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AUDITING

Accounting: - “ Accounting is the art of recording, classifying an summarizing in a

significant manner and in terms of money, transactions an events which are in past at
least of a financial character and interpreting the result thereof.” The word “AUDIT” is
derived from the latin word “Audire” which means to hear. In olden times whenever
the owner of a business suspected fraud, they appointed certain persons to check the
accounts. Such persons sets for the accountant and “heard” whatever they had to say in
connection with the accounts. It was an Italian, Luca Paciato, who first published his
treatise on double entry system of book keeping for the first time in 1494.

DIFINITION OF ACCOUNTING

It is a bit difficult to give a precise definition of the word ‘audit’ in a word or two. Originally, its
meaning and use were confined nearly to cash audit i.e. an auditor had to ascertain whether the person
responsible for the maintenance of accounts had properly accounted for all the cash receipts and
payment on behalf of his principal. But the word ‘audit’ a wide usage and it now means a through
security of the books of accounts and its ultimate aim is to verify the financial position disclosed by
the balance sheet and the profit and loss account of a company.

ACCORDING SPICER AND PEGLER “ An audit may be said to be such an

examination of the books, accounts and vouchers of a business as will enable the
auditor to satisfy that the balance sheet is properly brown up so as to give a true and
fair view of the state of affairs of the business and whether the profit and loss account
gives a true and fair view of the profit or loss for the financial period according to the
best of his information and the explanation given to him and as shown by the books,
and if not, in what respect he is not satisfy .
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EVALUATION OF AUDITING

The auditing has the origin in the necessity in the development of some system to put a
check on the persons whose duties were to record receipts and disbursements of money on
the behalf of owners. In the ancient days auditing was confined to public accounts only.
The historical records show that ancient Egyptians, the Greeks and the Romans used to get
their public accounts audited. With the development of trade and commerce the need for
recording transactions was felt by businessman. He started taking the services of others for
recording those transactions. This has necessitated the development of some system of
check upon the persons who recorded such transactions on the behalf of businessman.

Luca Paciolo, an Italian, who has published his treatise as double entry system of book
keeping for the first time in 1494. This system of double entry was capable of recording
all kinds of mercantile transactions. He also described the duties and responsibilities of an
auditor. This system has its effect on auditing also, thereby the scope of duties of an
auditor was enhanced.

The audit is in its present shape is the result of large-scale production in consequence of
industrial Revolution during the 18th century. With the development of banking facilities,
communication and transport means, the concept of corporate management had taken
birth. The management and the owners were separated. It necessitated the investors to
know whether there investment is safe or not. Shareholders need an independent person
having expert knowledge of accounts to report on the working of the company and
truthfulness of the profit or loss and the financial position disclosed by the management.

These developments have direct effect on revolution of auditing of business accounts

became common in 19th century. The enormous increase in trade, commerce and industry
made use of auditing of accounts unavoidable. Under these conditions, the public became
perfectly aware of necessity of auditing, and the importance of audit increased to such an
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extent that accounts were not accepted as correct unless professional and qualified
auditors audited these. In these days independent firms of professional accountants have
come into existence to audit the accounts of mercantile firms, but still the government
accounts and audit are with separate government departments.

BOOK-KEEPING, ACCOUNTING AND AUDITING

1. Journalizing
2. Posting into ledger
3. Totaling of different accounts in the ledger and balancing, checking the words of
the book keepers, preparation of trial balance, preparation of trading and P&L a/ c.
Preparation of balance sheet passing entries for rectification of errors and making
adjustments.

BOOK-KEEPING

As is evident from the above table, book keeping is the art of recording the daily
transaction in set of financial books. A book keeper who is mainly concern with
journalizing, posting, totaling and balancing the various accounts in the ledger
performs the elementary part of the week in the whole process.

ACCOUNTANCY

“Accountancy begins where book keeping ends.” It means than an accountant comes in
the picture only when the book keeper as done his job. He has to go behind the work of
a book keeper and so satisfy himself that the transaction has been properly recorded
and posted in the books of accounts. His duty lies in making the trial balance agree and
then to prepare the profit and loss account and balance sheet after making the necessary
adjustment and rectification of errors.
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AUDITING

“When accountancy ends, auditing begins” and auditor has to verify the entries pass by
the accountant and final accounts prepared by him. Auditing is therefore, the scrutiny
of the accounts of a business with the help of vouchers, documents and information
given to him and also explanation submitted to him. Unlike an accountant, an auditor
has to satisfy himself after due verification and through scrutiny of accounts as to
whether the transactions entered into the books and bona fide. It is to be note that an
auditor is required to submit his report to the affect whether or not the balance sheet is
a true and fair representation of the existing state of affairs of a business concern.
Hence, an auditor must be as well versed in the accounting principles. This is why he
should be a chartered accountant. He has to express his impartial opinion in his report,
which he cannot give unless he satisfies himself completely with the proper Recording
transactions. No auditor can dream of certifying a balance sheet as true and fair by
simply acting as an accounting.

ACCOUNTANT AND AUDIT

As shown earlier, a line of demarcation has to be drawn between accountancy and

auditing. The following points can be helpful in doing so:

1. Accounting is mainly concerned with the preparation of summary and

analysis of the records prepared by the bookkeeper. For this an accountant
has to prepare trial balance and the, annual. Auditing is the examination of the
completed records.
2. The main object of accounting is to ascertain the trading results of business
during a financial year while the object of audit is to certify the financial
statement prepared by the accountant.
3. An accountant is an employee of the business while an auditor is an independent
outsider.
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4. As an employee of the business, the draws his monthly salary regularly from the
business itself while an auditor does not get it but is paid remuneration agreed
upon between him and his client.
5. An accountant is not expected to have knowledge of auditing but for an auditor, it is
very essential to process a though knowledge of accountancy.

AUDITING AND INVESTIGATION

Auditing and investigation is not the same, but there is a lot of difference between two.
The accounts of a firm may be investigated for some special purpose. It is a sort of
thorough enquiry into the financial position of business to measure profit-earning
capacity. It is conducted in times of some suspicious about it.
1. As already pointed out, investigation is done with some special purpose in view
while audit is carried out to find whether the balance sheet of a concern is properly
drawn up and it exhibits a true and fair view of the state of affairs.
2. Audit is generally conducted at the end of financial year and as such is related to the
accounts of one year only, while investigation covers several years say 3,5or 7 tears,
to find out average earning capacity or to measure the financial position of a
concern.
3. Investigation may be normally carried out on behalf of those who are outsiders who
either want to purchase the business, to become partners, to advance loans or to
purchase the shares of a firm. Audit is always conducted for proprietors only
4. Audited accounts are further investigated for some special purpose in view while
investigated accounts are not audited in the ordinary sense.
5. As the purpose behind investigation are different from those of audit one cannot
take the place of the other. As such, they have a separate function to perform.
6. Audit is legally compulsory, especially in the case of companies, but in
investigation is voluntary and depends upon the necessary of some purpose.
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BASIC PRINCIPLES OF AUDIT

The council of the ICAI has issued statement an “standard audit practice”-I in April, 1985
describing the basic principle which govern the professional responsibilities of auditor.
these should be complied with whenever an audit is conducted. Various principles in SAP-
I are explained as followed:

1. Integrity Objectivity and Independence:

The auditor should be honest and sincere towards his work. He must maintained
objectivity without any bias or prejudice.

2. Confidentiality:
The information acquired during an audit should be kept confidential.

3. Skill and Competence:

The audit work shall be conducted by the person who has adequate training,
experience and competence in auditing.

4. Work Performed by Others:

The auditor remain responsible for expressing his opinion on financial
information when he delegates audit work to assistants or uses the work done by the other
auditors. He is permitted to rely on work done by others provided he exercise due skills
and care and there is no reason not to place such reliance.

5. Documentation:
The auditor must prepare and preserves all the document while conducting an
audit, these may be used as evidence that audit was conducted as per basic principles.

6. Planning:
To conduct the audit in time and efficiently, the auditor should plan his work.
The audit plan should cover:
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(i) Clients accounting system, policies and internal control system.
(ii) To what extent internal control system can be relied upon.
(iii) Determining the audit procedure to be used.
(iv) Co-coordinating the audit work.

7. Audit Evidence:
The auditor should obtained sufficient appropriate evidence before
conducting an audit.

8. Accounting System and Internal Control:

Management is responsible for maintaining an adequate accounting system
and incorporating internal controls as per the requirement of business.

9. Audit Conclusion and Reporting:

The auditor should express his opinion on financial statement on the basis of his
review and assessment of audit evidence and knowledge of business. It involves over all
conclusion as to whether:
(a) Financial information has been prepared using acceptable accounting policies, which
have been applied consistently.
(b) Financial information complies with relevant regulation and statutory requirements.
(c) There is adequate disclosures of all material matters relevant to the proper presentation
of financial information, subject to statutory requirement, where applicable.
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ADVANTAGES OF AN AUDIT

Importance of auditing can be judged from the fact that even those organizations which
are not covered by Companies Act 1956 get their financial statement audited. It has
become a necessity for every commercial and even non- commercial organization. People
are interested to know the true facts about their business which are helpful to them for
future planning and improvements in operations.

