy of amortisation or written off method.
3. Fair and adequate balancesheet presentation.
4. the accuracy, completeness and proper control of the income arising from the ownership
of such an asset as lease hold and patent.
5. Auditor must determine whether the asset represent any benefit or advantage at the date
of balancesheet.
6. Auditor should make sure that the assets are recorded on a basis consistent or relating
to the correct accounting principles.
7. Auditor must make sure that the assets are correctly represented in the financial
statements of the company.
8. They must be shown separately.
Valuation of Intangible asset.
1. They should be shown at cost price unless they have been acquired in a non-cash
transaction in which case they must be shown at a fair market price.
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2. They are the lease liquid of all assets since most of them are unsalable unlessthe
business or a part of it is sold.
Auditor’s duty regarding valuation of assets.
1. the most important function the auditor has to perform is to find out the correct profit
and loss a/c and draw the balancesheet.
2. The major problem is finding out the correct value of the asset as the audit is not a
technical person or a qualified valuer, he has to totally depend on all the information
provided by the directors, staff or the surveyors, therefore auditor must be careful while
accepting the value.
3. Auditor must make sure that certain principles of accountancy are followed when
valuation of assets are done.
4. The auditor should make sure that proper depreciation is only provided?
5. The auditor should make sure that the value of assets like shares, stocks etc are valued
according to the rule even if there is a slight suspicion he should make an individual
assessment.
6. The auditor should make sure that the value of as Auditor must make sure that the
entries made in the balance sheet are correct, proper and if any doubt arises he must
estimate individually only after that final posting is to be done.
VERIFICATION AND VALUATION OF DIFFERENT KINDS OF ASSETS.
INTRODUCTION
The next duty of the audit or after carrying out initial duties, is to make sure that only
the correct value of the assets and liabilities are entered in the balance sheet, in order to make
sure the auditor has to verify each of the asset and liability. This is not a guarantee given by the
auditor but a statement which according to the conscience and knowledge of the auditor it is
correct.
The auditor may normally check the following assets.
1. Cash in hand
2. Cash at Bank
3. Loans.
4. Bill Receivable
5. Investments
6. Stock in trade
7. Book debts.
8. Endowment policy
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9. Patent and trade market right.

10. Copy right.
11. Assets in a foreign country
12. Furniture and fixtures
13. Plant and machinery
14. Loose tools, pattern and dyes.
15. Property.
16. Goodwill.

1. Cash in hand
a. The major problem is to find out the correct value of cash in hand for this the
auditor must get a certificate from the management in which correct cash
balance in hand will be mentioned.
b. The auditor should visit the business enterprise frequently during the close of
business transactions or at the opening time so that he can count cash and check
the balance. If any difference he could get a certificate from the cashier to find
out the reason for difference if any
c. The auditor should count petty cash stamp etc to get correct balance.
d. Auditor should make sure that whenever any amount is spent, a proper bill or
voucher is put up signed by correct person.
e. Whenever a loan is granted, he should make sure that an acknowledgement is
received from the parsons who borrows the money.
f. Auditor must get an acknowledgement from the director or a responsible official
of the company whenever cash balance is maintained by the company.
g. The auditor must request his client to deposit cash in hand including the petty
cash and any other balance if any in the bank for correct verification after which
the client may withdraw the money for future expenses the next day, by opening
a new cash book.
h. The auditor should always ask the client to maintained only a minimum cash in
hand and extra money if any must be deposited in the bank.
i. Whenever there are branches for the company the auditor must see that he gets
a certificate from the auditors of these branches and based on their certificate he
would prepare the final statement. By chance if the branches don’t have local
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auditors, he should visit the branch and count the cash or ask the branch manager
to deposit the money in bank when he is not able to visit the branch.
j. With regard to the cash with the agents or with the all representatives, auditor
should visit the branch manager to deposit the money in bank when he is not
able to visit the branch
k. . With regard to the cash with the agents or with the sales representatives, auditor
should receive a documentary evidence and make sure that proper entries have
been recorded in the books of such money received.

CASH AT BANK
a. The auditor should examine the bank pass book and he must compare the balance as
shown by the bank column of the cash book.
b. Auditor must prepare the bank reconciliation statement, show that if there is any
difference between the cash book and pass book that could be found out and corrected
or difference could be noted down with reason.
c. Auditor should make sure whether the pass book presented is proper and correct.
d. Auditor must make sure by getting the certificate that no loan has been raised against a
bank deposit. If raised he must get the correct reason.
e. Auditor must also go through the cheques outstanding cheques and cheques not yet
collected to make correct entry and to find out if any deficiency exist.
f. Another important precaution to be taken by the auditor is that the balance as shown by
the cash book is only brought to the balance sheet and not the passbook amount.
g. The auditor must examine the cash deposit or the fixed deposit made by the company
in the bank so that false entries are not made.
h. If the company has divided account, charity a/c etc., in such cases all the accounts must
be carefully checked. If the balance sheet has a debit account with regard to the bank
account auditor must examine the reason for the overdraft and find out the securities
pledged and the interest charged on such overdraft.
3. Loans
Loans may be taken or given on following guarantees or securities
1. Against the security of land and property.
2. Against the security of stock and share.
3. Against the security of goods.
4. Against the securities insurance policies.
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5. Against the personal security of the borrower.

1. Loans against the security of land and property
a. Auditor must examine the loan a/c , documents relating to securities namely
promissory note, bond, acknowledgement by parties etc.,
b. The auditor should examine the mortgage deal with regard to land and property
and find out whether the mortgage has been properly executed in the name of
the client.
c. If second mortgage is done, he should make sure whether the first mortgaging
has been informed.
d. He should examine title deed of the property.
e. Whenever the second mortgage is done, the title deed will be with the auditor
must make sure whether the first mortgage has got the title deed correctly.
f. The amount of loan and the date on which it was received must be enquired loan
should but be more than 2/3rd of the original value of the property.
g. Auditor should find out the rate of interest, the date on which the payment if any
outstanding reasons for it.
h. He should make sure that the property pledged is insured against fire and
examine the last premium receipt.
i. If loan is taken on a lease hold property, he should make sure that the ground
rent is paid by the borrower on the due date examine last receipt.
j. Auditor must make sure whether the mortgage has power to mortgage the
property and borrow money
k. He should make sure that the mortgage is properly requested with the registrar
of companies.
l. Whenever loan has been paid partly, auditor must examine the amount paid and
if possible, get a confirmation from the other side about the payment.
2. Loans against the security of stocks and share
a. Auditor must get a list of stock and share which has been pledged.
b. Auditor must make sure that such stock and share is transferred to the name of his client.
c. He should inspect such shares and stock and make sure that they are pledged once and
not the own property of the client.
d. Auditor must get a written statement from the borrower regarding the amount of loan
on the date of balance sheet, if possible examine the agreement.
e. Partly paid up shares should not be accepted as a security.
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f. Auditor should check the value of the securities to find out the margin between the loan
and the present value of the security if margin is small, he should ask the client and ger
more security.
3.Loans against security of goods.
1. Where loans has been given against the godown keeper receipt, receipt should
be carefully examined, make sure it is duly endorsed in the name of the client.
2. Auditor must make sure the warehouse rent or godown rent has been paid by
the borrower, by chance not paid the amount should be added to the loan, and
the margin between security and loan must be found out, if security is low more
security must be asked.
3. Whenever goods are in transit the lading together with the letter of pledging,
insurance policy and invoice must be pledged and duly endorsed to the name of
the client.
4. To find out the value of the security, the market quotation or invoices of the
goods must be found out.
5. Auditor should examine the equality inspector’s report from time to time to find
out the quantity and quality of goods.
6. By chance goods are of perishable nature, he should examine the stock turnover.
4. Loans against the security of Insurance policies.
a. Receipt of the last premium paid if premium has ben paid by the client to prevent
lapsing of the policy, the auditor should debit the loan a/c fot the premium paid by his
client
b. Auditor should see that the notice of assignment of the policy has been given to the
insurance company.
c. The value of this type of security must not be taken as the assured sum but the surrender
value of the policy based on that only loans should be given
5. Loans against the personal security of the borrower.
a. Whenever loan has been given based on the personal security the auditor must enquire
the financial position of the surety because security depends on his financial position.
6.Auditor must make sure that no change in terms and conditions of the olosn has been made
because such a charge will automatically discharge the surety and the client will loose the
security.
4. Bills receivable
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The auditor should examine the bills receivable book with the bills receivable in hand.
This is to make sure that all the bills are correct and all the bills are correct and proper, if some
bills are sent for collection, they should be enquired and overall list must be prepared, bank
enquiries to be made.

