Difference Between Book-Keeping, Accountancy and

Auditing
The book-keeping, accountancy and auditing are different from each other in their meaning, scope,
advantages, interest served, recording, analysis and reliability. However, the difference between
these can be expressed as follows:

Book-keeping: May be defined as the act of recording financial transactions of an independent unit in
suitably ruled books, whether maintained manually or electronically, kept for the purpose of each
accounting cycle.
Book-keeping is concerned with maintaining a regular, correct and automatic record of day to day
financial transactions of economic unit. It is a work of a more or less mechanical nature and does not
require knowledge of the principles of accounting. Bookkeeping includes
i. entering the financial transaction in various books
ii. summarizing the same in the relevant ledger accounts,
iii. casting such accounts and striking the balance,
iv. proving the arithmetical accuracy of ledger, and
v. providing financial data for the preparation of financial statements.

Auditing: May be defined as the analytical and critical examination of the books of accounts
checking and verification of evidence in support of entries appearing in the books of accounts, and
ascertaining the authenticity of the assertions made in the financial statements. Auditing is a
systematic examination of the financial statements, to determine how far they have adhered to the
management policies and generally acceptable accounting principles.

Auditing is quite different from book-keeping and accountancy and is not concerned with the writing
up of books of accounts or the preparation of financial statements.
Concisely: Bookkeeping, as the name implies, is the writing up and keeping of books of accounts
(both subsidiary and main).

Accountancy, refers to the preparation of periodical financial statements for presentation to owners
and others. Auditing, is the examination, verification, valuation and giving professional opinion on the
books, records and financial statements prepared by the enterprise.

Concluding:
(a) Bookkeeping begins simultaneously with the introduction of capital, whether in cash or in kind of
partly in each form and comes to an end with the return of capital of the owner;
(b) Accountancy begins where bookkeeping ends.
(c) Auditing has nothing to do with bookkeeping and accountancy but is a critical and investigative
examination of financial data collected, classified and summarized according to proper and generally
accepted principles.

Continuous Audit - Meaning, Characteristics,

Advantages and Disadvantages
The audit that remains continue throughout the financial year is called continuous audit.
Continuous audit or a detailed audit is an audit which involves a detailed examination of books of
account at regular intervals i.e. one month or three months. The auditor visits clients at regular
intervals during the financial year and checks each and every transaction. At the end of the year
auditor checks the profit and loss account and the balance sheet. A continuous audit is not of much
use to small firm as its accounts can be audited at the end of the financial year without much loss of
time.

Characteristics of Continuous Audit

• The auditor visits the business regularly.
• It is conducted in the large business concern.
• It is conducted through the year.
• Throughout checking is possible.
• It is an expensive audit.
• Audit report is not prerequisite.
• It is used to cover the deficiencies of the business.
• Surprise visits are also possible by the auditor.
• The manager can fix the time.

Advantages of Continuous Audit

1. Early Location of Errors and Frauds
In the Continuous Audit, the audit visit the clients after a short period. So, he is in a position to check
the information completely in detail. It is helpful in checking the errors and frauds easily. If the audit
is conducted after the year ended. It is not possible to find the errors or frauds easily.

2. Check on Frauds
In the Continuous Audit the errors are located earlier. So it is also helpful in the early correction of
errors and frauds because it is located at the time when it can be corrected earlier.

3. Quick Rectification
Due to Continuous Audit errors are located easily and rectified at an early stage.

4. Special Attention
Before the finalization of accounts an auditor has a sufficient time to pay proper attention to the
checking of account and detection of frauds and errors.

5. Guidance to Client
The auditor remains in touch with the business details, so he also indicates about the mistakes and
gives valuable suggestions to the client to keep the accounts in proper manner.

6. Useful for Declaration of Dividend

The continuous audit is also helpful for the declaration of the dividend. As the accounts are checked
throughout the year, so the audit accounts are ready for the declaration of dividend.

7. Upto Date Accounts

Accounts of the business are kept up to date by the staff because they know that auditor may visit
and check the accounts at any time.

8. Chance of Over Looking Reduces

Auditor has a close contact with the details of the accounts and he has also sufficient time to check
the records. So the chances of over looking are reduced in this type of audit.

9. Quick Presentation of Accounts

Continuous audit is very useful because accounts are maintained regularly. So as the financial years
end final audited accounts are presented before the shareholders.
10. Accounts Completion
Another audit benefit is the early completion of the accounts checking. The results of audit can be
found out just at the end of the accounting period.

11. Moral Check

In the continuous audit the auditor make the surprise visit in the business. The clerks are not aware
about the visit. So they are alert and efficient in their work. There is less chances of frauds in this
type of business.

12. Convenient for Auditors

In this audit, the several visits paid by the auditor to the client’s office in enable his work to proceed
easily and smoothly. It also increases his confidence in his capacity to do his work efficiently and
effectively.

13. Regular Staff

The regular visits performed by the auditor, make the clerks alert to maintain the accounts up to date
and accurate for fear that the auditor may land up in the office any time.

14. Sufficient Time

Continuous audit provides sufficient time to the audit staff. The important and ambiguous matters
may require more time to draw conclusion. There is ample time for such matters.

15. No Missing Entries

Continuous audit is also helpful in keeping the full record. In the record there is no missing entries.

16. Early Correction of Errors

The continuous audit is helpful for early correction of errors. The auditor can point out.

17. Prompt Filing of Returns

The continuous audit is also helpful for the prompt filing of returns. The management can submit
audited account to the registrar as soon as the end of the year.

18. Early Meetings

This audit is helpful for the early meeting of the shareholders. The accounts are presented for the
distribution of profit.

19. Surprise Visits

The continuous audit provided chances of surprise visit to audit staff. The accounting staff becomes
alert due to surprise visit. It is essential for eliminating the chances of error and frauds.

20. Upto Date Record

The continuous audit is useful for keeping the up to date record. Such record is needed by
management for borrowing funds, settlement of tax and dealing with labour union.

Disadvantages of Continuous Audit

1. Alteration of Figures
The records and figures in the books of accounts, which have already been checked by the auditor,
may be altered after the audit is over. A dishonest clerk can do it do defraud the accounts.

2. Expensive
Continuous audit is more expensive as compared to other kinds of audit, because the auditor has to
devote more time to this audit.
3. Inconvenience
In this audit, the auditor visits the client’s office at regular intervals to check the accounts and
records these frequent visits made by the auditor may dislocate the work of his client and cause
convenient to him.

4. Mechanical Work
The work of audit becomes too mechanical because it remains continue throughout the year.

5. Queries Problem
If the auditor’s two visits interval is long then so many queries remains outstanding.

6. Small Business
Continuous audit is not fit for small business concerns. A small business has few transactions so
there is no need of audit for whole one year. The owner as manager can know facts behind books as
details audit is burden.

7. Client Work
The demerit of continuous audit is that the work of the client suffers due to clash of duties and the
client staff remaining busy for the whole years. When the audit work is started work of accounting
staff as books are not spare.

8. Staff Initimacy
The accounting staff and audit staff work side by side for the whole year. Friendship among the
employees and auditors may lead to error and frauds. The sympathetic view of audit staff may fail to
show true and fair view.

9. Missing Link
In the audit the auditor has to come at regular interval to check the accounts and hence the link
between the past and present work cannot be maintained. Consequently the thread of work is very
likely to be lost.

10. Low Income

The continuous audit keeps the staff busy for one year. They are not able to start and complete
many audits at the same time. The given to one business is much higher as compared to final audit.
So it is not suitable for audit staff from financial point of view.

11. Spoon Feeding

Frequent visits by the auditor may induce the client’s staff to depend upon him even for minor things.

12. Expensive
A continuous audit is an expensive form of audit in that the more frequent visits by the auditor means
the higher fees of auditor.

13. Wastage of Time

This type of audit is not helpful for the auditor because in this time period they cannot conduct any
other audit. So this is low-income audit for the auditor.

14. Words of Client

Another disadvantage of the audit is that the works of the client staff suffer due to the work of both
positive. The books of the accounts are not free for the other party to do.

15. Type of Business Concern

This is not fir for the small type of business concern. In the small business concern, there are only
few transactions. So there is no need for this concern.

16. Mechanical Work

In this type of audit, the auditor has to repeat all the products as bookkeeper does where as audit
work by nature should not be under thinking and boring.

17. Extensive Notes Taking

In this type of audit possible alteration after audit can be avoided by taking note on diary regarding
audit of internal control. So the continuous audit requires the compilation of bundle of notes.

18. Chances of Collusion

Frequent visits of auditor may establish some unhealthy relationship between the client’s staff and
auditor’s staff. Thus there are chances of moral check. Upon them and there may be collusion
between them.

Final Audit - Meaning, Characteristics, Advantages

and Disadvantages
Final audit is also called as the “Balance sheet audit” or the “Periodical audit”. Final audit is started
when the books of accounts closed at the end of the year. It is the most satisfactory form of audit
from the point of view of an auditor. In this audit there is cent percent checking of the accounts. In
case if the business has an effective and proper internal control system. Then the audit sampling is
possible.