ADVANTAGES OF AN AUDIT

For owners For the For the For the For other
Business & management creditors government
Shareholder bodies

1. For the Owners of the Business & Shareholder:

(i) In case of sole trader, he can depend on the audited accounts. He can value his
business on the basis of audited accounts for the purpose of sale of business or for
admitting a new partner.
(ii) Shareholder, who do not know about day to day administration of the company, can
judge the performance of management from audited accounts.
(iii) Shareholder can value their shares on the bases of audited financial statements.

2. For the Management:

(i) It helps the management in detecting and preventing errors and frauds.
(ii) Claims due to fire, theft and accident can be estimated from the audited accounts
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(iii) Management gets advice on financial affair from the auditor who have expert’s
knowledge.
(iv) Because the audited accounts are uniformly prepared over the year, comparison of
such statement becomes easier.
(v) It helps in reviewing the system of internal control and check.

3. For the Creditors:

(i) Long- term and short-term creditors can depend on audited financial statements while
taking decision to grant credit to business houses.

4. For the Government Bodies:

(i) Taxation authorities depend on audited statements in assessing the Income Tax, sales
Tax and wealth Tax liability of the business,
(ii) Audited accounts can be produced in the court to provide an evidence.
(iii) Audited accounts are useful for the government while granting subsidies etc.

5. For Other:

(i) It can be used by insurance companies to settle the claims arising on account of loss by
fire.
(ii) In case of amalgamation and absorption, the purchasing company can calculate
purchase consideration on the basis of audited accounts.
(iii) It safeguards the interest of the workers because audited accounts are useful for
settling trade disputes for higher wages and bonus.
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CLASSIFICATION OF AUDIT

There can be numerous ways to classify audit. The classification is meant to give
understanding of approaches to look upon the exercise of audit. The classification of audit
does not mean compartmentalization of audit. The same audit exercise will get different
name or classification depending upon the basis used or approach followed:

(A) ON THE BASIS OF SCOPE:-

An audit examination can be general or specific. A general audit will cover all the
areas of business. The audit can be independent or internal. On the other hand specific
audit concentrates on a particulars areas, object or may be period. On the basis emphasis it
can be further classified as:
(i) Partial audit.
(ii) Occasional audit.
(iii) Interim audit.
(iv) Cost audit.
(v) Management audit.
(vi) Performance audit.
(vii) Standard audit.
(viii) Audit in depth.
(ix) Post and vouch audit.
(x) Operational audit.
(xi) Cash audit.

(B) ON THE BASIS OF NATURE OF ACTIVITY:-

The activities which are the subject matter of audit may be commercial or non-
commercial. The nature of activity will determined the scope and approach of the audit.
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While the audit of profit motive organization can be called commercial audit, the audit of
non-profit organization will fall under non-commercial audit e.g. Government audit.

(C) ON THE BASIS OF FORM OF ORGANISATION:-

On the basis of form of organization the audit may be classified as private and
government. The method of appointment and reporting will differ considerably in these
two type of audit.

(D) ON THE BASIS OF WHO CONDUCT THE AUDIT:-

On this basis the audit is classified into independent or internal audit. An independent
audit is conducted by an independent, professionally qualified person who is not an
employee of the organization, by hiring his services. On the other hand internal audit is
conducted by the employees of the organization to enable better exercise of managerial
control.

(E) ON THE BASIS OF LEGAL NECESSITY:-

On this basis the audit can be classified into statutory and non-statutory audit.
Where law, through some act requires compulsory audit of an organization or activity,
such audit is called statutory audit e.g. Company Act. Where audit is conducted without
any legal necessity or requirement, the audit is called non-statutory.

(F) ON THE BASIS OF METHOD OF EXAMINATION:-

When the auditor and his staff is constantly engaged in the work during the whole
year or period at regular or irregular intervals, the audit is known as continuous audit. On
the other hand the audit conducted after annual closure of accounts is known as completed
audit, final audit. When the audit is concerned with the item of balance sheet then it is
called balance sheet audit.
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SOME OF THE IMPORTANT CLASSIFICATION IS DISCUSSED BELOW-

1. PRIVATE AUDIT:
When the audit is not a statutory requirement, but is conducted at the
desire of owners, such audit is a private audit. The audit is conducted primarily for their
own interest. Private audit is of following type:
(i) Audit of sole trader’s accounts.
(ii) Audit of accounts of partnership firms.
(iii) Audit of accounts of individuals.
(iv) Audit of institutions not covered by statutory audit.

2. GOVENEMENT AUDIT:
Audit of government offices and departments is covered under this
heading. A separate department is maintained by government of India, known as account
and audit department. Its working is strictly according to government rules and regulation.

3. INTERNAL AUDIT:
It implies the audit of accounts by the staff of the business. The staff may or
may not have professional qualification for audit of accounts. The internal audit staff is
permanent in nature and helps the business in early detection of errors and frauds.

4. COMPULSORY AUDIT:
An audit by qualified persons which is compulsory requirement under law
is known as compulsory or statutory audit. The qualified chartered accountants, who are
not connected with preparation of accounts or management of the concern, can be
appointed as auditors. The following are the statutes covering the audit of various
concerns:
(a) Audit of Company.
(b) Audit of accounts of trust
(c ) Audit of accounts of co-operative societies.
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FUNCTIONS OF AUDITING

Important functions of auditing can be summed up as follows: -

1. Reviewing systems and procedures of business.

2. Examining documentary evidence to established the accuracy of recorded transactions.
3. Reviewing the system of accounting and internal control.
4. To verify the valuation and existence of assets.
5. To examine the mathematical accuracy of accounting statements.
6. To see whether the statutory requirements have been complied with.
7. Reporting as the extent, accounts exhibited truth and fairness.
8. To make recommendations for improvement in internal control and accounting system.
9. To verify the distinction between capital and revenue items.
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OBJECTS OF AUDITING

The principal objectives of auditing are changing with the advancement of business
techniques. Earlier it was only to check the correctness of receipts and payments, which
was extended to detection of frauds. The methods of auditing of accounts have improved
the detection of frauds is simply incidental object. The main objective is not detection of
frauds and errors, unless the auditor is appointed for only for this purpose.

Objects of an Audit

MAIN OBJECT SUBSIDIARY OBJECT

Verification of accounts I. Detection and prevention
And financial statements fraud.
II. Detection and prevention
Of errors.

(A) MAIN OBJECT OF AN AUDIT

The main object of an audit is to verify and establish that at a given date balance sheet
presents true and fair view of financial position of the business and the profit and loss
account
gives the true and fair view of profit or loss for the accounting period. It is to be
established that accounting statements satisfy certain degree of reliability.
It is required under Companies Act that whether the books of accounts are kept
according to the Act and whether they show true and fair view of the state of affair of the
Company.
The auditor has to conduct an independent review of financial statement about the
reliability: to form such an opinion. The auditor must examine the system of internal
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control and internal check, arithmetic accuracy of book of account, validity of transaction
entered in the books and confirm the existence and value of assets and liability.

To judge the accuracy of the books of accounts, the auditor must

(1) Assess the system of internal control;

(2) verify the accuracy of posting, balancing etc;
(3) Confirm the validity of transaction and supporting
documents;
(4) Ascertain whether distinction has been made between
Capital and revenue items;
(5) Confirm existence of assets and liability.
(6) ascertain all statutory requirements of maintenance of
books and records have been complied with.

(B) SUBSIDIARY OBJECTS OF AN AUDIT

1. Detection and Prevention of Fraud

According to SAP-4issued by ICAI fraud refers to intentional misrepresentation of
financial information by one or more individuals among management, employees or third
parties, fraud may involve:
(a) Manipulation, falsification or alteration of records or documents.
(b) Misrepresentation of assets.
(c) Suppression or omission of effects of transaction from records or documents.
(D) Recording of transaction without substance.
(e) Misapplication of accounting polices.

When something is being done with an intent to deceive, to mislead or to conceal the
truth, it is an art of fraud. It is false representation or entry which is made with some
mischievous objectives intentionally to defraud certain persons. Frauds are more difficult
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to detect then unintentional errors. Detection of fraud is one of the principal functions of
the auditor. Frauds may be divided into following categories:

FRAUDS

Misappropriation Misappropriation Misappropriation

Of cash of goods of accounts

1. Embezzlement or Misappropriation of Cash: Misappropriation of cash is

usually done by theft of cash receipts, petty cash, cheques, negotiable instruments,
showing fictitious payments to workers, creditors, purchases etc. misappropriation of cash
is very easy. With the increase in the size of business, the opportunities of committing
fraud also increase because the owners of the business have no direct control over the
receipts and payments of cash. The transactions relating to the receipt of cash are
committed from the records or recorded with the lesser amount in the cash books, there by
all such cash or apart of it is pocketed by the cashier. Similarly false payments of cash or
over payments of cash are shown in the cash book. A strict control system shall be
adopted for receipts and payments of cash so that work of one clerk is automatically
checked by another. This technique of audit is known as internal check. A example of
misappropriation of cash can be quoted:

(1) Showing payment of wages to dummy workers in the wage sheet thereby
misappropriation cash involved there in.
(2) Cash sales may not be recorded at all and money received there from may be
misappropriated.
(3) Certain false payments may be shown on the credit side of cash book or excess amount
of payments may be shown.
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(4) Cash received from sale or return or V.P.P may be pocketed.