a. Whenever a bill has been discounted earlier, the auditor must make sure that he arrives
at the correct date of the maturity and enter it in the balancesheet in order to find out
the contingent liability if any.
b. Bills not discounted must be entered in the second column and compared with the bills
in hand.
c. Bills rent for collection must be entered in 3rd column and it should be verified through
correspondence or certificate from the bank.
d. Whenever bills are examined auditor must make sure that they are drawn up properly
and stamp duty and not over due. If the amount is not received on due date, provision
has to created.
e. Bills which has been dishonoured before the date of balance sheet not to be included in
the balance sheet.
f. The auditor must examine dishounoured bills and make sure that they are not fictitious
g. If bills received from previous endorser had been discounted and dishonoured, the
account of the previous endorser must be debited. Notice to the previous endorser must
be given.
h. Whenever bills have matured before the due date, the auditor must vouch the cash so
received in the cash book and in the pass book.
i. When there are many bills which are discounted the rule is to apportion the discount on
the bills which are maturing after the date of balance sheet. The discount relating to the
period after the date of balance sheet. The discount relating to the period after the date
of balance sheet is to be shown as an asset under rebate on bills discounted not yet due.

5. Investments
1. Whenever there are large number of investments like a bank or an insurance
company. The auditor must ask for the schedule of investments which is held
by the client. This schedule must give all the details regarding the investments.
2. The auditor must ask for full details of investments for which no certificate has
been given or no evidence ahs been produce till the date of verification.
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3. Auditor must examine all the investments simultaneously and has to compare it
with the schedule. If the no. of investments are large one checking is not
possible, he should inspect them by keeping the details totally under his control.
4. If investments are held by a trust, the trust deed exists, he should get an
authorization certificate from the trustee. He should make sure that the trust
properties are free from any pledge or charge.
5. If securities are entrusted to a banker for safe custody, auditor must obtain a
certificate from the bank has kept the security for safe custody, the certificate
must state that the investments are free from charge.
6. If the security of the company is kept under custody of the company secretary
or by some other officer of the company, such securities must be registered in
the name of the company only. The securities so held must be compared with
the schedule at the end of the year as per section 49 of companies Act.
7. All the certificates has to be accepted by the auditor, he should examine the date
and find out the rule for safe custody.
8. If the securities has been sold prior to the date of audit the audit must vouch the
proceeds in the cash book are and in the bank pass book.
9. In case of auditing the accounts of banking companies, auditor must make sure
that all the investments of the bank at the same time and the securities given to
the bank as security for loans and advances must be simultaneously inspected.
10. a. The certificate or the receipt should clearly state whether the securities which
are charged are free from any charge.
b. He should see that the provisions of banking companies Act 1949 are
compiled
with
c. He should compare the details of the investments with the investment register
maintained by the bank
d. He should see that investment are held by the nominee of the bank. The
nominee should clearly state the go as of the investment on behalf of bank. He
must examine the transfer deed.
e.He should see that invest merits are correctly valued and properly represented
in
the balance sheet according to the companies act 1949.
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Investments may be registered

Debentures, stocks and shares government securities.
Inscribed stocks
It is a type of stock where no certificate by the issuing authority is issued to the stock
receipt is issued to the purchaser giving the nominal amount purchased and the amount received
but his name is inscribed in the register of the stock maintained by one of the joint stock banks,
crown agents for colonies or by the RBI.
Eg: war loans, India, 3% loans colonial stocks, municipal stock etc,

Bearer bonds and share warrants

Valuation of Investments
Once the auditor has verified are the investments, he should correctly value the
investments and enter them in the balance sheet, he should make sure the various factors like
depreciation (It is not possible in investments) except in shares of mines or plantation
companies. Auditor must check the articles and memorandum of Association of the company,
dividend interest etc., In case of financial company the cost price or the market price to find
out. If the asset or investment is a temporary one, they must be shown at cost price or market
price whichever is lower. The auditor can find the present value of investments by making a
reference to the stock exchange. If the details of the value can not be found, he must write to
the company secretary for the latest price and value.
Whatever be the method of valuation, the auditor should see that the investments are
not over valued at any point of time except in extra ordinary situations. Even under such
situations, the investments must be revalued, so a correct adjustment could be arrived it is
basically necessary when we write off certain assets, balance sheet must be specific whether
valuation is on cost market price or cost less reserve. If investment is not fully paid up, correct
details must be made in a note, with regard to the valuation of investments of a bank, auditor
must see that mode of valuation of investment cost or market value is correctly stated in the
balance sheet as per the Banking companies Act. Such investments are shown at cost or below
cost where the value of investment is shown in the later column of the balance sheet then the
market value is more.
6. Stock in Hand
Auditor has to correctly value stock in hand because the item directly affects the
financial statements of an organization. According to Justice Lindley, “It is not part of an
auditor duty to take stock, no one contends that it is he must relay on other people for details
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of stock in trade”. This definition clearly points out that though the auditor must given a correct
value of the closing stock but physical verification is done by some other people on whose
report he submits the statements.
Methods of stock taking:
1. Stock checking is done on the last day of the business year, clerk goes to the godown
checks the number of items while another clerk notes down in a paper regarding quantity etc.,
this sheet is called as ‘stock sheet’.
2.Goods in transit, in branches, sent out on approval or sale or return etc., must be
3.correctly categories and properly entered.
4. Goods which have been sold but not delivered must not be shown in the balancesheet as
closing stock.
5. The auditor must be careful in analyzing and supervising the work of the clerks because
he is responsible.
Basic Principle of valuation of stock in trade.
1. The auditor should compare the prices with the original and independent data.
2. Discounts, frights and insurances duties should also be taken into consideration.
3. Ascertain the obsolent (out of fashion) or damage or slow moving stock, whether it has
been properly valued should be checked.
4. Auditor should investigate, material changes, if any, in the inventory from the
commencement and at the close of the year.
5. Auditor should check the computation of extensions if any made.
The term cost price has been used in various form and it can be interpreted in different way
1. Unit cost method
2. Average cost method.
3. FIFO method
4. LIFO method
5. Base stock method
6. Standard cost method
7. Adjusted selling price method.
Market Value
The main function of the auditor is to find out the market value or the market price of a
product. There are tow methods to find out the market value
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1. Replacement value – the amount is necessary to replace the product of the same kind,
the replacement cost would be always less than the actual cost, the cost of replacing the
stock at date of the balance sheet is considered as the market price of the product.
2. Market Value – The estimated net amount that the goods would get when sold after
deducting the estimated expenses that the goods would get when sold whenever we are
considering the market value we must consider expenses such as allowances, selling
and distributing charges which are included in the value whenever we take into the
above aspects we have to consider the reason for which stock is maintained.
a. Whether the goods are held for use.
b. Whether such goods are regularly sold or they are not be replaced when sold
out.
Methods of valuing different types of stocks or goods.
Goods can be classified category for the purpose of valuation they are,
1. Raw material valued at net invoice price namely cost price of a reasonable value of
freight, duty etc, which are connected to the raw material. The auditor should make sure
that they are not over value. He must also make sure that this concept is not applied in
case of unsalable, damaged or obsolent products.
2. Semi-manufactured goods must be valued at cost price of raw materials used, with
proportionate amount of wags or labour, charges and a % to cover establishment
charges related to manufacturing item according to the certificate given by the
departmental managers.
3. Finished goods – valued at cost of raw materials and the proportionate expenses for
manufacture auditor must make sure that it is not over valued. Normally the over rate
expenses on finished and semi-finished goods are divided according to direct labour or
a. The last months basis
b. The time spent to manufacture goods.
c. The average wages of the year
d. Volume of production.
4. Stores – these goods are not for sale purpose, shown in the B/S and must be valued at
cost price, if market price becomes less then at the written down value. They must not
be included in the list of stock in hand but must be shown separately and those stores
which are consumed during the process of manufacture must be shown on the debit side
of the account to get the correct cost of production.
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a. Space parts – valued at a cost price need not be written down to market value if
that value is lower at the date of B/S.
b. Goods on consignment – it should be valued at cost price + the proportionate
expenses the unsold consignment must also be valued as the some above form
but at not time at higher prices
c. Goods on approvals it must be valued at cost price – damaging if any during
course of transit. In case of unapproval, goods not at higher price than the market
price
d. Stock of plantation products Tea, Spices, coffee etc. this should be valued only
after the crop is sold.
Duty of the auditor in connection with stock in trade.
1. To verify the existence of the goods.
2. To make sure that it is valued properly.
The auditor must make sure the price by one or more of the following methods because
manipulation can be done by,
a. Incorrect additions and calculations in stock sheets.
b. Incorrect valuation of the closing stock in the stoic shares.
c. Inclusion of such stock of goods in the stock sheet which have been purchased
nut the invoices for which not been passed through the purchase book.
d. Goods such as tools, furniture etc to be checked in each stock sheet.
e. Old and out fashioned goods have to be carefully value of because over value
can be adopted.
f. The goods which have been sold in the market and entry passed in the sales
book but not delivered to be carefully analysed.
In the following circumstances, the auditor has to very carefully in handling the stock
in trade and can adopt following methods.
1. Auditor has to verify the quantity of stock and make sure with the internal check system
to prevent malpractice.
2. Auditor should ask for the stock sheet and check the method of stocktaking.
3. Stock sheet preparation must be under the control of a responsible officer and signed
by a director.
4. If there is any change in the stock sheet, the auditor must request the person to initial
so that it could be found out who make the change auditor must be careful and if mistake
arises auditor will be held responsible.
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5. Auditor must check the calculation, additions and entries et.,