Characteristics:
The following are the main essentials or features or characteristics of the final audit.
• In one session an auditor make only one visit.
• This type of audit can be conducted on both the large and small type of business.
• It is conducted when the accounting period ended.
• In this audit the auditor can do test checking.
• Auditor report is a prerequisite.
• It is conducted to report to shareholders.
• The audit is completed on a short period.

Advantages of Final Audit

1. Alteration Chances Limited
In the other types of audit the alteration is possible in the audit. But in the final audit the alteration of
any type is not possible after the audit.

2. Checking of Complete Record

In the final audit there is complete checking of the books of accounting. He can decide either to
check cent percent or by sampling.

3. Advantage for the Shareholders

Final audit serves the shareholders by giving them the most reliable financial information for the
investment purpose.

4. Advantage for the Owner

Sometimes the business is so large that even one owner doesn’t know the real position about the
business. So final audit throws light on the business position and provides him satisfaction.

5. Convenient or Suitable
Final audit is very suitable for the auditor and client staff. It saves both the parties from continuous
disturbance.

6. Saving of Time
In the continuous audit the work of audit is continuous through out the year. It takes a lot of time. But
as compare to it final audit takes a very short time. So, in the final audit the time is saved.

7. Legal Demand
Final audit is also helpful in checking either the management has fulfilled the legal requirements or
not. The management is bound to fulfill the legal requirement.

8. Economical
Final audit is beneficial for the client. It is not a regular burden on him, because it is conducted only
once in a year at the end of the accounting period. So, it gives the maximum benefit with minimum
cost.

9. Improves the Efficiency

In this audit the performance of the staff improves due to finding out the weak points of the
employees by the auditor by overcome these weakness the staff can improve his efficiency.

10. Submission of Report

About the fairness and correctness of accounts final report is very important for the good will of the
company.

11. Staff Duties

In final audit there is no clash of duties between the audit and accounting staff. They performed their
work accordingly. The accounting staff remains busy throughout the year in his work and the audit
staff his work when the accounting staff ends his work.

12. Convenient for Management

The benefit of final audit is that it is convenient for management as well as for audit staff. The auditor
can start and complete the audit at one session. The queries can be cleared on the same day.

13. Minimum Time Period

The time required for final audit is less as compared to continuous audit. The auditors can start and
complete many audits. They can raise their income by means of new audit work.

14. Planned Work

The final audit has minimum time. So, the work of audit is completed under planning. An audit
programme is maintained which provides the schedule of the working of the audit staff and the
principal auditor can control the audit work.

15. Work Continuity

In the final audit the work of audit go through without any break and same way the auditor can be
satisfied for the doubt, which raise from his work on the same time.

16. Small Business

The final audit is useful for small-scale business units. The fee charged by auditor is less as
compared to continuous work. The small income of business can afford small audit fee.
17. No Relations
The merit of final audit is that it provides no chance to audit staff to develop friendly relation with
accounting staff. The accounting staff is not in a position to get undue benefit from audit staff.

18. Full Information

The final audit is useful as it provides full information about business matters. The auditor can take
decision on the spot for completion of audit work and submission of audit report.

19. Income of Auditor

This type of audit is also helpful for the auditor. Because this audit saves the time of the auditor and
he can conduct many other audit of other business.

20. Information of Client

Final audit serves the shareholder by giving them the most reliable financial information for the
investment purpose.

Disadvantages of Final Audit

1. Shortage of Time
The auditor has many clients and their financial year ends on the same date. So it becomes very
difficult for the auditor to finish the work in time. It is a disadvantages of final audit.

2. Delay in Report
The decisions of the business are made on the basis of the audit report. But this report is made one
or two months late. So there is also delay in the making of important decisions.

3. Complete Checking Not Possible

It is very difficult for the auditor to check the each and every entry made in the books of account. He
applies only test to save the time. So many mistakes remain untouched.

4. May Misrepresent
There may be also a chance that audit report may not represent the correctness of accounts
because each and every transaction is not checked.

5. No Moral Influence
In this audit there is less pressure on the accounting staff. The audit staff comes once in the year. So
the employees are not altering in their work.

6. Late Corrections
In this audit the errors are locate at the end of the accounting period. Some way, the corrections of
errors are also late. And the entire producer takes more time.

7. Audit Report
The demerit of final audit is that report is not presented in time. It may be submitted one or two
months late. The decisions are to be made on the basis of audited accounts.

8. Planned Frauds
In this type of audit, the management has a whole year to think and decide how to make the frauds.
So they commit a planned fraud, which is very difficult to find by the auditor.

9. Previous Year Data

Past data is provided to the auditor for audit in this type of business. The errors and frauds are also
previous they have no concern with present or future.
10. Thorough Checking
In the final audit there may not be thorough checking. The auditor may select the sampling. In this
way the errors and frauds are not located and the purpose of audit dies.

11. Planning for Future

In the final audit the future planning is not prepared in time because audit work start when the
accounting work ends. The audit work is completed late and the projected financial statements are
also completed late.

12. Delay in Accounting

For the accounting staff it is not possible to prepare the financial accounts just at the end of the year.
Due to audit there is delay in finalizing the accounting matters.

13. Monthly Report

If in a business monthly or quarterly report are required. In this type of business the final audit
cannot be conducted.

14. Proper Attention

The auditor cannot pay the proper attention towards the audit because he is bound by the fixed time.

15. Proper Decision

As he is bound by the time period he cannot judge the weakness of the business properly and
cannot give the proper decisions to workers.

16. Interim Dividend

The business, which conducts the final audit, it is very difficult for him to declare the interim dividend.

Cost Audit - Meaning, Objectives, Advantages and

Disadvantages
Cost Audit:
It is an audit process for verifying the cost of manufacture or production of any article, on the basis of
accounts as regards utilisation of material or labour or other items of costs, maintained by the
company. In simple words the term cost audit means a systematic and accurate verification of the
cost accounts and records and checking of adherence to the objectives of the cost accounting.

As per ICWA London’ “cost audit is the verification of the correctness of cost accounts and of the
adherence to the cost accounting plan.”

The ICWAI defines cost audit as “system of audit introduced by the government of India for the
review, examination and appraisal of the cost accounting records and attendant information required
to be maintained by specified industries"

From above definition of cost audit, it is clear that cost audit is a systematic examination of cost
accounts to verify correctness of cost accounting records.

As per the section 233 B of Company Law 1956, there is the provision for cost audit. Under this
section, cost audit is compulsory for all the public and govt. companies which are associated with the
processing and production. If there aggregate value of net worth exceeds 5 crores or total sale
exceeds 20 crores, the cost audit is must.

Objectives of Cost Audit

The following are some of the objectives for which cost audit is under taken:
1. To establish the accuracy of costing data. This is done by verifying the arithmetical accuracy of
cost accounting entries in the books of accounts.

2. To ensure that cost accounting principles are governed by the management objectives and these
are strictly adhered in preparing cost accounts.

3. To ensure that cost accounts are correct and also to detect errors, frauds and wrong practice in
the existing system.

4. To check up the general working of the costing department of the organization and to make
suggestions for improvement.

5. To help the management in taking correct decisions on certain important matters i.e. to determine
the actual cost of production when the goods are ready.

6. To reduce the amount of detailed checking by the external auditor if effective internal cost audit
system is in operation.

Advantages of Cost Audit:

To The Management
1. Cost audit helps in detection of errors and frauds.
2. The management gets accurate and reliable data based on which they can make day-to-day
decisions like price fixation.
3. It helps in cost control and cost reduction.
4. It facilitates the system of standard costing and budgetary control.
5. It helps the management in inter-unit / firm comparison.
6. It enables the management to identify loss making propositions.

To The Government
1. Cost audit ensures efficient functioning of the industry. This in turn, nurtures a healthy competition
among the different companies and paves a path for fast progress.
2. It helps in identification of sick units and enables the Government to make relevant decisions.
3. It helps in fixing prices in the case of essential commodities and checking undue profiteering.
4. It enables to take decisions as to granting of subsidies, incentives and protection to various
industries.
5. It helps to take decisions as to levies, duties and taxes.

To the Society
1. Cost audit enables the Government to fix prices of essential commodities. This safeguards the
interests of the society.
2. Cost audit enables the Government to keep a check on undue profiteering by the manufacturers
and avoids artificial price rise due to monopolistic tendencies.

To the Shareholders
1. Cost audit reveals whether any of the products of the company are making losses. Thus though
the company making an overall profit, a loss making line may eat up the company’s profits. This is
brought to the notice of the shareholders and the management is forced to take remedial measures,
thereby making optimum utilisation of resources.
2. Cost audit ensures that the shareholders get a fair return on their investments.

Disadvantages of Cost Audit:

1. Holding a Cost Audit can be expensive. This is because a company will often bring in an
independent auditor who are normally charging higher price.
2. A Cost Audit can be a long process which will likely involve more time. This extra time and effort
can impact an employee's day to day routine work.
3. If a Cost Audit is carried out in order to find fraudulent activity it can take a long time by which time
people stealing could have covered their tracks.
4. Cost Audits involve a large amount of estimation and so there is the possibility that figures will be
incorrect and if record keeping from the company is not good to start with then inaccuracies will be
arises.