2. Misappropriation of Goods: The misappropriation of goods is easy in case of

those businesses which produce or deal in goods of high value and less bulky. Usually
businessmen do not bother much for defalcation of goods as compared to
misappropriation of money. This type of misappropriation is difficult to detect unless
proper records are maintained. Defalcation of goods can done by:
(a) Issuing false credit notes to customers for sales returns and such goods are
misappropriated.
(b) Goods may be stolen by employees from the godowns.

Misappropriation of goods can be detected by through checking of records and

physical verification of stocks as well as purchases and sales very carefully.

3. Manipulation of Accounts: This type of fraud is committed by upper level of

management with the different objectives to mislead certain parties within or outside the
business. This type of fraud is usually committed by managers, director, board of director
etc.

Mainly two type motives are behind such manipulation:

(a) Showing low profits than the actual ones
(1) To give a wrong impression about success of the business
to competitors.
(2) To reduce or avoid payments of income Tax.
(3) To purchase share at a lower price in the market.
(b) Showing more profits than what actually they are:
(1) The managers may get more commission if such commission is calculated on the
basis of profits earned.
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(2)To sell the share at a high price by declaring higher
dividend, thus is done when such person hold share of the company.
(3) To mislead financial institutions for obtaining further credit, the financial position
of the business is shown better then what actually it is.

Falsification of accounts may be resorted by using following devices:

(i) Purchases or expenses may be inflated or suppressed.
(ii) Sales or other incomes may be inflated or suppressed.
(iii) Stock may be over or under valued.
(iv) Omission of adjustment of expenses outstanding or prepaid expenses.
(v) Depreciation on assets may be over or under charged or omitted altogether.
(vi) Assets or liabilities may be over or under valued.
(vii) Outstanding expenses of current year or prepaid incomes of previous year may not be
adjusted to increase the profits.

II. Detection and Prevention of Errors:

Generally errors are the result of carelessness on the part of a person preparing the
accounts. Sometimes errors may be the result of fraudulent manipulation of accounts.
Auditor should be very careful because sometimes an accounting manipulation may
appear to be an error.

According to SAP-4, issued by ICAI. “an error is an unintentional mistake or

misdescription in the books of accounts or records by way of
(i) Clerical or mathematical mistake in record or data.
(ii) Oversight or misrepresentation of facts or
(iii) Misapplication of accounting policies. An error is generally taken to be innocent and
not deliberate.
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CLASSIFICATION OF ERRORS

Errors of Errors of Errors of Errors of Compensating

Principle omission commission duplication errors

1. Errors of Principle:

When principles of book keeping accountancy are not followed in the treatment and
recording of items of a transaction it is known as error of principle. Following are the
examples of such type of errors:

(a) Item of income posted to a personal account like rent received credited to the personal
account of the person making payment, it will reduced the profit and increase creditor in
the balance sheet.

(b) Item of expenses posted a personal account like rent paid to landlord posted to the
debit of his account there by profits will increase as well as debtors in the balance sheet

(c) Some other errors of principle are

(i) Wrong provision for doubtful debts.
(ii) Providing inadequate depreciation.
(iii) Providing excess depreciation.
(iv) Wrong provision for outstanding expenses or prepaid expenses.

Such errors are not disclosed in the trail balance, debit and credit sides of transaction are
same. Such errors can be detected by through checking of each and every transaction.
Errors of principle affect the reliability of financial statement.
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2. Errors of Omission:

When a transaction is omitted fully or partially from books of accounts, such types of
errors are known as error of omission. Usually it arises due to mistake of clerk. Where
transaction is totally omitted from the books, it will not affect trial balance and hence
becomes more difficult to detect. Such error can be detect only by careful scrutiny.
Following are example when the transaction are fully omitted from the book of accounts:

(i) Omission of purchases from purchases day book.

(ii) Omission of sales from sales day book.
(iii) Omitting the entry for charging depreciation in the books.
(iv) Rent or interest paid for eleven months, the remaining amount which is unpaid or
outstanding has not been recorded in the books.

3. Errors of Commission:

When entries made in the books of original entry or ledger are incorrect wholly or
partially, such errors are the errors of commission. Usually these errors arise due to
negligence in recording of some business transactions in the books of accounts. These
errors may or may not affect trail balance, profit and loss account and balance sheet these
errors may be intentional or otherwise.
Following are the examples of error of commission:

(a) Wrong recording in the book of original entry- wholly or partially.

(b) Wrong totaling of book of original entry.
(c) Wrong posting or posting to the wrong account.
(d) Posting to wrong side of an account, instead of debiting an account it may be wrongly
credited and vice versa.
(e) Wrong subsidiary book used for recording a transaction.
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(f) Wrong carry forward of balances of accounts to the trail balance. While preparing trail
balance, carry forward of balances of account from the ledger may not be correct. The
balances of accounts may be carried forward with the wrong amount or on the wrong side
of trail balance.
(g) When transaction is posted twice in the book of original entry or posting to account in
the ledger is made twice or balance of account is shown twice in the trial balance.

4. Errors of Duplication:

When a transaction is recorded twice and also posted twice in the ledger, such an error
will not affect trail balance. Sometime supplier sends the invoice in duplicate and both the
copies of the bill are recorded separately.
It is more difficult to locate such errors. Only through checking and comparing of
vouchers with the entries in the books of original entry will reveal such errors. While
going through an account, will reveal errors of duplication, if two entries on the same side
are appearing with same amounts.

5. Compensating Errors:

When an errors off sets the effect of another error, such errors are known as
compensating errors. These errors do not affect agreement of trail balance, hence can’t be
located by it.
Following is the example of such error:

(i) Sometimes under casting of one account is compensated by over casting of another
account, such as X’s account is under totaled by Rs. 100 and Y’s account is over totaled
by Rs. 100.

These errors can be located by checking the total, posting and casting. Some of these
errors may effect the profit of the year.
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HOW TO DETECT ERRORS

How an auditor can detect an error when he is called upon to do so although it is not his
duty. If an auditor does so, he does it as an accountant not as an auditor. Location of an
error depends on environment in the organization.
The auditor may take following in to consideration while detecting an error:
1. If varies books are maintained on self balancing system, errors can be located by
scrutiny of such books.
2. If the self balancing system is not used, then the trial balance should be checked and
ledger accounts balances shall be compared with those shown in trial balance. It is
possible some balances in the ledger might not have been transferred to trial balance.
3. Check the totals of trial balance. It is possible that there may be totaling mistake.
4. Compare the balances of accounts in trial balance with balances of accounts in the
ledger. It is possible that some balances of accounts might not have been properly
transferred to trial balance.
5 In case there is any difference in trial balance, see if there is any accounts having similar
balance which is not taken to trial balance. Half the difference in trial balance, and
compare it with balance of an account, as the accounts balance may be taken on the wrong
side in trial balance.
6. Ascertain the nature of account. Asset accounts, expense accounts, reserve for discount
on creditors accounts always have debit balance; ensure that these are shown in the proper
column of trial balance. Similarly liabilities accounts, incomes account, capital account
and reserves have credit balances and must be shown in credit column of trial balance.
7. If still there remain difference in trial balance, check the balances of ledger accounts
with trial balance.

8. Examine the totaling and balancing of each account in the ledger and see the balances
are carried forward to the next page.
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9. Total the list of creditor and debtor and compare it with the balance shown in the trial
balance.
10. Verify the totals of subsidiary books and their posting to ledger.
11. Compare items of trial balance with the items of trial balance of previous year to see if
any account balance is omitted.
12. An error of Rs. 1, Rs. 10, Rs. 100, Rs. 1000 may be due to wrong totaling.
13. If the difference is in rupees or paise, it may be due to wrong balancing or wrong
posting.
14. See that all journal entries are posted to ledger.
15. If self balancing ledger system is maintained see that balances in control account tally
with total of balances of personal accounts of the ledger.
16. Over and above all this, intensive and careful verification of subsidiary records,
vouchers and ledger is the only remedy for locating an error.
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AUDITOR’S DUTY

(AUDITOR IS WATCHDOG, NOT A BLOOD HOUND)

In the famous case of Kingston cotton Mill Co. (1896) the above reference was made by
the learned judge Lopse L.J.