6. Auditors should check the record maintained for purchase and sales which should be
compared with the balance of stock in hand as given by the stock sheet.
7. Auditor must do random checking of large items in the stock sheet and compare with
the stock record.
8. Auditor must make sure that the goods which have been sold but are not entered in the
stock record once again.
9. Auditor must make sure all the purchases have been entered in the purchase book and
are included in the closing stock.
10. The gross profit rate on the sales should be checked with the previous year’s gross profit
on the sales.
11. Auditor must make sure that furniture, tools etc., are not included in the stock list.
Duties of an auditor with regard to the valuation of stock
1. Auditor should make sure that the gods are properly valued.
2. He should make sure that the calculations, additions and entries are correct in the stock
sheet.
3. He should check the depreciation to calculate correct value of stock.
4. He should make sure that the same method of valuation is followed every year- he must
get a certificate from the client to this effect.
5. He should make sure that the stock sheet is signed by a responsible official and a correct
certificate is attached.
6. Auditor must make sure that the goods with the consignee branches or sent for approval
must not be valued at selling price.
(They should be valued only at cost price)
7. He should compare the gross profit with 2 to 3 previous years.
8. He should compare the present closing g stock with the previous year closing stock and
find out the difference, if difference is high, enquire the reason.
9. He should examine the purchase and sales and goods return inward and outward books
to find out whether the correct entries are recorded.
10. Auditor must se that stock in trade is shown in the B/S schedule 6 part I of the
Companies Act 1956.
Valuation of fixed assets.
1. The normal method of valuing fixed asset is cost price – depreciation when the asset is
to be replaced at the time of inflation, replacement cost method is preferred.
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2. In replacement method, a provision for replacement would be created for replacement

would be created instead of usual rate of depreciation
Difficulties under this method
If the assets is not replaced, within a short times, it is difficult to estimate the correct
replacement value money calculations had to be done and market a details have to be collected
and estimate the amount of changes.
Note:
1. From book debts, upto goodwill 7th point – 16th point and verification and valuation of
liabilities from introduction – first point and capital upto 8th point contingent liabilities
are in the typed form.
2. Depreciation –its introduction, difference between depreciation & fluctuation objects
of depreciation, measures of depreciation cost of rehabilitation, plant register, methods
of depreciation, auditors duty are in types form.
3. Reserve – meaning, kinds, difference between general and specific reserve, difference
between sinking fund and for redemption of liability and sinking fund for replacement
of an asset, development fund reserve,
Capital reserve, usage of capital profit, secret reserve – meaning objective, dangers and
auditor’s duty are in typed form.
7. Book debts
Introduction:
The auditor must go through the debt as given in the balance sheet and make sure what
are the recoverable book debts and irrecoverable bad debts. He must present a true and fair
view of the details. According to the Companies Act which has prescribed the form or balance
sheet as per schedule 6 part I the sundry debts should be shown as below:
1. Debts considered good and in respect of which the company is fully secured.
2. Debts considered good for which the company holds no security other than debtors
personal security.
3. Debts considered doubtful or bad.
4. Less provision.
Whenever the debt is due from directors or officers of the company, other company but
under same management from subsidiary company. Auditor must find out the genunious and
examine the document and must show them separately. The amount of loan to directors and
employees of the company during the year the year must be shown through a note. If auditor is
not able to find out the financial position of the debtors of his client he should not treat the debt
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as good. He should make sure the provision and other evidence. Debt from foreign and trade
to be converted in home currency. If gods are purchase system or installment system it should
be treated as good until the payment is regular. He can also create provision for such debt.
8. ENDOWNMENT POLICY
Endowment policy is normally taken by an organization whenever it needs fund in order
to replace an asset. Normally the sinking fund policy is opted by the companies for redemption
of debentures. The duty of the auditor is to check the policy physically and make sure that the
premium has been paid and make sure that the policy does not laps.
9.PATENT RIGHTS AND TRADE MARKS:-
The main duty of an auditor with regard to patent rights and trade mark is to verify the
certificates granted for such right or mark. If they have been purchased he should examine the
assignment deed and make sure that it is properly registered in the name of the client. If the
client has numerous patents for trademarks a schedule must be prepared containing:
1. Description of the patent.
2. Registered numbers.
3. The dates on which it was acquired.
4. The balance or un expired life period.
a. Auditor must examine the receipt for fees paid, renewal fee paid each year, and
if not paid patent right will get laps.
b. Normally a patent has 16 years life, unless the terms has been extended the right
of the patent will laps after expiry of the period.
c. If a pattern is to be lapsed a resolution of the board is must.
d. With valuation of them, they will loose their value based on times.
Causes for depreciation:
i) Passage of time
ii) Obsolsence
iii) Out of fashion
e. If the trademark or patent is created for doing some research work, money spent
on the research work has to be capitalized. Auditor must make sure that only the
cost incurred in doing the research work is debited to the patent account.
10. COPY RIGHT:-
Copy is the individual or the sole right to produce or reproduced the book or an article.
1. Copyright is the lifetime of the author and 50 years after his death.
2. Copyright value is not always same it looses its value over the passage of time.
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3. Copyright must be valued every time when the balance sheet is prepared.
4. If the books cannot be sold in the market the copyright must be written off.
5. Copyright for the films is 10 years and if not renewed the right is lost.
11.ASSETS IN A FOREIGN COUNTRY
1. Auditor must examine the documents of a property which is situated in a Foreign
country, the documents must be kept in head office. If document is not available a
certificate from the local auditor were the property is situated must be obtained and
presented to the auditor for verification.
2. Auditor must make sure that the assets are free from charges.
3. The auditor must mentioned that asset is free from charges in his report.
12. FURNITURES AND FIXTURES
1. Auditor must verify this item by going through the invoices, if additions made during
the year, it additions made during the year, it must be carefully verified.
2. Any expenses incurred with regard to the purchase of this asset it should be debited to
the furniture account.
3. Depreciation must be carefully calculated and then entered upon.
4. Repairs to the furniture must be taken in the revenue account and then debited.
5. Auditor must make sure that all the furniture purchased are entered in the furniture stock
register.
6. All the furniture must be numbered and damaged furniture must be written off through
a responsible official.
13. PLANTS AND MACHINERY
1. Auditor must examine original invoices and other relevant correspondences.
2. Expenses like customer duty, freight, errection charges etc., should be debited to the
machinery account and repairs to the revenue account.
3. Auditor must make sure that proper depreciation is charges to the machinery, if he does
not have technical idea he should get the help of the works manager or an engineer.
Find out the correct depreciation and then enter the amount in the balance sheet.
4. Auditor must make sure if there is any sale that sale is correctly entered in the proper
columns.
5. If a plant or machinery is kept in a foreign country, then the auditor should get a
certificate from the local auditor of the country in which the machinery has been dept.
14. LOOSE TOOLS, PATTERNS AND DYES:
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1. The auditor must make sure that these assets have real value because the life of such
assets are very short.
2. Auditor must carefully find out the correct number and the value of the machine because
theft and loss are very common in such assets.
3. Auditor must get a list of such assets signed by a responsible officer.
4. The auditor must make sure that no depreciation under conventional method is
followed.
According to Montigo Merry, “charging the replacement of such items to maintenance
is
Lieu of depreciation them is usually a satisfactory alternative”.
5. Whenever the organization manufactures its own tools auditor must make sure that they
are not more valued.
15. PROPERTY
Though the auditor is a qualify accountant he is fully competent to examine the value
of the property correctly. Therefore under such circumstances it is necessary to get an certificate
from the qualified engineer or an architect or an surveyor to find out the original value of the
assets. For auditing purpose and for easy accounting concept assets can be classified into two
categories.
a. Free hold property
b. Lease hold property
a. Free hold property:
1. The auditor must examine the title deed to regarding the property he should the brokers
or auctioneers account, if build the contractor or the architects’ certificate should be
examined.
2. If he property is mortgaged, he should examine the title deed with the mortgagee and
the amount of loan received.
3. If the title deed is in the safe custody of a bank or an advocate he should examine the
reason for it and find out if any loan taken if so the amount.
4. The auditor was make sure that the deed is properly registered u/s 17 (i) of the Indian
Registration Act.
5. If the property has been purchased in the current year, it should be vouched and the
property account must be shown in the balance sheet at cost including legal and
registration charges less depreciation up to the date.
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6. With regard to land and building he should make sure that appropriation or depreciation
is properly treated.
7. The auditor must make sure that proper and separate accounts are maintained for the
building but there is no depreciation for plant.
b. Lease hold property
1. The auditor must examine and find out the value of the property and the duration of the
lease.
2. Auditor must make sure that the lease has been properly registered with the registrar if
it for more that one year according to sec 107 of the transfer of property act 1907.
3. The auditor must sure that the lease money must be capitalized, any legal expenses or
expense met in regard to getting the lease should be capitalized. Lease must rent must
be debited to the revenue account.
4. The lease money and the other capitalized expenses should be spread over number of
years in which the lease sums and debited to the revenue account.
5. In case of lease building depreciation, insurance against fire and necessary repairs must
be debited to the revenue account and auditor must go through the last receipt for
payment of lease rent.
16. GOOD WILL:
Goodwill as defined as the calculated value of the reputation of a business or we could
called as a difference between the purchase prices and the net assets which are purchased and
the access amount which is paid as termed as goodwill. It is an intangible asset. It is an
intangible asset. It affects the profit and loss account by increasing or decreasing the amount.
1. The auditor must carefully value the goodwill by verifying the various contracts,
agreement assets and liabilities business reputation etc.,
2. The auditor must find out whether the goodwill is created out of the reputation of the
business or by investing huge amount introducing a new product in the market the
goodwill has been credited. Such expenses must be capitalized and it is called as
differed goodwill.
3. The auditor must find out the goodwill has been correctly credited if any false creation
he should but accepted deffered goodwill must be specifically shown in the balance
sheet to differentiated from the purchase goodwill. Such goodwill is to be written off
over the period of the time.
4. The company law does not make forces a company to show goodwill at its realizable
vale (same value). It is normally shown at cost less sum written off.
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5. The auditor should make sure that the goodwill is never appreciated in the books of a
company.
VERIFICATION OF LIABILITIES
Introduction
Verification of liabilities is also very important like the verification of assets. The
liabilities must be correctly stated in the balance sheet to give a fair and true view of the
company. If over or under stated it would affect the reputation, profit and loss account and the
balance sheet of the company. The auditor must verify the liabilities and get the certificate from
the organization and all the liabilities for purchases as well as for expenses. On the other
category are correctly included in the books of the company.
1. Capital
2. Reserves accounts and funds.
3. Debentures and mortgages
4. Trade creditors.
5. Bills payable.
6. Outstanding expenses
7. Loans
8. Continget liabilities.