Management Audit: Meaning, Objectives, Advantages

and Limitations
Management Audit:
Management audit is a method of independent and systematic evaluation of the management
activities at .all levels of management to ascertain the functions, efficiency and achievement of' the
management (i.e. policies) as compared to standards set by the company.

According to L. R. Howard, "Management audit is an investigation of business from the highest level
downward in order to ascertain whether sound management prevails throughout, thus facilitating the
most effective relationship with outside world and smooth running of internal organization."

As per Taylor and Perry; "Management auditing is a method to evaluate the efficiency of
management at all levels throughout the organization, or more specifically, it comprises the
investigation of a business by an independent body from the highest executive level downwards, in
order to ascertain whether sound management prevails through and to report as to its efficiency or
otherwise with recommendations to ensure its effectiveness where such is not the case."

Scope of Management Audit:

The scope of management audit is much wider than financial audit because management audit
evaluates not only financial audit but also other aspects of the business. It is the method of
evaluating the total efficiency of the management from the top level to the lowest level. Therefore,
the main scope of management audit is:

1. Evaluate the Efficiency of the Management: Management· audit evaluates and appraises the
efficiency of the management at all levels.

2. Implementation of Principles and Policies of the Management: Management audit review whether
principles and policies formulated by the management have been successfully implemented or not.

3. Find Variances: It detects the variances in efficiency with the standards set by the management.

4. Analyze the Reasons for Variances: Management audit analyze the reasons for inefficiencies of the
management for not fulfilling the targets.
5. Recommend Suggestions for Improvement: It gives suggestions for improvement in the areas e.g.
production, sales, purchase, finance, human resources, administration etc.

Need and Objectives of Management Audit:

Management audit is the total audit of the management i.e. reviews how the policies of the
management have been implemented and its efficiency to execute the policy. Therefore, the scope
is much greater than financial audit, as it examines the all aspects of the management. Management
audit has some objectives. These are discussed below:

1. Verifying the Efficiency: Management audit aims at to assess the efficiency at all levels of
management and implementation of policies.

2. Gives Suggestion for Increase in Efficiency: Management audit highlights the inefficiencies in
different areas of management and gives his valuable suggestions and means to improve the
efficiencies.

3. Asses the Effectiveness of Planning and Policies: Management audit examine and evaluates the
plans and policies and judge whether planning and policies are properly implemented.

4. Helps to Increase Profitability: Management audit helps the management to increase profitability
by giving remedies to maximize the organization's resources in an efficient way.

5. Helps to Co-Ordinate Activities: Management audit detects the interrelationship among the
activities, evaluates the authority and responsibility and gives valuable suggestions for improvement
of co- ordination among the activities and the employees.

6. Gives Valuable Advice: By scanning the management efficiency and detecting the weak spots of
different levels of management, the management auditor gives valuable advice to the top
management regarding different policies and future course of action.

Advantages or Importance of Management Audit:

There are several advantages of conducting management audit of an organization. When an
organization grows in its volume and activities, there is a need for management audit for evaluating
efficiency and effectiveness of the management at all levels of the organization. The advantages and
importance of management audit are discussed below:

1. Evaluates Efficiency of the Management: Management audit is a method of independent and

'systematic evaluation of the management activities at all levels of management to ascertain the
functions, efficiency and achievement of the management (i.e. policies) as compared to standards
set by the company.

2. Scrutiny of the Plans, Policies and Procedure: Management audit helps to determine how the
management has implemented their plans, policies and procedure to reach the organizations goal.

3. Helps for Correction of Plans, Policies and Procedure: Through management audit, it is possible to
change or revise the plans, policies and procedure as per needs of the company.

4. Aids for Decision Making: Management audit asses the ability of the managers to take important
decisions and helps them to rectify the defects.

5. Helps to Get Loan: Financial institutions who gives huge loan to the organizations are interested to
know the efficiency of the management and the profitability. Management audit certainly gives a
guide to them.
6. Helps to Get Subsidy: Before granting subsidy by the government, to any entity they are interested
to know the efficiency and functioning of the management. Management audit helps in this matter.

7. Helps to Increase Profitability: Management audit helps the management to increase profitability
by giving remedies to maximize the organization's resources in an efficient way.

Limitations of Management Audit:

1. The management audit is audit of the management, by the management, and for the
management. The management auditors are selected by the management itself. Such auditors may
or may not be able to handle the job assigned to them.

2. The management auditors are generally familiar with the organization and the staff and
employees. The personal aspects cannot be overlooked in such audits. Some may use this audit to
level the score with someone while other may utilize it to favour someone.

3. They are more likely to take the facts for granted and may not probe into depth to investigate the
matter any further.

4. Time and cost constraints may limit the scope, operation and extent of such audits.

5. The management audit team as selected by the management may not look, act and work as a
team. Conflicting interests, attitude and inclination may jeopardize the entire objective of the audit.

Types of Audit Report

For every financial report, an auditor or a group of auditors will step up to audit or inspect the
financial statement whether the financial report given are true and fair view. To conclude all the audit
process, an auditor must or responsible to issue an appropriate report to forming an opinion in
accordance with ISA 700. In a major division, auditiong report can be classified into two categorized,
it is modified report and unmodified report. These two categorized are established by 5 types of audit
report as shown below:

1. Standard Unqualified Report

2. Modified Unqualified Report
3. Qualified Opinion
4. Adverse Opinion
5. Disclaimer Opinion

1. Standard Unqualified Report

• It is a common audit report by an auditor
• It present or shown that the audited financial report are true and fair view
• All the requirement such as balance sheet, income statement and cash flow are fully presented and
audited
• The financial statement given are presented accordance with approve accounting standard.
• There are no explanatory pharagraph or modification of audit report.

2. Modified Unqualified Report

• It is similar to Standard Unqualified Report, but with an extra pharagraph presented in the audit
report that the auditor believes it is important to provide additional information regarding the
significant uncertanties matter.
• It still presented that the financial report are true and fair view.

3. Qualified Opinion
• Whole financial report are true and fair view except for a few areas
• A saperated pharagraph for qualified opinion will be published by an auditor when • There are
material misstatement in the financial statement given but not pervasive to the financial statement.
• Auditor unable to obtain sufficient audit evidence that material but not pervasive to the financial
statement
• If auditor believes that the matter are material and pervasive to the financial report, an adverse
opinion will be published

4. Adverse Opinion
• The financial statement given do not fairly represent the organization’s financial statement.
• Specified reason will be follow up the opinion
• It will be published when there are material misstatement and pervasive to the financial statement
• Resulted to the rejection of the audited financial statement

5. Disclaimer Opinion
• This type of report will be published when auditor can’t make any opinion due to insufficient audit
evidence.
• Due to limitation of audit evidence there are possibilities that there are material misstatement that
pervasive to the financial statement.
• However auditor can’t published adverse opinion although there are any possibilities that material
misstatement that pervasive to the financial statement due to lack knowledge

Qualified Audit Report

Meaning:
A qualified report means an audit report which is not clean. In case auditor has any reservation in
respect of certain methods mentioned in the financial statements he may qualify his report. A
qualified opinion shall be expressed as being subject of or except for the effects of the matter to
which the qualification matters. If the accounting standards issued by Institute of Chartered Accounts
of India is not followed by the company the auditor may qualify his report.

In addition as per CARO the auditor may qualify in his report in respect of inventories, Fixed Assets,
loan given or taken by the company, internal control procedures, internal audit system, acceptance
of public deposits, maintenance of cost records, payment of statutory dues, transaction prejudicial to
the interests of the company, etc.

Circumstances for Qualification of Audit Report: In following circumstances the auditor has to qualify
his report:

1. He cannot conduct audit satisfactorily due to non availability of certain books of accounts or
records, information or explanations necessary for conduct of his audit.

2. He finds that the Balance Sheet and Profit & loss Account have not been prepared in accordance
with accepted accounting principles.
3. He detects that provisions for Bad & Doubtful Debts, Depreciation etc. are not adequate.

4. He detects that the company has created certain secret reserve.

5. The stock in trade has been valued at market price which is more than cost price.

6. He finds that the contingent liability for bills discounted has not been disclosed.

7. If in his opinion provision for taxation made is not proper.

8. When he finds any embezzlements of cash or misappropriation of goods or manipulation of

accounts which considerably affects the financial position of the company.

Investigation Meaning and Classes

Investigation:
When for a special purpose an inquiry is made into the accounts of the business it is called
investigation. In other words, we may say that audit which is conducted for a particular object is
called investigation.

Investigation involves inquiry into facts behind the books and accounts, into the technical, financial
and the economic position of the business or organisation. Investigation is an examination of books
and records preliminary of financing or for any specified purpose, sometimes differing in scope from
the ordinary audit. Investigation implies an examination of and record for some special purpose.