“An auditor is not bound to be detective or to approach his work with suspicion, or
with the foregone conclusion that there is something wrong. He is a watch-dog but not a
blood – hound. He is justified in believing tried servants of the company and is entitled to
rely upon their representation provided he takes reasonable care”.
The following conclusions can be drawn from the judgment:

(i) An Auditor is Watch Dog:

The auditor must take care of interest of the owner of the
business. The watch dog is kept by the it’s owner to remain alert and inform the owner
when ever any suspicion arises.

(ii) Auditor is not a Blood Hound:

He is fully justified in believing the tried servants of the
company and is entitled to rely upon their representation provided he takes reasonable
care. It is not the part of his duty to harm those who have been found guilty of committing
fraud and errors.
The detection of errors and frauds is an important part of auditor’s duty.

(i) Detection of Errors and Fraud:

The auditor has to ensure that there is no material mis-
statement in the financial statements arising from error and fraud he has to exercise certain
degree of skill and care for detecting errors and fraud.
 26
The auditor has to decide the degree and levels of check and scrutiny to be applied
for detection of errors and frauds. If he certifies the accounts as correct, to the best of his
knowledge and belief, he can’t be held responsible for an error or fraud which is still there
in the financial statements.
(ii) Prevention of Errors and Frauds:
The auditor cannot do anything directly to prevent errors
and frauds. After completing the audit work, the auditor can advise his client by making
suggestions regarding various ways to prevent error and frauds in future if he is asked for
that. The suggestions can be:
(a) Changes in accounting systems.
(b) Improvement in internal control systems.

The auditor shall follow the following standards while performing his
duties:

1. He shall assess the internal control system in force and verify its working.
2. It shall be ensured that accounting principles are followed while recording the business
transactions.
3. It shall be examined whether policies of management have been followed while
recording accounting transactions.
4. It shall be examined that various accounts have been prepared as per provisions of
Companies Act.
5. It shall be checked whether Profit & loss account and balance sheet exhibit true and fair
view of state of affairs of the concern.

The auditor cannot check each and every financial transaction, test checks are applied
on the material items, which are subjects to certain degree of risk. Frauds are committed
which are difficult to be detected within a short period. The auditor is relieved of any mis-
statement due to errors and frauds as indicated in the audited financial statements. The
degree of care, skill and diligence will be determined by the specific circumstances of
each case.
 27

It can be concluded regarding position of auditor in regard to frauds and errors:

(a) If the auditor has carried out the audit as per generally accepted auditing principles, he
is not liable for mis-statement of financial information.
(b) If any fraud or error is discovered during the course of audit, he should see that errors
are corrected and information about fraud is reflected in his report. the fact must be
brought to the notice of all concerned at the earliest.
(c) As a watch dog he shall not unnecessarily sniff for errors or frauds, but if something
wrong smells out, he shall not over look it carelessly. The verifications and checking must
be widened to bring out any error or fraud.
(d) We should not forget that it is the responsibility of management to prevent frauds and
errors.
 28

QUALITIES OF AN AUDITOR

Only the qualified Chartered Accountants can be appointed as auditor of a limited

company. He must have adequate skill and qualities to conduct his work efficiently.
Above all he should be a man of integrity and character. The auditor must possess the
following qualifications and qualities:

1. The auditor must have though knowledge of principles and practice of all aspects of
accountancy. He must be familiar with all systems of accountancy in use. As he has to
deal with different accountancy system, he must understand their method of preparation.
2. He has to be tactful because for certain transaction no or in adequate information may
be available he has to extract such information tactfully from his clients.
3. He must have through knowledge of audit case laws as per the various cases decided by
courts in and outside India. These decisions are helpful in conducting audits and
determining the scope of his powers and duties.
4. He should have adequate knowledge of financial management, industrial administration
and business organization.
5. An auditor must be honest i.e. he must not certify what he does not believe to be true
and he must take responsible care and skill before he believes what he certifies is true.
6. While discharging his duties, he must act impartially and not influenced by others
directly or indirectly.
7. He should be able to understand the technical details of business whose accounts he is
going to audit. For this purpose he may make certain enquiries from the client as well as
visit place of work of his client.
8. He must have up to date knowledge of companies Act and Mercantile Laws.
9. He must have though knowledge of principles of Economics and Economic
Legislations because these affects the business whose accounts he has audit.
10. He must be familiar with Principles and Practices of Cost accounting for performing
cost audits.
 29
11. From time to time he should seek clarification on the matters which he is not able to
understand from the information provided to him.
12. He should have high moral standards and should not accept and sign a report or
statement which he does not believe to be true and fair.
13. He should be hardworking, systematic and methodical.
14. He must have adequate common sense.
15. He must have capacity to hear arguments of others.
16. He should not disclose the secrets of his client.
17. He should have adequate skill and courage to write audit report correctly clearly,
concisely and forcefully.
30
 31

RESEARCH METHODOLOGY

This chapter includes different methods on ways of study of the topic about the
company.

(1) Collection of Data

a) Primary Source:
This is the most authentic and accurate source of data Collection as it provides fresh and
first hand information. Under this data is collected by personal interview of the
concerned executives, daily customers of the concern. Direct Face- to -face questioning
was held with the staff members, Sales vice president and daily customers.

b) Secondary Sources: -
This source provides second hand information. Information Collection through this
source was extracted from companies Journals, pamphlets, brochures, manuals etc.
These sources proved very fruitful and successful during the preparation of the report
and completion of the report. Without this, the report could not be at the completion
stage.

(2) Period of Study

Period of study of the practical training is from 15.05. 2007 TO 30.06.2007 which
is very short duration of knowing the concept of auditing. However, data has been
processed within two weeks after its collection. This all work has been conducted under
the supervisions and guidance of Mr. N. Singh (Chartered Accountant) who provided me
valuable suggestions in presenting an interpreting the data.
 32

OBJECTIVE OF THE STUDY

(a). To know, how to conduct auditing.

(b). To know the impact of error on the profitability of concern.

(c). To Know the process of removal of errors.

(d). To know the necessary provisions which have been compiled with while conducting
auditing statutory under law.

(e). To study the factors influencing the financial well-being of the firm.
 33

LIMITATIONS OF STUDY

1) TIME
Time was the main constraint study. As the study wa to be completed in a very
short span of time i.e. only 4-6 Weeks & this time span was too compact to analyze
such a wide & vast concept of financial analysis. As this concept Includes analysis in
tune of comparisons, common size B/s, income statements, ratio analysis, fund flow,
cash flow etc. hence owing to lack of time, collection of data in depth analysis of
topic was very difficult in short period of time.

2) DETAILED INFORMATION
According to firm’s norms, ethics, strategies etc the financial Managers& executives
were not allowed to disclose each & every information related to the topic.

3) DELAY
Due to business schedule of the financial incentives & officers there was delay in
collection of data which further delayed completion of the analysis.
34
 35

COMPANY’S PROFILE

M/S AROHI RUBBER INDUSTRIES was established in the year 1995 for the
manufacture of rice rubber rolls, polishes, other rubber goods. The partnership firm came
into existence and was registered under the name of, ‘M/S AROHI RUBBER
INDUSTRIES on 04-04-95 as per the provisions of partnership Act. 1932. The line of
activity of this concern is manufacturing of rice rubber rolls, polishes, other rubber goods.
The unit is engaged in the manufacture of vide range of rice rubber rolls, polishes, other
rubber goods and since its establishment, the firm has always endeavored to keep pace
with good standards of quality. It is due to this only that today firm is one of the leading
units for manufacturing high quality rice rubber rolls, polishes, other rubber goods in the
city. The product of the firm enjoys a reputation of excellence.
The management of the firm is vested in the hands of two individuals, who enjoy the
privilege of being the partners of the firm:
The industry is supported by a team of highly experienced and efficient personnel.
The partners are having an equal share (50%) in the partnership business as per the
partnership deed. The firms are employing around 50 workers directly and a no. of
workers are employed on order basis casually. Workers are divided into three categories –
skilled, semi – skilled and unskilled workers. There are adequate no. of supervisors,
foreman ensuring the production of high quality goods in the factory and maintaining
discipline within the premises.
 36
HIGHLIGHTS OF THE COMPANY
1. Name : M/s. AROHI RUBBER INDUSTRIES

2. Status : Partnership firm

3. Establishment Date : 4th April 1995

4. Head Office Address : M/s AROHI RUBBER INDUSTRIES

24-Dada Colony

Industrial Area

Jalandhar

Punjab (India)

5. Telephone : 0181-

6. Fax : 0181-

7. Bankers : Punjab National Bank

8. Auditors : N. Singh & Associates

9. Factory Address : 24-Dada Colony

Industrial Area

Jalandhar City
 37
OBJECTIVE OF THE INDUSTRIES

1. Business Mission: The firm’s aim is steady and disciplined growth of the

enterprise to maintain the lead position and to expand the present scale of business.