1. CAPITAL:
a. Though capital not a liabilities but the auditor must verify and give a correct
certificate to entering in the balances sheet.
b. Auditor must carefully analyze the memorandum of association, AGA examine
cash book, pass book and minute book of the Board of Directors to find out the
number of shares in each class any forfeiture etc., should be found out.
c. The auditor should make sure that schedule 6 of part I of the companies act are
complied with.
d. The auditor must carefully analyse with regard to the sole trader, partnership
(examine deed) the cash book and the bank pass book of the partners-profit and
loss, withdrawals, additional capital etc., to be found out.
2. RESERVES AND FUNDS.
The auditor for this purpose must carefully examine whether the loss of the company
permit the creation of a reserve.
a. General reserve.
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b. Specific reserve
c. Sinking fund reserve
d. Reserve for development fund.
e. Capital reserve etc., could be crated must be referred in the rules.
The auditor must make sure the so created reserve is utilized only for the created
purpose.
3. DEBENTURES AND MORTGAGES.
The auditor must be carefully inspect the MOA and AOA in order to find out whether
the company has the power to borrow money. Off the company has the power to borrow then
he should find our whether there are any specific rules and regulations for such borrowings. If
so, he should refer in with the company rules. As in the case of debentures, auditor should
examine the companies cash book, bank book, director’s minute book etc., to find out the
amount of debentures issued – premium or discount life time – 5,7,9,11 or 13 years.
In case of mortgages auditor should examine the mortgage deed and make sure that
such borrowing has been authorized by the company. He should examine the rate of interest
and mode of payment and all the other connected aspects.
4. TRADE CREDITORS
a. The auditor should examine the schedule of creditors and check it with the
purchase book which could be check with the purchase invoices, credit note,
goods inward book, returns outward book, cash book etc.,
b. Auditor should see that all the purchases are correctly entered in the correct
books
and only that years purchases should be entered in the books.
c. Auditor must check the statement of account received from the creditors and
should check the amount.
d. Auditor must compare the percentage of gross profit with that of previous year
if there is any change to great extent, he should enquire the reasons and find out
the truth.

5. BILLS PAYABLE:
a. The auditor must verify the various items from the bills payable account in order
to find out whether the payment is correct and proper.
b. The auditor should examine the correctness of the bills payable by examining
the bills payable in hand on the date of the balance sheet.
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c. The auditor suspects any malparactice, he should send the bill to the concern
party and get the confirmation statement about the originality of the bill.
d. If any change has been created on any of the asset of the business concern by
accepting the bill, the information should be mentioned in the balancesheet.
6. OUTSTANDING EXPENSES
a. The auditor must get the certificate from a responsible official of an organization
to make sure that all the expenses for the current year are included, payment of
such expenses like interest, discount, salaries, wages etc., which are not been
paid are been excluded.
b. Certain expenses which could be debited to the current year example rent,
salary, electric changes for the last month may be included but payment is made
only in the next year – a proper note should be added and also make sure that
they are treated properly with careful consideration.
7. LOANS:
l. The auditor must examine the agreement for getting the loan.
m. Auditor must make sure that the interest on loan is paid on the correct day if
interest is not paid the auditor must see that interest is shown as a liability.
n. If loan has been secured by mortgaging a property, the property so mortgage
should be indicated in the balance sheet.
o. The auditor, if there is doubt must get a confirmation from the persons who has
given loan, about the amount, interest and the due date on which the loan is
repayable.
p. Auditor must make sure by going through the rules of the company whether the
company has power to borrow money.
q. He should make sure that a mortgage is registered with the registrar of the
company and incase of bank overdraft, agreement with the bank security offered
must be examined.

8. CONTINGENT LIABILITIES
a. The auditor must make sure that all the known and unknown liabilities are
correctly specified in the balance sheet. In case of future or unknown liabilities
which are termed as contingent liabilities, must be carefully analysed and then
entered into the books.
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b. The auditor must make sure that the contingent liabilities is true one by going
through the requisite records and making sure that it may turn into liability at a
future date and then entering in the books of account. Examples Contingent
liabilities can arise through discounted bills when dishonoured bills, contracts
unfinished etc.,
DEPRECIATION
Introduction
The word depreciation is derived from the Latin word “depretium” which means –refers
to declaim and pretium – refers to price therefore we can clearly state that the term depreciation
means deceases in the value of fixed or capital assets.
Definition:
1. B.G.Vickery “permanent decrease in the value of an asset through wear and tear in use
or passage of time”.
2. According to Cropper, Marsis and Fission “depreciation is a term employee by
accountants to indicate the gratual deterioration both in the value and the usefulness of
these assets which, by reason of the nature and uses steadily declaim in the value”.
3. According to Baulu, “in practice the term depreciation is commonly use in a very wide
sense, covering timuni (decreasing) in value of an assets cost by outside fluctuations in
realizable and replacement values, and also the amortization in the cost of an asset over
period of its use”.
The other important definition are given by, Montigo Merry, an American accountant and
the committees on terminology of American institute of accounts have also defined institution.
The basic essence of the above definition are:-
1. Wear and tear.
2. Passage of time (effluxion of time)
3. Obsolesence.
a. Technological development
b. Shortage of labour
4. Exhaustion – refers to minerals when taken out are extracted after some time period the
mineral becomes a nil.
5. The effect of weather and other element, rain, sunshino, mist etc.,
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DIFFERENCES BETWEEN DEPRECIATION AND FLUCTUATION