Classes of Investigation:
There are many types of Investigation, but certain main classes can be identified. Following are
some of the areas where the investigation is mostly called for:
1. Investigation on behalf of a person or company who wants to purchase a running business.
2. Investigation on behalf of a person who is interested to join as a partner in a partnership firm.
3. Investigation on behalf of a person who wants to lend money to a business or interested to know
its financial position.
4. Investigation on behalf of the owner/shareholder of the business who suspects a fraud.
5. Investigation on behalf of the tax authority for assessing actual tax liability.

Rights, Duties and Liabilities of Auditor

Rights and Powers of Company Auditors
According to Section 227(7) of the Companies Act, a company auditor has the following rights:

1. Right of Access Books of Accounts: As per Section 227(1) of the Companies Act every auditor of
the company has the right to access at all times to the books of accounts and vouchers of the
company, whether kept at the head office of the company or elsewhere. Under section 209(1) (d), a
company auditor has the right to examine the cost records also which are required to be maintained
by certain companies relating to production sales, stores etc.

2. Right to Obtain Information and Explanations: An auditor can call for any information or
explanation from different officers of the company which he may think necessary for the performance
of his duties.
Apart from the auditor’s right to obtain information and explanation it is the duty of every officer of the
company to furnish without delay the information to the company auditor. If the directors or officers
of the company refuse to supply some information on the ground that in their opinion it is not
necessary to furnish it, then the auditor has the right to mention that in his audit report.

3. Right to Receive Notices and Other Communication Relating to General Meetings and to attend
them: According to section 231, of the companies act an auditor of a company has the right to
receive notices and other communications relating to the general meetings in the same way as that
of the members of the company.
Similarly an auditor also has the right to attend any annual general meeting and also to be heard at
those meetings which he attends and which concerns him as an auditor.
The auditor also has the right to make a statement or explanation with regard to the accounts he has
audited. But he auditor is not expected to answer questions in the general meeting.

4. Right to Visit Branches: According to section 228 of the companies act the auditor of the company
has the right to visit the branch office or offices of the company.
He can also audit such accounts of eh offices of the company provided that there is not qualified
auditor to audit the accounts of the branch office or offices of the company, in such cases, the
auditor has the right to access at all times to the books of accounts and vouchers that the company
maintains at branch office or offices.
Moreover section 226 of the companies act provides that in case of the company gets the branch
accounts audited by some of the local auditors, even the auditor has access at all times, to the
books, accounts an vouchers of the company and he can also visit the branches, if he feels
necessary.

5. Right to Correct Any Wrong Statement: The company auditor is required to make a report to the
members of the company on the accounts examined by him of the final accounts and the related
documents which are laid down before the company in the general meeting.

6. Right to sign the Audit Report: As per section 229 of the companies act only the person appointed
as auditor of the company or where a firm is so appointed, only a partner in the firm practicing in
India, may sign the audit report or authenticate any other document of the company required by law
to be signed.

7. Right to Being Indemnified: Under Section 633 of the Companies Act, an auditor is considered to
be an officer of the company and he has the right to be indemnified out of the assets of the company
against any liability incurred by him in defending himself against any civil and criminal proceedings
by the company if it is proved that the auditor has acted honestly or the judgment is delivered in his
favour.

8. Right to seek Legal and Technical Advice: The company auditor has the full right to seek the
opinion of the experts and to take their legal and technical advice so as to discharge his duties
efficiently.

9. Right to Receive Remuneration: As per Section 224(8) of the Companies Act, the company auditor
has the right to receive remuneration provided he has completed the work which he has undertaken
to do so.

Duties and Liabilities of a Company Auditor (Section 227):

Duties towards the shareholders:
1. Report shareholders about true and fair state of affairs of the company
2. State that balance sheet and profit and loss a/c give all information required by law
3. State that balance sheet and profit and loss a/c agree with the books of account
4. State that balance sheet and profit and loss a/c agree with accounting standards
5. State that he has obtained all the necessary information
6. State whether the company has maintained all books as required by law;
7. State the reasons of qualification in his report
8. State that he has received the audit report on the branch accounts audited by other auditor and
how he has dealt with the same in preparing his report
9. Auditor shall state in his report whether:

a) The loans taken are properly secured and the terms of loans are not against the interests of the
company
b) Loans given are shown as fixed deposits and the terms of loans are not against the interests of
the company

10. Transactions recorded as book entry are not against the interests of the company
11. Personal expenses of directors have not been charged to revenue a/c of company;
12. The company fulfills the requirements of CARO 2003.

Duties towards Company:

1. Prospectus: According to Sec 56, the auditor is required to certify profits or losses, assets &
Liabilities and dividend paid etc in the prospectus.

2. Statutory Report: Section 165 requires that the auditor has to certify the statutory report.

3. Public Deposits: Section 58AA requires the auditor to report about whether the company has
followed all rules and guideline of RBI in regard to public deposits or not.

4. Signature on Audit Report: Section 229: It is duty of auditor to sign on his report.

5. Insolvency (Section 488): If the company wants itself to be declared insolvent, it is duty of auditor to
prepare profit and loss a/c for the current period.

Duties towards Government:

1. CARO-2003: The auditor has to report para-wise that the company has fulfilled all the
requirements of CARO-2003.

2. Assist the Investigation u/s 237: It is duty of auditor to assist the investigation ordered by the CG u/s
237.

Duties towards General Public:

1. His office is of confidence and faith. He must be reliable in all respects.

2. He should reveal all material information regarding the state of affairs of the company to the
company as well as to the general public.

3. While issuing prospectus u/s 56, he should see that the prospectus does not include any
misleading information or material.

Audit Evidence
Meaning: “Audit Evidence” is a mixture of observations made by audit inquiry and data compiled via
analysis of other data which, when combined, enables the auditor to from and substantiate an
opinion on financial statement.
Audit separates all the confirmations that the auditor has obtained and that
a) Is relevant to what the auditor is trying to determine.
b) Influences the auditor in formulating an opinion as to fairness of the financial statements.

Assertion by Management
Financial statements assertions are the representations of the directors that are embodied in the
financial statements. The directors by approving the financial statements are making representations
about the information thereon. So every item in the financial statements constitutes one or more
assertions from the management.

Examples
1. If there is an item in the current assets section of the balance sheet which states as: Cash Rs. 1,
00,000.
In this case the management’s assertions are:
Company has cash in hand of Rs. 1, 00, 000.
Asset cash is free and available for expenditure as the management directs.

2. Like wise an item is states as:

Accounts Receivables Rs. 3, 00,000 asserts that:
company has accounts receivable from its customers of Rs. 3, 00, 000.
such accounts are considered collectible within the operating cycle
they are expected to receive Rs. 3, 00, 000 in cash or an amount very close to it from the debtors
who purchased goods on credit.

Management produces financial statements and in doing so it asserts that the individual items are
correctly described and show figures which are mathematically correct or fairly estimated. Further,
the accounts are a whole show, a trace and fair view of financial state of affairs of the concerned
enterprises.
The assertion of representations that are usually made are in this connection are:

1. Existence: An asset or a liability exists on the date of balance sheet.

This is an obvious assertion in respect of items like land, building, merchandise and others.

2. Rights and obligations: An asset or liability pertains to the entity on the date of balance sheet.
The enterprise has ownership of an asset i.e. it has all sorts of rights and obligations relating to a
given asset or liability.

3. Occurrence: A financial transaction or event took place which pertains to the entity during the
relevant accounting period. Even when false transaction have been recorded, the assertion is that all
record transactions actually took place.

4. Completeness: There are no unrecorded assets, liabilities, transactions or events or undisclosed

financial items.
This is essential for all items of balance sheet but is particularly important in respect of liabilities.

5. Valuation: An asset or liability is recorded at an appropriate carrying value. Appropriate means it is

in accordance with the generally accepted accounting principles, Companies Ordinance and
Accounting Standards.

6. Measurement: A transaction or event is recorded as the proper amount and revenue or expense
allocated to the proper period.
7. Presentation and disclosure: An item is disclosed, classified and described in accordance with
applicable reporting framework.

Example: An overdraft of Rs. 80,000 appears in a balance sheet. So the directors are made the
following assertions:

i. There exists a liability to companies’ bankers.

ii. In balance sheet data the liability of Rs. 80,000 is exhibited.
iii. The said amount is agreed by bank.
iv. Overdraft was payable on demand.
v. Overdraft was unsecured.
vi. Memorandum and Articles of Association authorise borrowings.
vii. Bank reconciliation statement has been prepared.
viii. Bank is willing to allow the overdraft to continue.

Notice that if no overdraft appears in the balance sheet, there is an assertion that on the date of
balance sheet no overdraft liability existed.

Internal Check vs Internal Audit

Similarities: Both Internal Check and Internal Audit are part of the whole system of internal control,
as such both are complementary and go together.

Dissimilarities: There is a lot of difference b/w Internal Check and Internal Audit. Both differ from
each other in the following respects:

1. Meaning: Internal Check is an arrangement of duties allocated in such a way that the work of one
person is automatically checked by another.
Internal Audit is an independent appraisal of the operations and records of the company.

2. Object: The purpose of Internal Audit is to detect the errors and frauds which have already been
committed.
The purpose of Internal Check is to prevent or minimize he possibilities of errors, frauds or
irregularities.