2. Social Goal : Apart from securing economic goals the firm aims to fulfill social

goal as well./ To provide greeter quality product at cheap rates for serving consumer,

to reduce wastage to ensure proper utilization of society resources, to pay fair

remuneration to its workers, to participate in the nations struggle to reduce pollution

are its priorities.

3. Profitability: This firm to employ its present resources in the best possible

way,. Keep a control upon cost in order to have handsome results along with

maintenance of good quality of products.

4. Growth: This firm is endeavoring to earn reasonable return on capital employed

to finance and expansion of the concern.

5. Image: By producing and supplying good quality products at reasonable prices

in the firm aims to secure a favorable image in the minds of its customers.
 38

PRODUCTION PROCESS

Procurement of raw rubber

Mixing with rubber chemicals

Formation of rubber sheets

Pressing of sheets

Cutting into need able sizes (Strap-making)

Fitting

Finishing

Manufacture of sponge rubber chapels

 39
COMPANY’S POSITION

The Company is financial sound. All the expenditure including administrative,

personnel and financial overheads are covered under a revenue account and different
sources of income. Administrative overheads are payable within a year. All the assets are
valued according to Reducing Installment method and depreciated within a year through
which the value of assets is decreased. This depicts the real value of assets while selling
them. The net profit of the company is Rs. 5134847 which is incurred by reducing out all
the direct and indirect expenses.

The purchase of the company is Rs. 37561971 which is good and the sales are excellent.
The company had adequate reserves and surpluses to cover the loss incurred in the future.
The fixed assets are shown under current rate. The balance of the investments is valued at
real and good management is made. The financial result of the company is increased up to
the double to the previous year. The Net profit of the company is increased up to 1.18 per
cent. Appropriation of the amount of the balance transferred to general reserve statutory
reserve and other reserves is increased up to proportionate increase in the income of the
company. The Current Liabilities balancing at is minimized and adequate according to the
Accounting Rules and conventions. The net profit of the company is 18857.6 which are
much better the previous year. The comp
 40

DEPARTMENTS OF THE COMPANY

The main departments in the company are as follows:

1. Personnel Department
It has to perform activities like maintaining records of employees, progress of their work,
merit rating of employees, preparing job description etc.

2. Finance and Accounts Department.

This department is the key of whole concern i.e. it is mainly concern with proper
assignment of funds and accounts keeping on accounts, maintaining books of accounts,
preparing statements of assets and liabilities etc. are other activities of specialized nature.
All this office work performed by this special office or Department.

3. Marketing Department
This Department deals with purchase, sales, market research, pricing related while
performing these activities of this department has to depend on office service including
preparing invoice, gate keeper, write pads and collecting data regarding market surveys
etc.
 41
Accounting Policies of the Company

1. System of Accounting
The company maintains its accounts on accrual basis.

2. Fixed Assets
Fixed assets are accounted for their original cost including freight, taxes, and incidental
charges etc.

3. Investments
Investments are valued at cost; profit and losses are recognized as income or expenditure
Oil their transfer.

4. Inventory
a) Raw material, Stores and spares, components are valued at cost
b) Stock in process is valued at raw materials cost or reliable value whichever is lower.

5. Research and Development Expenses

Expenses on Research and Development charged off as and when incurred.
42
 43

FORM NO. 3CD

[SEE RULE 6G (2)]

STATEMENT OF PARTICULARS RECURRED TO BE FURNISHED UNDER

SECTION 44 AB OF THE INCOME TAX ACT, 1961

PART -A

1. Name of the Assessee : M/S AROHI RUBBER INDUSTRIES

Sh. NUTAN KUMAR MEHTA
Sh. RAJINDER SEHGAL

2. Address : M/S AROHI RUBBER INDUSTRIES

BASTI SHEKH ROAD
JALANDHAR CITY.

3. Permanent Account No. : AABFM7188G

4. Status : PARTNERSHIP

5. Previous Year ended : 31st March, 2007

6. Assessment Year : 2007-2007

PART -B
NAME PROFIT
SHARING
RATIO
7. (a) If firm or association a) Mr. Nutan Kumar Mehta 25%
of persons, indicate names b)Mr. Rajinder Sehgal 25%
of partners/members and c)Mrs. Jasbir Kaur 25%
their profit sharing ratios d)Mrs. Veena Makin 25%
 44
(b) If there is any change in
the partners/members or No .
their profit sharing ratio, the
particulars of such change.

8. (a) Nature of business or Rice Rubber Rolls, Polishes, other

profession. Rubber Goods
(b) If there is any change
in the nature of business - NO
or profession, the particulars
of such change.

9. (a) Whether books of account - NO

are prescribed under section
44AA, if yes, list of books so
prescribed.
(b) Books of account maintained. – Cash Book, Ledger
In cash books of accounts are & Sale Book.
maintained in a computer system,
mention the books of generated by -Yes
such computer system.
(c) List of books of account examined - Cash Book, Ledger,
Sale Book and Pur-
Chase & expenses.
10. Whether the profit or loss account
includes any profits and gains -NO
assessable on presumptive basis?
If yes, indicate the amount and the
Relevant section (44\AD, 44AE,
44AF, 44B, 44BB, 44BBA, 44BBB,
 45
or any other relevant section).

11. (a) Method of accounting employed -Mercantile

in the previous year.

(b) Whether there has been any -NO

change in the method of accounting
employed vis-à-vis the method
employed in the immediately
preceding previous year.

(c) If answer to (b) above is in the -N.A.

affirmative, give details of such
change, and the effect there of on
the profit or loss.

(d) Details of deviation, if any, in -N.A.

the method of accounting employed
in the previous year from accounting
standards prescribed under section
145 and the effect there of on the
profit or loss.

12. (a) Method of valuation of closing - value of stock is

stock employed in the previous taken as certified
year. by the partner.
(b) Details of deviation, if any from
the valuation described under section ……………..
145A and the effect there of on the
profit or loss.
 46
13. Amounts not credited to the profit
and loss account, being:-

(a) The items falling within the scope -NIL

of section 28:

(b) The proforma credits, drawbacks, -NIL

refunds of duty of customs or excise
or refunds of sales tax, where such
credits, drawbacks or refunds are
admitted as due by the authorities
concerned :
(c) Escalation claims accepted during -NIL
the previous year:
(d) Any other item of income: -NIL
(e) Capital receipt, if any: -NIL
14. Particulars of depreciation allowable - as per annexure -I
as per the income tax act, 1961 in enclosed.
respect of each asset or block of
assets, as the case may be, in the
following forms:-
(a) Description of asset/block of assets.
(b) Rate of depreciation.
(c) Actual cost or written down
value, as the case may be.
(d) Addition/deductions during
the year with dates ; in the case
of any addition of an asset, date
put to use ; including adjustments
on account of
 47
(1) Modified value added tax
credit claimed and allowed under
the central excise rules, 1945,
in respect of assets acquired on
or after 1st march 1994,
(2) Change in rate of exchange of currency, and
(3) Subsidy or grant or reim-bursement,
by whatever name called.
(e) Depreciation allowable.
(f) Written down value at the
end of the year.
15. Amounts admissible under sec.
33AB, 33ABA, 33AC, 35,
35ABB, 35AC, 35CCA, 35CCB,
35D, 35E:-
(a) Debited to the profit and loss -NIL
account.
(b) Not debited to the profit and -NIL
loss account.
16. (a) Any sum paid to an employee -NIL
as bonus or commission for
services rendered, where such
sum was otherwise payable to
him as profits or dividend.[ Sec.
36(1) (11)].
(b) Any sum received from emp- - As per annexure 11
loyees towards contribution to enclosed.
any provided fund or super
annuation fund or any other fund
mentioned in sec. 2(24).
 48
(c) And due date for payment and
and the actual date of payment to
the concerned authorities under
sec. 36(1)(va).