S.NO. DEPRECIATION FLUCTUATION
1. Depreciation is due to the internal cost. Fluctuation is due to the external cost.
2. Depreciation always means decrease in Fluctuation may either increase or
the value of an asset. decrease the value of an asset.
3. Depreciation is always a permanent Fluctuation is a temporary effect
decrease. increasing or decreasing the market
value of an asset.
4. Depreciation as a charge against the Fluctuation does not affect the profit
profit. and therefore it is not taken into
consideration.
5. Depreciation is in connection with fixed Fluctuation is connected with the
asset. current assets.
Objects and the necessity for providing depreciation
1. The first and the foremost important objective to provide depreciation is to find out the
correct cost of production and the correct value of the asset. Which will determine the
profit of the business.
2. If depreciation is not provided the assets will be always depicted (presented) in the
higher value in the balance sheet than the real value – which will provide a wrong
statement.
3. The main objective of providing depreciation is to keep the capital in that by distributing
the loss in its value over a number of years when it is in use.
4. Another objective of depreciation is to show the value of the assets not only in the
realizable value but also to set a side certain amount of money for replacement.
5. A provision for depreciation helps the organization to replace the old asset with the new
one by making necessary funds.
6. Depreciation is also necessary as per law according to Sec 205 of the Companies Act
before a company distributes its profit.
Measures of Depreciation
The following are the important points which should be considered by an auditor before
deciding the total amount of depreciation which is to be provided;
1. Original cost of the asset.
2. The addition to the asset during the year taking in to the consideration the dates on
which these additions were made for the purpose of calculations.
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3. Interest that could be earned if the sums present in the purchase of the asset have been
invested outside.
4. The estimated efficiency of the life of the asset.
5. The scrap, break up or the residual value of the asset.
6. Obsolence (out of fashion)
7. The working hours of the assets concerned.
8. The repairs and renewals or the maintenance policy.
9. The skill of the operators who handled the assets.
10. Depreciation should be provided according to the Income tax Act and the Companies
Act (10%)
Cost of Rehabilitation
One of the important concepts in depreciation is an original cost therefore the
depreciation on the original cost may arise depreciation plus cost of rehabilitation.
Interest during construction:-
Interest paid on debentures, Lon etc., must be added to the cost of building or machinery
and the deprecation should be provide over the total cost of building machinery (+) Interest
paid.
Cash discount
Here the same system should be followed if cash discount is allowed on the purchase
of machinery provided the amount of interest is substantial.
Property acquired in exchange of company stock or bond
Cost of such property should be determined by the market value of consideration is
given or by the fair market value of the property acquired whichever is more clearly identified.
Property acquired as a contribution or donation
It should be valued when received at the priced amount a set amount. Plant surveyor is
calculated the a price amount.
Plant Register
The plant contains the following information with regard to each type of the assets.
1. Opening balance of plant and machinery.
2. Additional made during the year.
3. Nature of the plant. (example, boiler, drilling machine, later etc.,)
4. Original cost price.
5. Estimated life of the plant.
6. Estimated scrap value.
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7. The rate at which depreciation is to be charged.

8. Numbered of working hours per week.
9. The number of non-working hours. Eg: Strike, lock-out, machine break-down etc.,
10. Repairs made during the year.
11. Sale of any part of the plant.

Advantages of plant register

1. The rate of depreciation is fixed on the advice of an expert who posses technical
knowledge therefore the auditor can be sure of the depreciation.
2. The depreciation allowances can be easily checked by the Income Tax authority.
3. The exact amount of depreciation can be found out therefore the correct cost price of
the asset can be easily found out.
4. Un economic repairs can be found out.
Various methods for providing depreciation
1. Fixed installment method.
2. Reducing balance or installment method or written down value method.
3. Depreciation fund method or sinking fund method.
4. Annuity method.
5. Insurance policy method.
6. Revaluation method.
7. The use or the mileage method – This is used in case of vehicles, the value of
depreciation is based on number or kilometers the vehicle has run and the balance
kilometers is taken to calculate the cost.
8. Efficiency hours method- this also termed as machine hour rate method or unit of
production method or hours of service method.
9. Production unit method – in this depreciation is provided according to the number of
units of the gods manufactured – it is like efficiency hours method.
10. Global method – this method is unscientific and should not be adopted, method is
planned by Companies Ac. Under this method depreciation is provided according to the
rage of depreciation is charged.
11. Depletion unit method-this method is adopted to washing or usage of assets such a
mines, quarry’s, oil mills etc., Depreciation in any year is calculated per tonne
according to the output of the year. In this method a minimum annual charge is
sometimes adopted irrespective of the fact the production has not reached the minimum.
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12. Single charged method – under this method a definite sum of money representing a
proper proportion of the total amount of depreciation and repairs over the life of the
assets is debited to the revenue account and credited to the depreciation and repair
reserve account.
Which method of depreciation is to be followed from the above is left to the owner.
Auditors duty regarding depreciation
1. The auditor has to correctly estimate the rate of depreciation and make sure that only
the found out amount is specify in the balance sheet.
2. Auditor should make sure that depreciation is acceptable to the income tax authority.
3. Auditor must make sure that the rate of depreciation is only a correct as approved by
the central government.
4. Auditor should make sure that proper accounting principles or employee for calculating
depreciation
5. Auditor make sure that provision for depreciation is according to the companies act and
acceptable to the authorities.
6. With regard to immovable properties, the auditor must make sure only the correct
amount of depreciation is only charged.
7. Auditor is not able to find out the correct value of depreciation then he should get
technical advice with regard to depreciation and then specify the amount.

RESERVES
Meaning
The term reserve is used in various forms in various categories. According to an
ordinary person reserve means is set aside by the organization for only known as unknown
liabilities, contingency, decease in value of assets.
Definition
According to the American Institute of Accountants appeared in Accounting
Terminology Bulletin “The use of the term reserve be limited to indicate that an undivided
portion of the asset is being held or retained for general or specific purpose”.
Kinds of Reserve
Normally, the reserve is split up into two wide category.
1. General reserve
2. Specific reserve
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General Reserve
General reserve is not to meet any specific expenses. Specific reserve is created for a
specific purpose.
At present the reserves are classified into following categories.
1. General Reserve.
2. Specific Reserves of provision.
3. Sinking fund.
4. Reserve or development fund.
5. Capital reserve (fixed assets increased)
6. Secret reserve.

DIFFERENCE BETWEEN GENERAL RESERVE AND SPECIFIC RESERVE

S.NO GENERAL RESERVE SPECIFIC RESERVE
1. The reserve is created by debiting P&L The provision is made by debiting P&L
appropriation account for the redemption a/c for a specific contingencies or
of a known liability are to strengthen the respected losses. Eg: Provision for bad
Liquid resources of the company or for and doubtful debts, provision for
equalization of dividends or redemption of depreciation etc.,
debentures.
2. The reserve is created without taking into A provision is made for a definite
consideration the actual amount required amount and therefore a definite amount
except in the case of redemption of is set aside every year to meet the known
debentures. When a definite amount is set liability.
aside.
3. Incase of the reserve is standing credit When the loss occurs the provision
Balance may be carried to the P&L a/c or account is debited.
may be distributed among the shareholders
Except in case of debentures redemption
reserve which cannot be touched before the
debenture are redeemed when it is carried
to the General Reserve account.
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4. It is normally shown on the liabilities side Provision is generally shown on the

of the balance sheet as it is not specific Asset side of the balance sheet by way of
reserve. deduction from the concerned asset Eg:
reserve for doubtful debts is deducted in
sundry debtors.
5. Making reserve is choice of the Making provision is compulsory.
organization and left to the company, it
should be mentioned in A.O.C, in case of
banking companies act 1949, says that
20% of the profit must be credited to the
general reserve account every year, when
debenture means debenture redemption
reserve to be credited.
6. A reserve is not created with the view to Auditor must see correct provision is
meet any definite liabilities and therefore it created, and refer to the articles, minute
is left to the director to make any provision book and recommendation of the
or not to make provision. Auditor will not director about the reserve.
inter fere except if not mention in article.
7. The amount allocated to the reserve is Provision does not depend on profit. It it
based on the profit of the company. If no a must.
profit, no reserve.