3. Need for separate staff: for carrying out Internal Audit, a separate staff of employees is engaged for
the purpose.
For internal check, no new appointment is made. It, in fact represents only the arrangement of duties
of the staff in a particular way.

4. Nature of work: The work involved in the Internal Audit is just like that of a watch man. Internal
auditor has to report, from time to time, to the management about the various in efficiencies and
suggest improvements. It is also his duty to see that the internal check system does not become
static.
Internal Check, on the other hand, represents a process under which the work goes on
uninterruptedly and the checking too is more or less automatic.

5. Timing of work: Internal Audit starts when the accounting process of different transactions is
finished.
Internal Check is an operation during the course of transaction.
6. Internal audit: It is a device for checking the work, whereas internal check is a device for doing the
work.

7. In Internal Audit Errors and Frauds are detected after the completion of work, whereas in Internal
Check the Errors and Frauds are discovered during the course of work.

8. Scope of work: The scope of Internal Check is very limited. The scope of Internal Audit is
comparatively board.

9. Involvement: A large number of employees are needed for the implementation of Internal Check
System.
Whereas, a much smaller number of persons are needed for implementing Internal Audit
implementation.

Internal Check Advantages and Disadvantages

Advantages of Internal Check
Some of the widely accepted advantages of an efficient system of internal check are as follows.

1. For the Business

a) Proper division of work: Internal check entails a proper and rational distribution of work among the
members of staff of the enterprises keeping in view their individual qualifications, experience and
area of
specialization.

b) Detection of errors and frauds: since no individual worker is allowed to handle a job completely
from the beginning to the end, and the work of each clerk is automatically checked by the other, this
heaps in the early detection and discovery of errors and frauds and the possibilities of the
commission of errors and frauds can be minimized.

c) Increased efficiency coupled with economy: A good system of internal check increase the efficiency
of work among the staff and leads to overall economy.

d) Moral check: knowledge of subsequent checking of each employees work by others, acts as a
great check to commission of errors and frauds.

2. For the Auditor

a) Quick preparation of final accounts: The Profit & Loss Account and the Balance Sheet are
prepared without any loss of time.

b) Convenience to Auditor: Where an organization is operating system internal check, the statutory
auditor may conveniently avoid detailed checking of the transactions. He may apply a few tests here
and there and can relieve himself from detailed checking.

3. For the Owner

a) Accuracy of the accounts can be relied upon: if there is a system of internal check the owner of the
concern may rely upon genuineness and accuracy of the accounts.

b) Increase in profits: Overall efficiency and economy in operations result in more profit - thus
ensuring larger dividends for the owners or shareholders.

Disadvantages of Internal Check

Depending on each other proves fatal in the quick disposal of the work. if one person is absent, the
day-to-day work will be seriously disrupted. Following are some of the disadvantages of a system of
internal check:

1. Costly for small business: A system of Internal check system quite expensive especially for small
business houses.

2. Quality is sacrificed for Promptness: In an internal check system quality of work declines because
the clerks of the business attach greater importance to become quick and do not care if in the
process their work gets substandardised.

3. Carelessness among high officials: The possibility of some of the responsible and high officials
being complacent, increases as they believe, though not always rightly, that under a sound system
of internal check nothing can go wrong.

4. Disorder in the working of a business: In the absence of a proper organized system of internal
check there will be chaos and disorder in the working of business.

5. Risky for an auditor: If the auditor does not apply tests and procedure his own and if he relies on
the output of the system his work cannot be free from irregularities if the system itself proves to be
defective.

Characteristics of Good System of Internal Check

1. Responsibility: Responsibility of each individual must be properly defined and fixed. The work of
the business should be allocated amongst various clerks in such a manner that their duties and
responsibilities are clearly and judiciously divided.

2. Completion: The work should be divided in such a way that no single person is allowed to
complete the work solely by himself from the beginning to the end. However, there should be no
duplication of work.

3. Rotation of employees: A good system of internal check should not allow person having custody of
assets to have access to the books of account. A system of transfer or rotation of employees from
one seat of work to another must be followed by the business.

4. Automatic check: A good system of internal check must provide for an automatic checking of the
work of one clerk by the other.

5. Reliance: No clerk of the business should be relied upon too much.

6. Safeguards: Safeguards should be prescribed to keep un-used cheque books, files and securities
etc.

7. Supervision: A strict supervision should be exercised to ensure that the prescribed internal checks
and procedures are fully operative.

8. Formal sanction: No deviation should be allowed from the established procedures till it is formally
sanctioned by the top official.

9. Periodical review: The system of internal check be reviewed from time to time to introduce
improvements.
 Advantages and Disadvantages of Internal Control
System (ICS) to Auditor and Clients
Advantages of Internal Control System (ICS) to the Auditor
1. ICS will reduce the amount of audit work to be done in so far as the auditor will be able to use
systems based audits to apply tests which will facilitate his audit work.

2. A strong ICS will minimise chances of errors and frauds, and the introduction of inter-checking
supervision and improved custody will in turn minimise liabilities to third parties, who would have
depended on his opinion with greater surety and speed.

3. Will reduce the amount of audit evidence to be gathered, because it will facilitate reaching and
using a greater variety of audit evidence available within the business. This will enable him to form
an opinion with greater surety and speed.

4. The presence of an internal check system strengthens the credibility of audit evidence gathered.

5. ICS minimises the work load and the time need to take in order to produce his report.

6. The preparation of an ICS will identify those areas prone to errors and frauds, which will enable
the auditor to plan his audit work so that he allocates more time and effort to those areas where for
organisational reasons the internal check system is weakest.

7. ICS emphasises the use of control accounts thus assuring the auditor of up to date account
reconciliation information which will facilitate his examinations.

8. ICS enables him reduce the sample size to be tested and thus facilitate his ability to carry out as
many varied audit checks as possible.

9. ICS can only be strong normally with support of a strong internal audit function which in turn
enables the auditor to use internal auditor’s work to facilitate his work.

10. A strong ICS boosts accountability which depends on clearly segregated and defined duties and
responsibilities and this will enable the auditor to know who to contact in case of difficulties.

11. It also helps him to give quality advice to management; this in turn may minimise his work load in
future audits.

12. ICS enables the auditor to have greater knowledge of his client’s business and facilitates the
drawing up of a balanced audit opinion.

Disadvantages of Internal Control System (ICS) to the Auditor

1. The management may over rely on the strength of the ICS and therefore relax their supervision
which may leave room for errors and frauds thus exposing the auditor to potential civil liabilities.

2. The presence of ICS may lead to the auditor reducing the volume of examination carried out which
may lead to smaller samples of data thus leaving other areas to possibilities of errors and frauds
which may expose him to civil liabilities.

3. It may be frustrated by management through collusion and manipulation which may mislead the
auditor’s opinion leading to biased reports.
4. The presence of ICS is supposed to minimise the auditor’s volume of tests but not his liabilities
which means that its strength may leave some errors and frauds undetected due to relaxed tests.
This will increase his liabilities. ICS may be manipulated so that errors and frauds by the
management cannot be easily detected and this may lead to a biased opinion.

5. ICS may reduce the auditor’s vigilance and observations with an unfavourable effect on the quality
of the audit.

6. ICS may be abused by the internal auditors through collusion with the management and this may
lead to the external auditor being mislead.

Advantages of Internal Control System (ICS) to the Client

1. Safeguarding client’s assets against:
a) Misuse
b) Misappropriation
c) Manipulations
d) Abuse of the Company’s assets (for reasons that will not benefit the Company)
e) Facilitates optimal use of the Company’s assets.

2. Reduces Audit Fees. This is because less audit work is needed and less audit staff.
Increased efficiency through management supervision and a defined organisation chart. Routine and
automatic checks also increase efficiency.

3. Chances of errors and frauds are minimised.

4. This ensures minimum losses, facilitates audit work and hence early reports and attainment of
budgeted performance.

5. Facilitates corrective measures in so far as the objectives of the business are better defined and
therefore the facilities available can be suitably directed to their achievements.

6. Facilitates up to date records.

7. This is advantageous in that is prompts decisions through feed back to management which helps
detect irregularities.

8. Leads to balanced opinion (unqualified report) improving public opinion of the business.

9. This helps in raising finances by selling shares through public sale and improving investment
implementation.

10. It boosts morale of staff through motivation of supervision. This may lead to high output and high
profitability.

11. ICS helps in the redress of disastrous decisions especially in high risk situation. This is done
through close application of management controls in development situations.

12. ICS assists in the co-ordination of operations. This is done through definition of duties and
responsibilities of all employees and it boosts efficiency in the:
i. Carrying out of operations,
ii. Efficiency in delegation,
iii. Efficiency in execution.
Disadvantages of Internal Control System (ICS) to the Client

1. ICS is expensive to install and maintain. For example, the physical control security systems
require qualified personnel to maintain them and constant servicing.

2. ICS could lead to a problem of over reliance on the ICS. This may lead to relaxation in supervision
and allow manipulation of accounts and assets and can also bring about inefficiencies. Maintaining
controls requires constancy and consistency.