17. Amounts debited to the profit

and loss account, being:-
(a) Expenditure of capital nature: -NIL
(b) Expenditure of personal -NIL
nature.
(c) Expenditure on advertisement -NIL
in any souvenir, brochure. Track,
pamphlet or the like published by
a political party ;
(d) Expenditure incurred at clubs:-
(1) As entrance fees and subscription -NIL
(2) As cost for club services and -NIL
facilities used;
(e) (i) Expenditure by way of -NIL
penalty or fine for violation of
any law for the time being in force;
(ii) Any other penalty or fine; -NIL
(iii) Expenditure incurred for any -NIL
purpose which is an offence or which
prohibited by law;
(f) Accounts inadmissible under sec. -NIL
40(a);
(g) Interest, salary, bonus, commission -NIL
or remuneration inadmissible under
sec. 40(b)/40(ba) and computation
 49
there of.
(h) Amount inadmissible under sec. -As per annexure
40A (3) read with rule 6DD and - 111 enclosed
computation thereof.
(i) Prevision for payment of -NIL
gratuity not allowable under sec.
40A (7);
(J) Any sum paid by the assessee -NIL
as an employer not allowable under
sec. 40A (9).
(k) Particulars of any liability of -NIL
a contingent nature.
18. Particular of payment made to - As per annexure-
person specified under 1V Enclosed
sec. 40A (2) (b).
19. Amounts deemed to be profits -NIL
and gains under 33AB or 33ABA
or 33AC.
20. Any amount or profit chargeable -NIL
to tax under sec. 41 and computation
thereof;
21. 1) In respect of any sum referred to
in clause (a), (c), (d) or (e) of sec.
43B, the liability for which;
A) Pre-existed on the first day of -NIL
the previous year but was not
allowed in the assessment of any
preceding previous year and was
a) Paid during the previous …………….
Year.
 50
b) Not paid during the pre vious year ……………..
B) Was incurred in the previous year and was
A) Paid on or before the due a) C.S.T. Payable:
date for furnishing the return of Rs. 96,123/-
income of the previous year under b) P.S.T. Payable:
sec, 139(1) Rs. 24,983/-
c) Bonus payable:
Rs. 52,730/-
d) Leave with
wages:
Rs. 27,343/-
b) Not paid on or before the -NIL
aforesaid date

2) In respect of any sum referred to ……….

in clause (b) of sec. 43B, the
liability for which:-

A) Pre-existed on the first day of -NIL

allowed in the assessment of any
preceding previous year;
A) Nature of liability; ……………
b) Due date of payment under ……………
second proviso to sec. 43B; …………...
c) Actual date of payment ……………
d) If paid otherwise in cash, …………..
whether the sum has been
realised within fifteen days
of the aforesaid due date.
B) Was incurred in the - a) Provident Fund
 51
Previous year: payable Rs. 5,668/-
a) Nature of liability; ESI Rs. 1,760/-
b) Due date of payment under : 31-10-2005
second proviso to sec. 43B ;
c) Actual date of payment; : 20-04-2005
d) If paid otherwise than in -N.A.
cash, whether the sum has
been realised within fifteen
days of the aforesaid due date;
* State whether sale tax, customs …………..
duty, excise duty or any other
indirect tax, levy, cess, import
etc. is passed through the profit
and loss account.
22. A) Amount of modified value -MODVAT credit
Added tax credits availed of or availed
utilised during the previous Input Rs. 10,61,318
year and its treatment in the Capital goods:
profit and loss account and Rs. 1,92,073/-
treatment of outstanding - MODVAT credit
modified Value Added tax outstanding :
credits in the account. Rs. 28,938/-
b) Particulars of income or
expenditure of prior period credited -NIL
or debited to the profit and loss account.

23. Details of any account borrowed -NIL

on hundi or any amount due
there on (including interest on the
amount borrowed) repaid, otherwise
 52
than through an account payee
cheque.[section 69D]
24. A)* Particulars of each loan or - No fresh loan or
deposit in an amount exceeding deposits have been
the limit specified in sec. 26988 accepted during
taken or accepted during the the year.
Previous year:-
(i) Name, address and permanent ………..
account no. of the Ledger or
depositor;
(ii) Amount of loan or deposit …………
taken or accepted;
(iii) Whether the loan or deposit …………
was squared up during the
previous year;
(iv) Maximum amount outstanding ………….
in the account at any time during
the previous year ;
(v) Whether the loan or deposit was ………….
taken or accepted otherwise than
by an account payee cheque or
an account payee bank draft.
*(These particulars need not
be given in the case of a
Government company, a banking
Company or a corporation
Established by a central, state or
Provinicial Act).
B) Particulars of each repayment -NIL
of loan or deposit in any amount
 53
exceeding the limit specified
in sec. 269T made during the
previous year:-
i) Name, address, permanent ……………
account no. (if available with
the assessee) of the payee;
ii) Amount of the repayment; …………..
iii) Maximum amount outstanding ………….
in the account at any time of
the previous year ;
iv) Whether the repayment was ………….
made otherwise than by account
payee cheque or account payee
bank draft.
25. Details of brought forward loss
or depreciation allowance, in the
following manner, to the extent
available

Sr. Assessment Nature of Amount Amount Remark

No. Year loss/ as as assessed
Allowance returned
(in Rs.) (in Rs.)

…… ……. …….. ……… ……….. ………

………………….NIL……………………………

26. Sec. Wise details of deduction - As per Act.

if any, admissible under
chapter VIA.
 54
27. (A) whether the assessee has - in our opinion and as
deduction tax at source and explained to and verified
paid the amount so deducted by us, TDS due was deducted
to the credit of the central and deposited in accordance
Government in accordance with with the provision of chapter
the provision of chapter XVII-B XVII-B
(b) If the answer to (a) above
is in negative, then give the -N.A.
following details:-

Sr Particulars Amount Due date Details Remark

No. of head of for rem- of pay-
Under TDS ittance to ment date/
TDS (Rs.) Govt. Amt.(Rs.)
…… ……….. ……… ………… …………. …
…………….NIL…………………..

28. (a) In the case of the trading

Concern, give quantitative
details of principal items
of goods traded:
(i) Opening stock;
(ii) Purchases during the …….. ……….
previous year;
(iii) Sales during the previous ……………….
Year;
(iv) Closing stocks ………. ………
(v) Shortage/excess, if any ………………..
(b) In the case of manufacturing …No stock register
concern, give quantitative details is maintained/shown
 55
the principal items of raw materials, to us by the assessee.
finished products and by products.
A. Raw materials:
(i) Opening Stock; …………
(ii) Purchases during the previous …………
year;
(iii) Consumption during the …………
previous year;
(iv) Sales during the previous year; ………….
(v) Closing Stocks; …………
(vi) Yield of finished products; …………
(vii) Percentage of yield ; ………….
(viii) Shortage/excess, if any. ………….
B. Finished Products/By Products
(i) Opening Stock; …………..

(ii) Purchases during the previous year; …………

(iii) Quantity manufactured during …………

the previous year;
(iv) Sales during the previous year; …………
(v) Closing Stock; …………
(vi) Shortage/excess, if any …………
* Information may be given to
the extant available.
29. In the case of a domestic company ….N.A….
details of the tax on distributed
profits under section 115-0 in
the following form :-
(a) Total amount of distributed ………..
 56
profits;
(b) Total tax paid there on; ………..
(c) Dates of payment with amounts. ……….
30. Whether any audit was conducted ….NO…
under the central Excise Act,1944,
if yes, enclose a copy of the report
of such audit .
31. Whether any cost audit was carried ….NO
out, if yes, enclose a copy of the
report of such audit [See sec. 139(9)]
32. Accounting ratio with calculations as
follows:-
(a) Gross profit/Turnover; Rs.52, 09,945.84
----------------- =0.139
Rs. 3, 73, 63,903.00

(b) Net profit/turnover; Rs.2, 62,460.63

(Profit before salary ---------------- =0.007
interest to partners) Rs.3, 73,63,903.00
(c) Stock-in-trade/turnover; Rs.70, 97,580.00
------------------ =0.190
Rs.3, 73, 63,903.00

(d) Material consumed/Finished ….detailed information not

goods produced. made availabl
 57
ANNEXURE
PART—A

1. Name of the assessee : M/S AROHI RUBBER INDUSTRIES

2. Address : M/S AROHI RUBBER INDUSTRIES

BASTI SHEKH ROAD
JALANDHAR CITY.

3. Permanent Account No. : AABFM7188G

4. Status : PARTNERSHIP

5. Previous Year Ended : 31st March, 2007.

6. Assessment year : 2007—2008

PART---B

M/S AROHI RUBBER INDUSTRIES, JALANDHAR CITY.

Nature of Business Code 0 1 1 2
SR. NO. Parameters Current year Preceding
(Rs.) Year (Rs.)
1. Paid up share capital 23,78,021.01 25,94,296.52
2. Share application money -NIL- - NIL-
3. Reserve and surplus -NIL- -NIL-
4. Secured loan 19,34,902.08 21,41,694.30
5. Unsecured Loans 12,12,129.14 9,79,393.00
6. Current Liabilities and provisions 151,28,489.00 108,32,932.88
7. Total of Balance Sheet 206,53,541.23 165,48,316.31
8. Gross Turnover 373,63,903.00 296,18,534.00
9. Gross Profit 52,09,945.84 40,82,827.30
10. Commission Received --NIL-- --NIL--
11. Commission Paid 1,98,767.00 1,63,936.00
12. Interest Received --NIL-- --NIL--
13. Interest Paid 85,175.96 14,296.91
14. Depreciation as per Books of account 13,39,259.80 10,63,829.37
15. Net Profit (or Loss) before tax 2,005.63 540.68
16. Taxes on Income paid/provided for in the --NIL-- --NIL--
books
 58

Statement of depreciation allowable under the Income Tax act, 1961

12 Description Rate W.D.D Addition during Deduc- Depreci- W.D.V

Of Of As on The year -tion Ation As on
Assets Dep. 01-04-05 Before After During allowable 31-03-2007
p.a 30-9-06 30-9-06 The
year

1. Building 10% 3,08,409.00 --NIL-- --NIL-- --NIL-- 30,841.00 2,77,568.00

2. Electronic 15% 3,49,757.00 21,713.00 96,956.00 --NIL-- 62,992.00 4,05,434.00
Fitting
3. Car 20% 4,32,260.00 --NIL-- --NIL-- --NIL-- 86,452.00 3,45,808.00
4. Plant & 25% 29,24,931.00 4,02,678.5 19,07,962.91 --NIL-- 10,70,397.00 41,65,175.00
Machinery
5. Tata 407 25% 3,41,019.39 --NIL-- --NIL-- --NIL-- 85,255.39 2,55,764.00
tempu
6. Computer 60% 5,536.00 --NIL-- --NIL-- --NIL-- 3,322.00 2,214.00

TOTAL 43,61,912.39 4,24,391.5 20,04,919.91 --NIL-- 13,39,259.80 54,51,963.00

.