Specific reserves
Specific reserve is created for
1. To met and known loss, Eg, Doubtful debts, liability for disputed claim etc.,
2. To meet an expected contingency Eg., Doubtful debts, liability for desputed claim etc.,
3. To meet an outstanding liability for expenses already incurred, Eg., salary, wages,
income tax etc.,
Sinking Fund
It is reserve by which a provision is made.
1. To reduce a liability. Eg., payment of loan or debenture
2. To reduce a wasting asset. Eg: mine, oil well etc.,
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3. To replace a depreciating asset.

4. To renew or lease.
Differences between sinking fund for redemption of liability and sinking fund for
replacement of an asset.
Sinking fund for redemption of liability
1. Provision for redemption of liability is made out of the divisible profit of the company.
2. The sinking fund is not required after the liability is redeemed and the undistributed
profit may be distributed to share holders or may be transferred to the general reserve
account.
3. After the expiry of the period, the securities are sold and money so received is used for
payment of liability.
Sinking fund for replacement of an asset
1. Provision is made by debiting the revenue account.
2. When the asset is replaced the fund no longer exceeds as money is totally spent on
replacement.
3. Cash realized by sale of securities is used to purchase asset.
Auditors duty regarding sinking fund
The auditor has to make sure that AOA permit the company to create sinking fund the
auditor has to examine the articles or the debenture trust deed and make sure the correct
provision is created. He should see that investment in sinking fund is clearly mentioned in the
balance sheet to differentiate from the other investment.
Development fund reserve
Development fund reserve is normally created by an organization for undertaking some
developmental activity. There is no difference between general reserve an development reserve
fund, both the reserves are crated with the same objective and are debited to the profit and loss
appropriation account. The one and the only basic difference is that in case of general reserve,
the surplus amount is retained in the business and is represented by the general asets of the
company. Whereas the development reserve fund or reserve fund, the surplus is invested
outside the business in the securities and is represented by such investments. Previously no
difference was established between the two but in the present date, the balance sheet some
times clearly differentiates. The development reserve fund is created for a specific purpose.
Capital reserve
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This term has not been defined by the companies act except in a negative way in part 3
of schedule 6 of the act. It is defined, “as any reserve which cannot legally be distributed among
the
share holders”. But this concept is not totally agreeable as capital reserve may be distributed to
the shareholders under certain circumstances.
Capita reserve and reserve capital are quite different. Capital reserve is an amount
which is created but reserve capital is uncalled or unpaid up share capital.
According to sec 99 of companies act, “a limited company may, by special resolution,
determined that any portion of its share capital which has not already being called up, shall not
be capable of being called up except in the event and the purposes of the company being wound
up, and there on that portion off its share capital shall not be capable of being called up except
in that event and for these purposes” is for reserve capital.
Capital rese4rve is created out of the profit of a capital nature. Eg: -
a. Increase in value of fixed assets.
b. Fixed assets sold for more than the book value.
c. Premium received on the issue of shares and debentures.
d. Profit made on the redemption of debentures in discount in market.
e. The balance standing of the credit of forfeited shares account, after reissue.
f. Profit of unusual nature.
g. Profit made in the purchase of business. (book value more, purchased at less
price).
h. Profit earned prior to incorporation of a company.
i. Any profit including revenue profit.
j. Assets replacement reserve fund.
UTILISATION OF CAPITAL PROFIT
1. Issue of bonus shares as per the Articles of Association.
2. For writing off intangible assets such as goodwill, preliminary expenses, cost of issue
of debentures.
3. The premium received on issue of shares through can be taken the C/Ra/c can eb utilized
for the purpose mention under section 78 of the Companies Act.
a) In paying up an issued shares of the company to be issued to the members of
the company as fully paid up shares.
b) In writing off preliminary expenses.
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c) In writing off commission, expense of redemption of redeemable preference

shares or debentures.
4. Providing for the premium payable or redemption of redeemable preference shares or
debentures.
Duties of an Auditor to Capital Reserve
1. Auditor should see that those capital profits which have been transferred to the C/R
account are really surplus of capital over the assets and liabilities.
2. Capital reserve is used according to the articles and laws.
3. Capital profit may be transferred to Revenue account and distribyted or used to write
off old losses. They can be given as dividend only
a. Articles of association permits.
b. Surplus is realized.
c. Surplus remains after revaluation of other assets.
4. Capital reserve must be specifically shown in the balance sheet. Any addition or
deduction are correctly specified.
5. Capital reserve may be invested either in business or any other investment where
security can be sold quickly.
SECRET RESERVE
Secret reserve or Hidden reserve is an amount which is created by under statement of
assets or over statement of liabilities accompanied by corresponding under statement of capital.
This reserve normally represent the surplus of assets over liabilities and capital byt it is no
disclosed in the booked or in ledger. Secret reserve is usually created by joint stock companies
especially Banking, Insurance and Financial concerns. The creation of this reserve need not
always be seen with suspicion.
DIFINITION FOR SECRET RESERVE
“Any reserve which is not apparent on the face of balance sheet” is called as secret
reserve or hidden reserve or internal or inner reserves.
METHODS OF CREATING SECRET RESERVE OR OUT SECRET IS CREATED
Secret reserve is normally created under the following methods.
1. By writing down the assets below the asset or market value, such as investments, stock
in hand, plan and machinery, building etc.,
2. By not writing up or increasing the value of an asset even after the price going up
permanently.
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3. By providing more reserves than the necessary amount required for the bad and
doubtful debts or discount on sundry debtors.
4. By providing excessive depreciation on fixed assets.
5. By writing down the goodwill to a nominal value.
/34/
6. By omitting certain assets from the balance sheet totally.
7. By charging the capital expenses to the revenue account and thereby showing the value
of the asset to be less than its actual value.
8. By overvaluing the liabilities.
9. By inclusion of fictitious (false or imaginary) concepts, Eg: Bad.
10. By showing the contingent liabilities as a real liability.
11. By grouping dis-similar items on the liabilities side of the balance sheet. Eg: reserves,
provisions and creditors as sundry creditors or other credit balances.
Objectives of creating secret reserve
1. The reserve may be used in future to meet any extra-ordinary loss without disclosing
the loss to the share holders or the outsiders.
2. Secret reserve is created to without the information of the progress of the company of
trade competitors.
3. Where the company has made an abnormal profit in a particular year and when the
Board of Directors decide that the profit should not be distribute they may create a
secret reserve which will be utilized at the time of scarcity.
4. The profit which have been utilized for the payment dividend would remain in the
business as a secret reserve and will increase the working capital and the financial
stability of the business over the period of time.
5. Reserves help the company to equalized the payment of dividend.
Danger of creating secret reserve or objections
1. The balance sheet will not portray the correct financial statement or position of the
company, the position of the company is not shown actually.
2. The shareholders do not get the due share of profit when secret reserve is created.
3. Value of shares goes down in the market because the dividend paid will be less when
compare to the previous year.
4. Low dividend and bank position of the company may automatically create crises for the
company.
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5. By creating secret reserve and lowering the dividend, the directors may indugged in
speculation of the shares of the company.
6. If fixed assets are under valued for the purpose of creating secret reserve, if there is an
insurance claim because of an happening, full claim cannot be made.
7. Secret reserve may be used improperly by the directors and the company may suffered
at the lost.
8. According to the companies act, creation of a secret reserve is totally prohibited except
in case of banking, insurance or finance companies. The reason are,
a. Whenever a secret reserve is created, it should be fully disclosed.
b. The profit and loss a/c and the balance sheet of the limited company must
portray only a correct statement, therefore any misleading information for
creation of such reserve is unlawful except for banking , insurance, electricity,
finance company etc.,
Duties of an auditor in connection with the secret reserve
1. The auditor must make sure that public companies other than banking, insurance and
electricity company do not create a secret reserve. If such a reserve has been created,
auditor must make that the reserve is fully and properly disclosed and specify in the
balance sheet in order to present a true and fair view of the company.
2. The auditor must carefully examine the way or the form by which a secret reserve has
been created, he should make sure whether the intension for this reserve is correct or
honest.
3. The auditor must make sure that the creation of secret reserve does not affect the profit
and loss account and balance sheet to an great extent.
4. The auditor must examine articles of the company and make sure that no point is there
which prevent s creation of secret reserve, if prohibited the company can not create.
5. Auditor must make sure that reserve so created it utilized only for proper reason.
6. The auditor if fines any misrepresentation of at the acts in the accounting principle and
in the accounts, he must make sure that it is separate.
In case of partnership secret reserve can not be created, but if so created, all the partners
must be informed.
Conclusion
Since the auditor has to certify of the state of affairs of the company no secret reserve
can be created by the limited company.
Suggested Questions
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Objective Type Questions:

1. Verification is the - act of establishing the accuracy of entries in the books of accounts.
2. The following method is adopted for valuing the stock in trade – cost price or market
price which ever is less.
3. What do you mean by Depreciation?
Depreciation is the decrease in the value of our asset.
4. The raw materials of a manufacturing concern are valued at – cost price or market price
whichever is lower.
5. The Research expenses of a business is to be treated as differed Revenue expenditure.
6. Investment held by a finance company are valued at cost prices or market price which
ever is lower.
7. The main cause of depreciation for a mine is exhaustion or depletion.
8. Replacement value of an asset refers to the amount which could be required to purchase
another asset of same type.
9. The following method is adopted for valuing the assets
(a) Cost price method (b) Book value (c) Market value (d) All the above.
10. Stock in trade should be valued on cost price method.
11. A reserve which is not apparent on the face a B/S is called – Secret reserve.
12. Capital profit includes the following:
(a) Sale of fixed assets for profit.
(b) Profit on taking over a business.
(c) Premium on issue of shares & debentures.
(d) All the above.
13. The following method adopted for valuing the assets
(a) Cost price method (b) Market value (c) Book value (d) All the above.
Short Answer Questions:
1. Write a brief note on the term verification and valuation with regard to auditing of assets
and liabilities?
2. What do you mean by intangible assets?
3. Discuss auditors duty with regard to valuing assets and liabilities?
4. Define Depreciation and bring out the difference between Depreciation and Flucation?
5. What do you mean by Plant Register? Discuss its contents?
6. Reserves – Define and bring out its meaning and kinds in detail?
7. What do you mean by Secret Reserve?
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Long Answer Questions:

8. What are the various methods of verifying and valuing assets? Discuss any five assets
verification and valuation in detail?
9. What are the various methods of verifying and valuing liabilities? Discuss any five
liabilities verification and valuation in detail?
10. Bring out the difference between General Reserve and Specific Reserve?
11. Write short notes on –
(a) Sinking Fund.
(b) Development Fund Reserve Fund.
(c) Capital Reserve.
12. What are the methods by which Secret Reserves can be created? What are the objectives
of a Secret Reserve? What are its dangers? Duty of an auditor with regard to it?
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AUDIT OF LIMITED COMPANIES:

Whenever it comes to the auditing process of the accounts of a limited company
or a company registered under the Companies Act 1956. The auditing work should be carried
down by a qualified auditor.

Qualification of an Auditor (Ltd.Co.)

An auditor who can audit the accounts of Limited company must be a qualified
person according to section 226 of the Companies Act. He should be an Charted Accountant
under the Charted Accountant Act 1949 or any other equivalent qualification. The qualified
auditor must be practicing in India, he may be appointed by this firm name or individual name.
According to Section 226 (2), the person holding a certificate under Restricted
Auditor Capital Part B states Rules 1956 is also qualified. This qualification is notified in the
official gazette any renewal, suspension or cancellation can be done by the central government.
Disqualification:
According to Section 226 (3) following persons qualified accountants.
Body of corporate or corporate body.
An officer or employee of the company.
A person who is a partner or who is an employee of an officer or employee of the
company.
A person who is in debited to the company for an amount exceeding Rs. 1000 or who
has given a guarantee or provided any security for third person related to the company.
A person who is a director or member of a private company or a partner of a firm which
is managing agents or secretaries or treasurers of the company.
A person who is a director, holding shares exceeding 5% in the nominal value of the
subscribed capital. Any body corporate which is managing agent or secretary or treasurer of a
company.
Any person who has shares or is a nominal or a trustee for a third party shall not
exceeding 5% and as no beneficial interest is allowed by the raw to become auditors.
Appointment of an auditor:
Every company, even a private company must appoint an auditor.
First auditor of the company shall be appointed by the Board of Director within one
month of registration. They will hold office until the first AGM. A new auditor can be
appointed at the AGM. Any renomination or nomination noticed for new auditor must be made
before 14 days of the AGM.
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If the Board fails to make the appointment of the first auditor the General Meeting will
appoint first auditor who is automatically reappointed.
Every company at the AGM must appoint an auditor who will hold office till the next
AGM and shall within 7 days of appointment give intimation to the appointed auditor regarding
his appointment. (Incase it is a new appointment).
An auditor appointed unless he is a retiring auditor shall within 30 days of the receipt
of the information from the company must intimate to the registrar in writing whether he
accepts or refuses the order or offer.
Whenever no auditor is appointed or reappointed in the AGM, the central government
may appoint an auditor to fill the vacancy.
The company shall within 7 days of the central government power under section 3 of
becoming excisable must give notice of the fact to the central government, about the non-
appointment or the vacancy, on failing to carry out the procedure, the central government will
hold the company and every officer of the company for the default and punish them with the
fine extending upto Rs.500.
Where the appointment of an auditor in the AGM becomes null and void, new auditor
must be appointed at the general meeting of shareholders.
The auditor appointed by whatever authority shall be reappointed at AGM unless
He is not qualified for reappointment.
Given notice of unwillingness.
Resolution passed not to re-appoint.
Resolution passed by the company to appoint a new person because of death,
disqualification etc.
The auditor of the company is appointed or reappointed by the central government on
the advice of the controller and Auditor General of India as per Section 619.
Rotation of an auditor:
This is an issue which has been discussed in various quarters at various times at
various forms. Many young auditors strongly supported the issue of rotational basis for the
auditors, they clearly outlined that, since the country is committed to a socialistic pattern of
society, the monopoly held by old auditors must be removed.
In this connection, the Union Minister tried to introduce a bill making provision
for the rotation of auditors, but later on, the bill was withdrawn. The minister said that the
rotation was though was applied to the public sector undertakings and government
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undertakings, it did not worked out properly. Therefore this system though came up, has not
been so far successful.
Audit of share capital:
For the purpose of checking share capital in case of a newly formed company,
the following books, accounts and documents must be examined. They are,
Application for shares.
Application on book or register.
Letters of allotment.
Allotment sheets or books.
Letters of regret.
Letters of calls.
Calls Book.
The share ledger book.
The cash book.
The pass book.
Memorandum of association.
Articles of association.
Director’s minute book.

The programme for checking the issue of shares for cash as follows:
If authorized capital is more than Rs.25 lakhs, permission must be got from controller
of capital issues. Auditor should examine the permission certificate. If capital is less
than Rs.25 lakhs no permission needed.
He should check the application and allotment letters.
He should check the application and allotment books with the share books with the
share ledger to find out the amount payable.
He should check the amount received with the cash book or pass book and the
application and allotment book and the share ledger.
He should check the amount returned to the applicants to whom the shares were not
issued.
He should check the payees acknowledgement receipt.
He should check the director’s minute book to make sure that the shares have been
properly allotted, minimum subscription has been subscription and all calls have been
made according to articles of association.
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He should check the amount received on account of calls with the counter foil of the
receipt book and the cash and the pass book.
He should see that the shares allotted do not exceed the nominal capital of the company.
Where shares have been issued, for consideration other than cash, examine director’s
minute book, prospectus and see whether the shares have been fully paid or partly paid.
He should get the list of calls in arrears from the management. Compare it with the
share ledger and compare with the debit balances of the calls and allotment account.
If calls have been received in advance, check the cash or pass book, counter foil of
receipt book, make sure it is as per the articles of association and make sure interest
does not cross 6%.
Audit of share transfer:
Introduction:
The audit of share transfer is not compulsory. It is not part of an auditor’s duty
to do so. The auditor has only to see that the share capital as stated in the balance sheet agrees
with the share capital. Sometimes the auditor is asked to undertake this work also for an extra
remuneration to ensure that there has been no error or fraud in the office of the secretary, and
that duplicate share have not been issued. The auditor should follow the under mentioned
procedure in connection with share transfer audit.