3. If not well instituted it may encourage over staffing.

4. Rigid implementation may lead to a slowdown in the operation of the business.

5. The ICS requires continuos updating as the organisation changes, if not the ICS may become
increasingly obsolete.

6. Use of wrong controls may expose the Company to more problems, e.g. errors and frauds. These
are more easily perpetrated if the ICS used is inappropriate.

7. ICS may be frustrated if through changes in company organisation the checks become
uncoordinated.

Internal Control System and its Nature

Internal control is not necessarily a control over finance only. Its scope is wider. It covers the control
of the whole management system. The control may be financial or even non-financial. But the main
objectives are to safeguard all the assets of the entity, to run the business smoothly and to have
accuracy and reliability of all the records. So the control may spread even to the books of accounts.
The internal control may be in respect of production or even quality.

The internal control is the responsibility and function of the management. The management is
responsible not only for establishing an adequate system of internal control but also to see that such
an adequate system is maintained throughout. Where internal control is good, the recording of
fictitious or fraudulent transactions would be rare. Chances of fraud in accounts or in documents
would be reduced to the minimum. Where, however, there is no system of internal control or such a
system in inadequate, the chances of fraud and error may be more.

The auditor should study and evaluate the internal control existing in the organization of the client.
He should ascertain whether the system is adequate or otherwise. On the evaluation of internal
control will depend the extent of the test checks which the auditor may apply during the audit of such
organization.

• Internal control system is defined by ISA as follows:

“The internal control system means all policies and procedures (internal control) adopted by the
management of an entity to assist in achieving management objective of ensuring, as far as
practicable the orderly and efficient conduct of its business, including:

i. Adherence to management policies.

ii. Safeguarding of assets.
iii. Prevention and detection of fraud and error.
iv. Accuracy and completeness of accounting records.
v. Timely preparation of financial statements.
• Millichamp has defined the expression internal control as:
Internal control system—the whole system of controls, financial and otherwise, established by the
management in order to carry on the business of the enterprise in an orderly and efficient manner,
ensure adherents to management’s policies, safeguard the assets and secure as far as possible to
completeness and accuracy of the records.

Note: The individual components of an internal control system are known as controls or internal
controls.
From the above definition the following salient points emerge:

1. Whole System: Internal control can be seen as a whole system rather than as single system.

2. Financial and Otherwise: Financial includes the use of control accounts and otherwise includes
physical access restriction to computer terminals.

3. Established by Management: Internal control is established by management either directly or by

means of external consultants, internal auditor accounting personnel.

4. Carry On-Efficient Manner: This is acceptable to every business.

5. Ensure Adherence to Management Policies: Budget or selling prices are expressions of

management policies and adherence to them can be achieved by variance analysis.

6. Safeguarding Assets: Assets are not to be allowed to be broken, lost or stolen – there must be
locks and keys. An assets register should be kept. The debtors’ balances should be reviewed
regularly.

7. Secure-Completeness: All transactions should be recorded and processed.

8. Accuracy of Records: This includes the checking of work of one person by another.

Audit Sampling
Audit sampling means the application of audit procedures to less than 100% of the items within an
account balance or class of transactions to enable the auditor to obtain and evaluate audit evidence
about some characteristic of the items selected in order to form or assist in forming a conclusion
concerning the population.

Need and Importance of Sampling:

The need for audit sampling arises from:
• The increasing complexities in business,
Auditor’s time involved and
• The volume of transactions involved in the business

Purpose of Audit Sampling:

• to obtain an evidence,
• to fulfill the audit objectives set by the auditor
• which enables the auditor to test the validity and accuracy of the transactions.

Scope and Objective of Audit Sampling

The scope of sampling is determined by audit objectives, audit evidence and audit procedures. The
purpose of this standard is to establish standards on the design and selection of an audit sample
and the evaluation of the sample results. This AAS applies equally to both statistical and non
statistical sampling methods. The application of either of the methods provides sufficient appropriate
audit evidence.

Stages in Audit Sampling

1. Planning the Sample
When planning how to carry out the sampling the auditor should consider the following:

• The objective of the test and the combination of audit procedures which are likely to achieve these
objectives;

• The population and sampling units. The population should be appropriate to the objective of the
sampling procedure. E.g. if the auditor’s objective is to test for overstatement of debtors an
appropriate population would be the debtors listing;

• Definition of errors in substantive testing and deviations in compliance testing. Before performing
tests on the chosen sample, the auditor should define clearly those test results and conditions that
will be considered errors or deviations by reference to the audit objective. For substantive testing the
auditor should project monetary errors found in the sample to the population and should consider the
effect of the projected error on the particular test objectives.

2. Determination of the Sample Size

The auditor needs to determine an appropriate size of the sample on which the audit procedures will
be applied. The size is determined by:

• The tolerable error or deviation rate- the larger the tolerable error or deviation rate, the smaller the
sample size.

• Auditor’s assessment of inherent risk. The higher the auditor’s assessment of inherent risk, the
larger the sample size. Higher inherent risk implies that there is a greater risk that the financial
balance will be misstated. To reduce this risk the auditor will need to extend the level of testing. This
is achieved by testing a larger sample.

• Auditor’s assessment of control risk. The higher the auditor’s assessment of control risk, the larger
the sample size. A high control risk implies that little reliance can be placed on effective operation of
internal controls. To reduce the audit risk the auditor will need to extend the level of testing, this is
achieved by increasing the size of the sample.

• Expected error. This refers to the total error that the auditor expects to find in the population. The
greater the amount of error the auditor expects to find in the population, the larger the size of the
sample needed in order to make a reasonable estimate of the actual amount of error in the
population.

• Auditor’s required confidence level. The greater the degree of confidence that the auditor requires
that the results of the sample are in fact representative of the actual amount of error in the
population, the larger the sample needs to be.

3. Selecting the items to be tested

The sample selected should be representative of the population so that the auditor can draw
conclusions about the entire population. All sampling units should have an equal chance of being
selected. Common methods of selecting samples include:

• Random sampling by use of random number tables or use of computers to select sampling units
• Systematic selection
• Haphazard selection

4. Testing the Items

After selecting the sample units, the auditor should carry out the pre- determined audit tests on each
item.

5. Evaluating the Results of the Tests

The following procedures should be followed in evaluating the results of the tests:
• All errors identified and deviations should be evaluated;
• Projection of error. The auditor should estimate the expected error or deviation rate in the whole
population by projecting the results of the sample to the population so as to obtain a broad view of
possible error or deviation rates in the entire population. This will then be compared with the
established tolerable error or deviation rate;

• Assessing the risk of incorrect conclusion. In general the expected error or deviation is rarely a
precise measure of the actual error or deviation rate present in the population. Actual error rate may
be greater or smaller than projected error. The auditor must therefore consider on the basis of his
sample results and relevant evidence obtained from other audit procedures, the possible levels
which the actual error or deviation rate might take and particularly the likelihood that the actual error
or deviation rate may exceed tolerable error or deviation rate.

Auditing Work Papers

Audit Working Papers include those papers and documents, which consist of details about accounts,
which are under audit. They are the written, private materials, which an auditor prepares for each
audit. They describe the accounting information, which he obtained from his client, the method of
examination used, his conclusions and the financial statements.

According to Prof. Meigs,

“The term working papers is a comprehensive one and includes all the evidences gathered by the
auditor to show the work he has done, the methods and procedures he has followed and the
conclusions he has developed “.

From an analysis of above two definitions, it is clear that the working paper should specify

• How the work was planned and supervised?

• How the internal control system was reviewed and its reliability was assessed?
• How the evidence was collected and what procedures were adopted to collect the evidence?
• Whether the testing performed provided sufficient competent evidential matter to enable to form a
reasonable basis for an opinion or recommendation?
• Thus the working papers constitute a valid evidence of the work done in the current audit.

Objectives of Audit Working Papers

1. The working papers serve the auditor both as useful audit tool as well as a permanent record of
the audit work performed.
2. They are useful to the auditor to control the current year’s audit work.

3. They constitute a reliable guidance for planning the future audit assignments.

4. A review of the audit working papers gives an assurance that the audit work is both accurate and
complete.

5. The auditors arrange the data properly in the working papers. Hence, the data become more
meaningful and useful for the purpose of the,audit.

6. Working papers are necessary to corroborate the work and the findings of all the audit staff.

7. The chief auditor is assured that the opinion is supported by the findings of their audit staff.

8. The working papers constitute complete and conclusive evidence in future as to the entirety and
completeness of the audit work.

Flexible Audit Programme

Nomenclature: Also called Progressive Audit Programme or Special Audit Programme.
Definition: A flexible audit programme may be defined as a plan which only outlines general scope,
character and limitations of the audit engagement, and makes no mention of audit procedures to be
followed, the nature of work to be performed by individual staff, and time allocated for each item.

Under flexible audit programme, the staffs have much discretion in improving it as the audit work
progresses. The staff can also display its initiative.

Construction of Audit Programme:

Audit programme containing detailed directions to audit staff regarding the audit work to be carried
out is prepared to ensure intended implementation of the strategy set up in the planning
memorandum.