For AROHI RUBBER INDUSTRIES

.
PARTNER.
 59

M/S AROHI RUBBER INDUSTRIES, JALANDHAR CITY

Particulars of payments except in rule 6DD in excess of

Rs. 20,000/-.

DECLARATION

We hereby declare that no payment exceeding Rs.20.000/- towards expenses

have been made otherwise than by crossed cheque or bank draft during the
accounting year 31st march, 2007.

For AROHI RUBBER INDUSTRIES,

PARTNERS.

NOTE: “It is not possible for us to verify whether the payment in excess of Rs. 20,000/- as
mentioned above, have been made otherwise than by crossed cheque and bank draft as the
necessary evidence is not in the possession of the assessee.”`
 60

M/S AROHI RUBBER INDUSTRIES, JALANDHAR CITY.

Particulars of payments made to persons specified under section 40A (2)(b).

Account Debited Particulars Amount

(Paid to)

1. Rent paid Mr. Rajinder Sehgal 48,000.00

2. Interest on part- Mr. Nuttan Kumar Mehta 71,357.00
ners capital
account
3. ----do----- Mr. Jaspreet Singh 39,926.00
4. ----do----- Mr. Jasbir Singh 38,207.00
5. ----do----- Mrs. Veena Makin 35,965.00
6. Salary to partners Mr. Narinderpal Singh 48,000.00
7. ---do---- Mr. Jaspreet Singh 27,000.00

For AROHI RUBBER INDUSTRIES,

Partner
 61

M/S AROHI RUBBER INDUSTRIES, JALNDHAR CITY.

BALANCE SHEET AS ON 31 MARCH, 2007.

LIABILITIES AMOUNT ASSETS AMOUNT

Partner’s Capital Account Fixed Assets
As per schedule annexed 23,78,021.01 As per schedule annexed 54,51,963.00
SECURED LOANS CURRENT ASSETS
CITI Bank, Jalandhar Cash in hand 48,472.13
Loan Account 17,00,000.00 Closing Stocks (certified as to 70,97,580.00
quantity and value by
partners)
HDFC Bank Ltd., Jal With bank of India, Jalandhar 812.69
in C/A
Vehicle Loan account 81,221.74 With HDFC Bank, Jalandhar 95,983.22
in C/A
ICICI Bank Ltd., Jal With Citi bank, Jalandhar in 8,618.00
C/A
Car Loan Account 1,53,680.34 Sundry Debtors(considered 77,72,382.00
goods) (List enclosed)
UNSECURED LOANS LOANS & ADVANCES
Miss Dalbir Kaur, Jalandhar 5,00,000.00 Central excise duty adjustable 29,606.60
Sh. Sardari Lal HUF, Jalandhar 4,79,393.00 Central excise duty on capital 1,44,616.00
adjustable
Mr. Gurcharan Singh, Jalandhar 2,32,736.14 Telephone security 3,000.00
Insurance recoverable 507.00
CURRENT LIA & PROVISIONS
Sundry creditors 139,34,333.00
Cheque issued but not encashed 17,894.00
Central Sales Tax Payable 96,123.00
Sales Tax Payable 24,983.00
TDS Payable 11,151.00
Expenses Payable
Electricity Exp. 9,48,980.00
Telephone Exp. 7,524.00
Provident Fund 5,668.00
Bonus Payable 52,730.00
 62
Leave with wages 27,343.00
ESI 1,760.00
--------------
TOTAL Rs. 2,06,53,541.2 TOTAL Rs. 2,06,53,541.0
M/S AROHI RUBBER INDUSTRIES, JALANDAHR CITY

Manufacturing, Trading, Profit and Loss Account for the year ended 31 st March 2007.

PARTICULARS AMOUNT PARTICULARS AMOUNT

To opening Stock 72,50,811.00 By Sales 3,73,63,903.00
To purchases 2,00,89,384.56 By Closing Stocks 70,97,580.00
To purchase of Rice Husk 5,77,431.00
(Fuel)
To Consumable storage 2,92,232.00
To Fuel Expenses 68,968.00
To Electricity Expenses 1,02,26,243.00
To Wages Paid 5,20,346.00
To Freight, Octroi & Cartage I/W 1,54,606.00
To Oil & Lubricant 71,515.00
To Gross Profit C/d 52,09,945.00

TOTAL 4,44,61,483.00 TOTAL 4,44,61,483.00

To Salary paid to staff 2,58,887.00 By Gross Profit B/d 52,09,945.84

To Printing & Stationary 1,199.00
To Bank charges and interest 61,074.79
To Postage & Courier Exp. 17,966.00
To Freight, octroi & Cartage 3,26,345.00
To Rent Paid 1,08,000.00
To Staff welfare exp. 2,890.00
To Entertainment exp. 4,100.00
To Electricity exp. 10,11,387.00
To Machinery/Electricity repair & 6,31,577.00
maintenance
To Packing & Forwarding exp. 4,64,628.00
To Fees, Duties, Taxes 43,613.00
To Traveling & Conveyance exp. 29,424.00
To Car Petrol & Repair exp. 52.650.45
To Insurance charges 73,613.00
To Telephone/Mobile exp. 44,023.00
To commission exp. 1,98,767.00
To Interest on Vehicle loan 33,651.17
 63
To Medical exp. 2,205.00
To Miscellaneous exp. 2,876.00
To Charity & Donations 15,200.00
To Service Tax paid 6,824.00
To Sales Tax paid 45,500.00
To advertisement exp. 4,305.00
To Income Tax paid 8,140.00
To Provident Fund 34,137.00
To E.S.I. 3,927.00
To Bonus Paid 52,730.00
To Leave with wages 27,343.00
To Tata Repair & Diesel 41,243.00
To Salary to Partners 75,000.00
To Depreciation written off 13,39,259.00
To Interest to partners on Capital 1,85,455.00
Accounts
To Net Profit transferred to Capital 2,005.63
Accounts

TOTAL Rs. 52,09,945.00 TOTAL Rs. 52,09,945.00

 64

M/S AROHI RUBBER INDUSTRIES, JALANDHAR CITY.

SCHEDULE OF FIXED ASSETS ANNEXED TO AND

FORMING PART OF
BALANCE SHEET AS ON 31ST MARCH 2007.

Nature W.D.V as Purchases Sales Total as On Depreciation W.D.V

of On During Dur. 31-03-07 Written off Value as
Asset 01-04-06 Year Year On
s Rate Amount 31-03-07
Building 3,08,409.00 --NIL-- -NIL- 3,08,409.00 10% 30,841.00 2,77,568
Electric 3,49,757.00 1,18,669.00 -NIL- 4,68,426.00 15% 62,992.00 4,05,434
fitting
Car 4,32,260.00 --NIL-- -NIL- 4,32,260.00 20% 86,452.00 3,45,808
P&M 29,24,931.0 23,10,641.41 -NIL- 52,35,572.41 25% 10,70,397.4 41,65,175
Tata 407 3,41,019.39 --NIL-- -NIL- 3,41,019.39 25% 85,255.39 2,55,764
Tempo
Computer 5,536.00 --NIL-- -NIL- 5,536.00 60% 3,322.00 2,214

Total Rs. 43,61,912.39 24,29,310.41 -NIL- 67,91,222.80 13,39,259.8 54,51,963

 65

M/S AROHI RUBBER INDUSTRIES, JALANDHAR CITY.

SCHEDULE OF PARTNER’ CAPITAL ACCOUNT

ANNEXED TO FORMING PART OF THE
BALANCE SHEET AS ON 31ST, 2007.

Name Balance Add Interest Salary Share Total With- BALANCE

of the As on Dur Accrued Credited Net rawal ON
Partner 1-04-06 Year 8% pa Profit 31-03-07
Nuttan 9,26,339.98 -NIL- 71,357.00 48000 501.40 10,46,198.38 2,28,000 8,18,198.38
Kumar
Mehta
Rajinder 5,08,079.14 -NIL- 39,926.00 27,000 501.41 5,75,506.55 18000 5,57,506.55
Sehgal
Jasbir 4,77,581.13 -NIL- 38,207.00 -NIL- 501.41 5,16,289.54 -NIL- 5,16,289.54
Kaur
Veena 4,49,560.13 -NIL- 35,965.00 -NIL- 501.41 4,86,026.54 -NIL- 4,86,026.54
Makin

TOTAL 23,61,560.38 -NIL- 1,85,455.00 75,000 2,005.3 26,24,021,01 2,46,000 23,78,021.