Steps to be followed by an auditor with regard to share transfer audit:

He should examine the articles regarding the procedure to be followed in case of
transfer of shares.
He should see that the transfer fees is duly received and credited to the P&L a/c and
whether money has been deposited in bank.
To make sure whether it is properly stamped.
He should verify the signature of the transfer or with the signature on the application
form. This is to prevent forgery.
He should check the transfer with the share register and see that no share has been
transferred twice.
He should find out whether the transfer has been duly notified to the transferor, joint
holders means each of them to be informed.
Make sure the old share certificate has been cancelled, so nobody can misuse it.
When a part of the holding has been transferred, auditor should check the balance of
certificate with the counter foil of certificate.
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Examine director’s minute book and make sure that transfer is duly sanctioned by the
Board.
He should compare the total issued capital with the balances on the shareholder’s a/c in
the share book.
He should enquire whether a notice as required by Section 110 (2) of the Companies
Act was issued to the transferee in case of partly paid shares and no objection received.
He should see that the transferee is not a disqualified person to hold the shares of the
company.
In absence of share certificate, letter of identity should be examined.
If shares have been mortgaged, are transferred, he should see that due notice had been
given to the mortgage.
If a share has been transmitted on account of death or bankruptcy of the holder, examine
that shares have been transferred according to the articles, examine succession certificate given
by court, examine the certificate issued by the controller of estate duty to make sure whether
the estate duty has been paid, order of court of insolvency, the application from the executor or
legality that the shares may be issued to him.
Compare the transfer fees received with the no. of transfers lodeged.
Whether blank transfer was correct for more than 6 months. If so company should not
accept.
Compare the share ledger balances with the issued share capital.
If transfer has been executed by an agent, his signature should be compared with the
specimen signature or the power of attorney.
Signature of the transferor who is in a foreign country should be attested by a local
council etc., attorney etc.
If shares have been issued to an incorporated company, he should examine its
memorandum of association as to whether it can hold such shares.
He should see whether the restriction on the transfer of share imposed by the company.
 111

DEFINITION OF INVESTIGATION:
An auditing investigation refers to a detailed verification and clarification of any doubts
that may have occurred regarding any form of transaction, which have been made by the
ccounts department of an organisation or company. This usually involves the investigation of
large’purchases such as property and other assets that are deemed large.
Objectives Of Investigation:
• To determine the nature and scope of the abuse, to assess the child victim's physical
and emotional condition, and to determine whether the child needs immediate
medical services and/or crisis counseling.
• To assess the perpetrator to determine whether legal and court involvement will be
necessary to protect the child during the investigation phase.
• To determine whether the non-offending parent believes the child victim, and
whether the parent is willing and able to protect the child from the perpetrator.
• To provide the child victim with support and reassurance, and to help family
members support the child; thereby lessening the likelihood of retribution and
reducing the chance that the child will falsely recant.
• To determine the capacity of the non-offending parent and other family members to
provide the child with emotional support and help the child in his/her recovery.
• To identify the immediate needs of the non-offending parent and initiate supportive
services that enable his/her to stabilize the family and maintain the child in the home.
Amendments Relating To Investigations Companies Act 1985 (c. 6)
1.The Companies Act 1985 has effect subject to the following...
2.After section 447 insert— Information provided: evidence (1) A statement made by a
person in compliance with...
3.For section 449 substitute— Provision for security of information obtained...
4.For section 451 substitute— Punishment for furnishing false information (1) A person
commits an offence if in purported compliance...
5.(1) Section 451A (disclosure of certain information) is amended as...
6.In section 732 (prosecution by public authorities)—
7.In section 733 (offences by bodies corporate)—
8.In section 734(1) (criminal proceedings against unincorporated bodies), for “447...
9.After Schedule 15B insert— SCHEDULE 15C Specified persons Section 449...
10.(1) Schedule 24 (punishment of offences) is amended as follows....Insolvency Act 1986
(c. 45)
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11.In section 124A(1)(a) of the Insolvency Act 1986 (petition for...Company Directors
Disqualification Act 1986 (c. 46)
12.In section 8(1A)(b)(i) of the Company Directors Disqualification Act
1986...Companies
Act 1989 (c. 40)
13.In the table in section 87(4) of the Companies Act...Criminal Justice and Police Act
2001
(c. 16)
14.In paragraph 17 of Schedule 2 to the Criminal Justice...Anti-terrorism, Crime and
Security Act 2001 (c. 24)
15.In paragraph 24 of Schedule 4 to the Anti-terrorism, Crime...It is common to use more
than one approach in the same audit. For example, sales and fixed assets could be audited
using the electronic detail approach, while expenses could be audited using stratified
statistical sampling.
Audit of Computerised Accounts
The audit process for a computerized accounting system involves five main steps:
conducting the initial review (planning the audit); reviewing and assessing internal controls;
compliance testing (testing the internal controls); substantive testing (testing the detailed data);
and reporting (conclusions and findings). The auditor(s) should reach an understanding with
the client concerning the scope and limitations of the audit from the very beginning. This will
facilitate the accomplishment of the audit objectives in an effective and efficient manner.
Computerized Auditing
Governmental agencies have been introducing computers in various operations in
recent years for the purpose of swift processing of increasing amount of operations as well as
their adequate control. Even in the very limited fields directly related to accounting matters
alone, many computers have been used in tax collection, financing operation, insurance
operation, pension operation, inventory control, construction cost estimation among others.
With the introduction of computers, conventional accounting systems and methods
using papers, pens and abacuses have undergone drastic changes, therefore exerting a great
impact on internal control and audit trails in following audit procedures. That is, auditors can
no longer depend on visible records but check the existence of adequate internal control system
which ensures accuracy of operations; the number of records which can be read only when
processed by computers is increasing while intermediary and legible records which existed in
conventional manual accounting processes are decreasing in number; also there are many cases
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in which audit trails are not available. Therefore, audit procedures had to be revised to cope
with these problems.
The Board of Audit of Japan has been using computers in conducting audit for the
purpose of swift and accurate processing of massive amount of data as well as drawing logical
judgment, in an attempt to deal with computerized accounting systems.
The following are methods and practices of computerized auditing so far employed by
the Board of Audit.
1. Procedures for computerized auditing
(i) Preparation for computer processing
(ii) Preparation of a check list
(iii) Data processing
2. Audit methods
(i) Test-data method
(ii) Detailed examination of selected programs and reprocessing of selected data
with
these programs.
(iii) Use of custom-designed programs
(iv) Use of general-purpose programs

3. Past audit operation

(1)Verification of adequacy of credit reserve for bad debts provided in the
Corporation Tax Law.
(2)Identification of principal income eanrers in case of aggregation of income
from assets in accordance with the Income Tax Law
(3)Loans being extended to unqualified borrowers Auditors checked 200,000
loans extended by the Small
(4)Duplicate affiliation in small-scale enterprise mutual aid scheme
(5)Computerized Auditing In Future
In future audits using computers, it will be important t make clear what should be
focused and what should be done on them. Computerized auditing methods should be
developed to suit the nature of data processing by computers which is based on strictly logical
operations. Considerations should be also given to characteristics of computers, possible
irregularities by use of computerized systems, ideal internal controls in computerized systems
and roles of computerized audit. Taking into considerations all these factors, it should be made
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clear what kind of auditing technology is necessary and effective in achieving the purpose of
audit. It will be also necessary to improve or establish systems and procedures of computerized
auditing, and questionnaires on internal control.
Electronic Auditing
Electronic auditing is the same as computer-assisted auditing where electronic records are
used to complete all or part of the audit. This manual will list the benefits of performing
electronic audits, cite the legal authority for electronic auditing, explain steps to ensure
confidentiality, identify electronic audit candidates, explain the process of obtaining,
converting and testing taxpayer data (along with several sample letters and forms), review the
three electronic audit techniques and when they should be used, identify the additional
considerations for a stratified statistical sample, refer you to the eAuditing website, and review
the documentation required for an electronic audit case file
Benefits
The decision of whether the Department can pursue an electronic audit instead of a hard
copy audit is based on the nature of the taxpayers’ records. Electronic audits generally reduce
the
collective effort needed by the taxpayer and the Department to complete the audit. In many
instances detail audit procedures can be performed using the electronic data in the same amount
of time as it takes to perform a sample, making the audit results more accurate. In addition,
stratified statistical sampling can be performed on electronic records. Stratified statistical
sampling allows for measurement of audit risk and is therefore more defensible in court.
Electronic Audit Techniques
After the data has been obtained and data integrity tests have been completed, a
decision will need to be made on which electronic audit technique to use for conducting the
audit. Alternative electronic audit techniques include:
• electronic detail audit
• stratified statistical sample
• electronic judgmental sample

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