The audit programme of different clients would of course, contain similar points but still programme
for each must be written individually in the light of the needs and circumstances of each particular
audit. The programme for the current audit should be based on the planning memorandum
(explained separately) using previous year’s programme and working papers as a guide. The check
list issued by the Institute of Chartered Accountants of Pakistan should be referred to. The audit
manager should before audit steps are carried out, should review the audit programme to ensure
that the planned scheme would achieve the desired objectives.

The audit steps identified in the audit programme should be detailed enough to enable the audit staff
to carry out any particular audit step without seeking further instruction. So each audit step should
specify the relevant documents and records, direction for test, method of selection and cross-
reference to relevant points in audit manual (if any) or permanent notes on record.

Every group of audit steps should be proceeded by a statement of the relevant audit objectives.
Where reliance on internal control is planned the internal control objectives relevant to the audit
objectives should be included in the audit programme and cross-reference should be made to the
internal control and Accounting System Evaluation Schedules.
Audit programme may differ depending upon the nature of business but the principle behind the
preparation of audit programme will remain the same. The programme will usually commence with
the basic and routine audit tests and will lead up to the signing of the audit opinion (i.e. audit report).
Care should be taken to ensure that audit steps are not repeated under different heads.

Audit Programme - Meaning, Nature, Advantages &

Disadvantages
Definition:
Audit programme may be defined as the auditor’s plan of action indicating the work to be
accomplished, the audit tests and procedures to be followed, the persons responsible for the
accomplishment of the work, and the time within which the work is to be accomplished.

Some Authoritative Definitions

“An Audit programme is a detailed plan of the auditing work to be performed, specially the
procedures to be followed in verification of each item in the financial statements and giving the
estimated time required”.
An audit programme is a flexible planned procedure of examination.

Meaning & Nature of the Audit Programme

Audit programme consists of a set of detailed guiding points or instructions describing the nature,
timing and extent of the audit procedures required to implement the overall audit plan. It is a
description, memorandum, outline or written scheme designed to identify the work to be done. It is
the auditor’s plan indicating the work to be accomplished, the audit tests and procedures to be
followed, the persons responsible for the accomplishment of the work, and the time within which the
work is to be accomplished. The audit programme includes audit objectives for each area. The level
of detail in the audit programme depends upon the complexity of audit.

It is a written scheme of the exact details of the work done by the auditor and his staff in connection
with the particular work. All the work which is assigned to each member of the audit team is written
in the audit programme. Audit programme guides the audit personal in work to audit be done.

Following are the methods by which the programme is carried out :

Methods of Audit Programme

1. Complete Programme:
Complete programme is on the file. Completed items are ticked off by the particular assistant.
Assistant knows what he has to do. He also knows that by which date each item is to be completed.

2. Individual Programme:
According to the nature of the business auditor prepares the programme for each assistant in such
cases.

3. No Any Advance Programme:

In this case auditor never prepares the programme in advance but according the progress of the
work he allows to go.

Advantages of Audit Programme

1. Supervision Of Work:
The auditor can judge the efficiency of his audit team by holding of an audit programme. He is in a
position to know the progress of the work. He can see at any time that what part of the work has
been completed and what remains to be done.

2. Distribution Of Work:
Audit programme is very useful in distributing the audit work properly among the members f the audit
team according to their talent.

3. Uniformity Of Work:
Audit programme helps in settling all the things in advance, so the uniformity of work can be
achieved.

4. Basic Instrument For Training:

Audit programme is very useful for the new auditor. It provides training and guidance to him. So it is
rightly called the basic instrument for training.

5. Legal Evidence:
Audit programme is a legal evidence of work done by every assistant of the audit team. It can be
presented in the court of law if any client is taken against the auditor for negligence.

6. Fixation Of Responsibility:
If any error or fraud remains undetected the responsibility of negligence will fall on the particular
assistant who has performed that job.

7. Several Audits may Be Controlled:

The auditor controls the audit of various companies at the same time. In the absence of audit
programme he can not supervise them effectively.

8. Easy Transfer:
If one assistant is unable to continue the work given to him, it can be given to another person. Audit
programme guides him that what is done and what is remaining.

9. Final Review:
Before signing the report, final review is made and for this purpose also auditing programme is very
useful.

10. Useful For Future:

On completion of an audit, it serves the purpose of audit record which may be useful for future
reference.

Disadvantages of Audit Programme

1. Not Comprehensive:
Auditors may have covered the whole field but it can not be said with certainty that all the necessary
work have been done.

2. Rigidness:
Audit programme looses its flexibility. While each business have a separate problems. So audit
programme can not be laid down for each type of business.

3. No Initiative:
It kills the initiative of capable persons assistant can not suggest any improvement in the plan.

4. Too Mechanical:
Such audit programme is mechanical that it ignores many other aspects like internal control.

5. Not Suitable For Small Audit:

It has been proved that audit programme is not suitable for sail audits.

6. New Problems Over Looked:

With the passage of time new problems arise which may be over looked.

Rededy of Disadvantages
The remedy in such situations is that audit programme should be flexible must he always open to
changes and improvements.

Qualification and Disqualification of a Company

Auditor
Qualification of a Company Auditor:
According to Section 226(1) and 226(2) of the Companies Act, the prescribed qualifications of an
auditor are as follows:

Qualification [sec226 (1)]:

1. The auditor of a co. may be either, an individual or a firm
2. In the case of an individual, he should be a Chartered Accountant within the meaning of Chartered
Accountants Act 1949 i.e. he should be holding certificate of practice.
3. In the case of firm of auditor’s all the partners of a firm shall be chartered accountants practicing in
India within chartered accountants Act1949.

Qualification [Sec 226(2)]:

A person holding a certificate issued by central govt. under restricted state auditors rules prior to
the enactment of part B state laws 1951 can also be auditor of the co.
The central government in empowered to frame rules relating to granting renewals, suspension or
cancellation of such certificates.

Disqualification of a Company Auditor:

According to section 226(3) of the Companies Act, the following persons shall not be appointed as
auditors of a company:

1. A body corporate. A company cannot audit any other company,

2. An officer or employee of the company.
3. A person who is either a partner or employee of an officer or employee of the company.
4. A person who has taken debt from the company for amount exceeding Rs. 1,000.
5. A person who has taken guarantee of another person who has taken a loan exceeding Rs. 1,000
from the company.
6. A person who holds shares or debentures of the company cannot audit that company.

A person, who is disqualified for being appointed as auditor of a company, is automatically

disqualified for being auditor of its holding company or its subsidiary company or any other
subsidiary of holding company.

Articles of Association (AOA)

Introduction:
The memorandum of association is the most important document , the
articles of association comes second in terms of importance. It contains all
rules regulations regarding internal control of the company. A private
company that is limited by shares, a company limited by guarantee and an
unlimited company have to adopt articles of association.

Schedule 1 of the companies act sets out model forms of articles for various companies , which can
be adopted by such companies. This is called as Table A. A company limited by shares has to adopt
table A. It can also prepare its own articles.. But Table A would be applicable to the extent it is
excluded. We can say that the Table is like a ready made articles of association which can be easily
adopted. Since such Table is provided by the act, it legal beyond any doubt.

The articles of association have to be signed by every subscriber.

Relationship of the Articles to the Memorandum:

Memorandum of association is the supreme document when compared to articles. It explains the
very purpose as to why the company exists. The articles are related only to internal control of the
company. An alteration of the memorandum would need the sanction of central government and the
company law board, there is no such requisite for the articles. Where the memorandum and articles
of association clash, it is the memorandum that prevails, except in matter relating to reduction of
share capital.

Binding for of Memorandum and Articles of Association:

1. Members bound to the Company:

The members cannot contravene the provisions of the article of association or the memorandum of
association. Once they have subscribed to such documents they are completely bound by it and
cannot later say they were not aware of such provisions, hence their subscription is essential.

2. Company to the Members:

A company has to follow all provisions of the memorandum and articles. It cannot contravene it as
such provisions have been subscribed to and agreed by the share holders. The company would be
answerable to the shareholders on an event of such contravention.

3. Members inter se:

The members are bound among themselves due to the provisions of the articles of association. But
they can enforce their right only in the capacity of being a member and not an individual . And such
rights can only be enforced through the company.

4. Not bound to Outsiders:

Neither the company nor the members are bound to the outsiders by the provisions of the articles. In
the case of Browne vs Trinidad, The plaintiff was agreed to be made director and not removable till a
certain date, it was so provided by the articles. But such provision could not be enforced as the
plaintiff was an outsider. Even a members becomes an outsider, when he acts outside the capacity
of a member.

Alteration of the Articles of Association:

The articles can be ordered by passing a special resolution and filing a copy of such altered articles
with the registrar of companies.
Following points should be noted regarding Alteration:

1. The alteration can be regarding the constitution of the company. Eg a company can issue a
certain class of shares about which the memorandum is silent.

2. A company can cause a breach of contract by alteration of the articles. A company would not be
liable for damages, if such contract is wholly dependent on the articles, but it would be liable for
damages for breach of contract if such contract is wholly independent of the articles.