 66

M/S AROHI RUBBER INDUSTRIES, JALANDHAR CITY.

List of Sundry Debtors as on 31st March 2007.

PARTICULARS AMOUNT

M/S Ganesh Trading Co. 5,52,187.00

M/S Arohi Rubber Ind. 4,52,795.00
M/S Vishal Rubber Ind. 5,69,382.00
M/S Gagan rubber Ind. 90,886.00
M/S Durga Trading Co. 1,51,017.00
M/S Ess Pee Exports 78,226.00
M/S G.Desai & Company 91,174.00
M/S Gutam Trading Co. 73,095.00
M/S Mittal Rubber Ind. 30,000.00
M/S Jai Enterprises 6,14,869.00
M/S Jain rubber Mart 1,03,800.00
M/S Minesh Trading Co. 3,96,193.29
M/S Dinesh Trading Co. 90,292.00
M/S Rishabh Trading Co. 26,94,411.50
M/S S.J. Rubber Ind. 4,28,280.00
M/S Dashmesh Trading Co. 60,147.00
M/S Sudarshan Lal Jain & Sons co. 10,62,524.00
M/S Arsh Trading Co. 1,71,371.00
M/S S.R.S Trading Co. 10,956.60
M/S Madan Rubber Ind. 50,776.00

TOTAL Rs. 77,72,382.39

 67

M/S AROHI RUBBER INDUSTRIES, JALANDHAR CITY.

List of Sundry Creditors as on 31st March 2007

PARTICULARS AMOUNT
M/S Aman Agencies, Jalandhar 1,957.00
M/S Anmol Polymers Pvt. Ltd. Jalandhar. 13,47,050.00
M/S Aroma Rubber Ind. 2,36,876.74
M/S Arora Traders, Jalandhar 61,850.00
M/S Ashoka Bearing Store, Jalandhar 36,135.00
M/S Surya Enterprises 3,500.00
M/S Azad Traders 8,028.00
M/S Bansal Agro. Inds (Regt.) 3,500.00
M/S Bansal Rubber 79,924,00
M/S Besto Rubber Rolls 2,418.00
M/S Bharat Petrolubes Pvt. Ltd. 11,863.00
M/S Eastern Trading Co. 24,99,635.80
M/S Electro Mech. (India) 27,840.95
M/S First Flight Couriers (P) Ltd. 1,752.00
M/S Goyal Traders 21,480.00
M/S H.S. Trading Co. 96,344.50
M/S Harish Bottle Store, 5,20,245.00
M/S Harison Pipe Fitting Co. 9,221.00
M/S Hindustan Rasyan (P) Ltd. 9,67,802.02
M/S Hira Foundry & Engg. Works 68,600.00
M/S Jai Shree Enterprises 1,02,684.50
M/S K.B.K. Plascon (P) Ltd. 13,932.00
M/S K.S. Plastic (India) Pvt. Ltd. 29,237.00
M/S Kapil Trading Co. 6,67,547.00
M/S Karkirpa Dyes & Chem. 1,01,846.40
M/S Lalwani & Lalwani 2,10,280.00
M/S Lov Kush Traders 92,014.50
M/S Mahajan Traders 38,660.50
M/S Nand Kishore & Co. 20,345.00
M/S N.B.H. Engineers & Consultants. 19,500.00
M/S Neochem Industries 4,590.00
M/S P.S. Traders Rubber Rolls 16,46,796.50
M/S Pal Traders Rubber Rolls 30,841.00
M/S Panesar Engineering Corporation 4,000.00
M/S Pankaj Sales Corp. 1,26,760.00
 68
M/S Paramount Enterprises 39,125.00
M/S Paras Minerals & Alloys 70,596.50
M/S Parbati Traders 8,569.00
M/S Porrits & Spancer (Asia) Ltd. 1,17,285.00
M/S Punjab Bijlee Center 1,112.00
M/S Punjab Machinery Store (Regd.) 18,793.79
M/S R.S Traders 61,568.00
M/S Ram Lal & Sons 2,43,671.50
M/S Rattan Singh & Jaswant Singh 5,80,133.00
M/S Rohit Agencies 80,000.00
M/S S.G. Oils & Chemicals 12,594.60
M/S Rubber Goods Co. 67,466.00
M/S Shri Ram Mineral Inds. 8,13,210.00
M/S Sonu Rubber Industries 4,834.00
M/S Star Trading Co. 24,90,304.20
M/S Sunny Waste Cutting Suppliers 65,306.00
M/S Uphar Petroleums 23,900.00
M/S Vee Kay Electric Trading Co. 51,332.00
M/S W & F Matal Wires Ltd. 25,403.00
M/S Wadhawan Mill Store 2,535.00
M/S Punjab Sales Corporation 41,537.00

TOTAL Rs. 1,39,34,333.00

 69

V.K RAJPUT & CO.

CHARTERED ACCOUNTANTS
Bank Colony, Basti Bawa Khel, Jalandhar.

----------------------------------------------------------------------------

FORM NO. 3CB

(See Rule 6G (1) (b)

AUDIT REPORT UNDER SECTION 44 AB OF THE INCOME TAX ACT, 1961,IN

THE CASE OF A PERSON REFERRED TO IN CLAUSE (b) OF SUB RULE (1)
OF RULE 6G

1. We have examined the Balance sheet as at 31st March 2007 and profit and the loss
account for the year ended on that date, attached herewith of M/S AROHI RUBBER
INDUSTRIES, Basti Shekh Road, and Jalandhar City. (Permanent account no.
(AABFM7188G)

2. We certify that the Balance sheet and the profit and loss account are in agreement with
the books of accounts maintained at the head office at Basti Shekh Road, and Jalandhar
City and branches (nil).

3. (a) We report the following observations/comments/discrepancies /inconsistencies; if

any;
(i) Sundry Debtors and Creditors are subject to confirmation.
(ii)No stock Register is maintained / shown to us by the assessee.

(b) Subject to above: -

(A) We have obtain all the information and explanations, which to the best of our
knowledge and belief were necessary for the purpose of the audit.
 70
(B) In our opinion, proper books of accounts have been kept by the head office and the
branches (Nil) of the assessee so far as appears from our examination of books.

(C) In our opinion and to the best of our information and according to explanations given
to us, the said accounts, read along with notes on accounts enclosed thereon, if any, give a
true and fair view: -

(i) In the case of Balance sheet, of the state of the affairs of the assessee as at 31 st March,
2007 and
(ii) In the case of profit and loss account of the profit of the assessee for the year ended on
that date.

4. The statement of particulars required to be furnished under section 44AB is annexed

herewith in form No. 3CD.

5. In our opinion and to the best of our information and according to the examinations
given to us, the particulars given in the said Form No. 3CD and the Annexure thereto are
true and correct.
71
 72

SUGGESTIONS

1. STOCK REGISTER: -
The stock register was not maintained by the Company. The
Company will be more beneficial if they maintain stock register.

2. PROVIDENT FUND: -
The provident fund was not correct. So, the provident fund
record maintained by the company with proper care and avoid this mistake in future.
.

3. PARTIES BALANCE CONFIRMATION: -

Maintain the parties balance
confirmation then the result will be more profitable.

4. SIGNATURE ON VOUCHER: -
There is no signature on the voucher by the managing
partners of the company, it is compulsory to take the sign of the managing partner.

The company will become profit oriental company if they take into
considered these points.
 73

FINDINGS

While in summer training reporting on auditing of M/S

AROHI RUBBER INDUSTRIES I had faced so many problems and that problem made
the auditing of M/S AROHI RUBBER INDUSTRIES so difficult. Certain findings are
written below:-

1. Stock register was not maintained by the company.

2. There is no parties balance confirmation.
3. The managing partners of the company does not sign the voucher. The sign of the
managing partners is necessary on the voucher.
4. Provident fund record was not correctly prepared by the company.
74
 75

CONCLUSION

In the earlier days the objective of audit was detection of frauds and now it is extended to
determining true and fair view of financial statement as well as detection and prevention
of frauds.
The audit report should be prepared expressing a clear opinion on financial
information. The report should be prepared as per the term and contents prescribed by law,
regulation or agreement. An unqualified report means that auditor is satisfied in all
material report of above. In case of qualified report, an adverse opinion is given regarding
any or all of the above matters along with reasons.
76
 77

BIBLIOGRAPHY

Auditing Principles and Practices

Pardeep Kumar
Baldev Sachdeva
Jagvant Singh
Financial Accounting
Jain and Narang
Auditing
Kamal Gupta
Financial Management
I.M. Pandey
Others
Books of accounts of the Company
Company Manuals