3. Alteration cannot increase the liability of any members by asking him to subscribe to more shares.

4. The alteration cannot constitute a fraud upon the minority share holders.

Appointment of Auditor
The provisions regarding appointment of auditor are contained in Section 224 of the Companies Act.

Auditor's appointment:
1. First auditor
2. Subsequent auditor
3. Appointment by Central Government
4. Appointment against the casual vacancy
5. Appointment by special resolution
6. Appointment of auditor of Government or certain other companies
1. First Auditor:
The appointment of first auditor should be done by the Board of Directors within the one month of
the date of registration of the company. The appointed auditor shall hold the office till the conclusion
of the first annual general meeting.
But the company in general meeting can remove such an auditor and can appoint another in his
place.
2. Subsequent Auditor
This auditor is appointed every year by the shareholders in annual general meeting by passing an
ordinary resolution.
If the auditor so appointed doesn't accept the appointment, the vacancy can neither be treated as
casual nor a vacancy by resignation.
3. Appointment by Central Government
If no auditor is appointed at an annual general meeting then the Central Government may appoint
the auditor to fill the vacancy.
4. Appointment against a casual vacancy
If the casual vacancy of auditor arises due to death, insanity or insolvency etc. the Board of Directors
can fill the vacancy under the Section 224 (6).
5. Appointment by special resolution
In Companies Act, 1974 Section 224A,provides that if 25% or more of the subscribed capital is held
whether individually or collectively by:
1) A public financial institution or government company or any other state government
2) Any financial institution in which state government holds not less than 51% of the subscribed
capital
3) A nationalised bank or any insurance company carrying on general insurance business
The appointment of auditor shall be made by special resolution.
6. Appointment of auditor of Government or certain other companies
Section 619 provides that auditor of Government company shall be appointed by the Central
Government.
Routine Checking, its Objectives, Advantages and
Disadvantages
The term ‘routine checking’ means
(a) The checking of casts, sub-casts, carry forwards, extensions and other calculations in the books
of original entry;
(b) The checking of postings into ledgers, and
(c) The checking of ledger accounts, as regards their casts, balancing the carrying forward of
balances and the transfer of balances and the transfer of balances to the Trial Balance.
For this purpose, Auditors usually employ ticks of different kinds. Very often coloured pencils are
used to distinguish one type of ticks from other.

Objectives:
1. Verification of the arithmetical accuracy of the original books;
2. Ascertainment of postings from books of original entry to the correct accounts in the ledgers;
3. Ensuring, by special ticks, that no figures are altered after they have been checked.
Contrary to this the objects of vouching are much wider in their scope. In addition to the objects of
routine checking discussed above, auditor undertakes the work of vouching with the object of going
behind the books and to completely satisfy himself that the transactions recorded in the books are (i)
properly authorised and (ii) correctly entered into. His attempt would be in the direction of finding out
facts behind the figures. Careful and intelligent vouching would help an auditor to a very great extent
in detecting frauds. The extent of vouching to be performed by an auditor would depend upon the
systems of book-keeping and internal check in operation in the business.

Advantages Of Routine Checking

Following benefits can be obtained from the routine checking:
1. All the original entries will be checked; so all the errors and frauds can be detected easily.
2. All the entries and posting will be tested.

3. Routine checking helps to conduct final audit because all the balancing and totals have already
been checked.

4. Separate and specific staffs are not needed because it is a regular process.

Disadvantages Of Routine Checking

Followings are the limitations of routine checking:
1. Routine checking is a mechanical test, so the staff who performs this work does not have
inspiration. So, there are chances of leaving errors and frauds.

2. Routine checking can only detect small errors and frauds but not the planned frauds.

3. Routine checking is not needed where self balancing system is applied.

4. Routine checking cannot detect principle and compensating errors.

Voucher and its Types

Payees, Invoice Bills, Demand Notes, Wages Books, Salaries Books, Contracts, Correspondence,
Confirmation by Creditors etc,

3) Purchases: Invoices, Books, Copies of Orders, Correspondence etc.

4) Sales: Copies of Invoices, Orders Record, Goods Outward Book, Correspondence etc.
similarly, evidence can be had with regard to transactions like Purchases and Sales Returns, Bills
Receivable and Payable and Journal Entries.

All vouchers relating to business transactions should be carefully preserved and properly filed.

Vouching - Meaning, Objectives, Importance and

Techniques
Meaning:
Voucher is known as the evident for the support of a transaction in the books of account. It may be
bill, receipts, requisition form, agreement, decision, bank paying slip etc.
The act of examining documentary evidence in order to ascertain the accuracy of entries in the
account books is called "Vouching". Vouching is a technical term which refers to the inspection by
the auditor of documentary evidence supporting and substantiating a transaction. Simply stated,
vouching means a careful examination of all original evidence i.e invoices, statements, receipts,
correspondence, minutes and contracts etc. with a view to ascertain the accuracy of the entries in
the books of accounts and also to find out, as far as possible, that no entries have been omitted in
the books of accounts. Therefore, vouching is the act of testing the truth of entries appearing in the
primary books of accounts. It is initial for auditing.
Voucher:
A voucher is a documentary evidence in support of a transaction in the books of account.

Objectives:
Main objective of vouching is to find out the regularity or irregularity of transactions, frauds and
errors. Regularity means maintaining record and performing the work compliance with the rules,
regulation and law. But irregularity means doing the work crossing to the line of rules, regulation and
laws. Some of the major objectives of vouching are given below:

1. To Detect Errors And Frauds

All transactions are to be supported by evidence. Each document should be proved
by authorized authority. With the help of vouching we can detect errors and frauds by verifying each
transaction. Planned fraud can be detected through vouching.

2. To Know The Truth Of Account

Each and every transaction is checked and ratified on the basis of support document. So, we can
easily know the truth of account.

3. To Find The Unrecorded Transactions

Each and every transaction is checked and ratified on the basis of document. Vouching helps to find
out the unrecorded or missing transactions. If any voucher is found unrecorded, auditor can suggest
to record such transactions.

4. To Know That All The Transactions Are Authorized

If the transactions are made on the consent of concerned authority, such transactions are known as
authorized transactions. If transactions are not authorized, such transactions can be fictitious
transactions. So, such fictitious transactions ca be found with the help of vouching.

5. To Know That Only The Business Transactions Are Recorded

Sometimes, transactions are performed for individual purpose but payment is made out of business.
Such transactions should not be recorded in account of business. If such transactions are recorded,
we can find it with the help of vouching. To know the real profit or loss of business, such transactions
are to be separated.

Importance:
Vouching is the act of checking evidential documents to find out errors and frauds and to know the
authenticity, accuracy and reliability of books of accounts. Thus, it is important for an auditor due to
the following reasons:

1. Vouching Is The Backbone Of Auditing

Main aim of auditing is to detect errors and frauds for proving the true and fairness of results
presented by income statement and balance sheet. Vouching is only the way of detecting all sorts of
errors and planned frauds. So, it is the backbone of auditing.

2. Vouching Is The Essence Of Auditing

Auditing not only checks the accuracy of books of accounts but also checks whether the transactions
are related to business or not. All the transactions are performed after the prior approval of
concerned authority or not, transactions are real or not because an accountant may include fictitious
transactions to commit frauds. All these facts can be found with the help of vouching. So, vouching is
essential for auditing.

3. Vouching Is Important To See Whether Evidences Are Correct Or Not

An auditor checks the books of accounts to detect errors and frauds. Frauds may be committed
presenting duplicate vouchers. All the small and big amounts of frauds can be detected with the help
of vouching. So, all the evidential documents and records are to be checked carefully and in detail
by an auditor which is the scope of vouching.

Therefore, it can be said that vouching is the heart of auditing because without the work of vouching,
the work of auditing cannot be performed.

Principles or Techniques of Vouching:

At the time of vouching auditor should keep in view the following important principles in his mind :

1. Arranged Vouchers:
First of all auditor should check all the vouchers provided by the client are properly arranged. These
are in the same order as the entries are made in the books.

2. Checking Of Date:
The auditor should compare the date of the voucher with he date recorded in the cash book.

3. Compare The Words And Figures :

The auditor should satisfy himself amount written numbered consecutively. All the vouchers should
be properly filed. On the vouchers, its figures and words are same or not.

4. Checking Of Authority:
The auditor should examine that all the vouchers are passed by the authorized officer. If the voucher
is passed by unauthorized person it will not be correct.

5. Cutting Or Change:
If there is any cutting or change on the receipts and vouchers figures it should be signed by the
authorized officer. The auditor should satisfy himself by inquiring about it.

6. Transaction Must Relate To Business:

The auditor should carefully examine that the entries must relate to the business.

7. Case Of Personal Vouchers:

The auditor should not accept the voucher in personal name. There is a chance that an officer of the
company has purchased any item in his personal capacity.

8. Checking Of Account Head:

Auditor must be satisfied about the head of account on which cash is deposited and drawn. He
should examine the documentary evidence in this regard.

9. Revenue Stamp:
The auditor should also check that voucher bears a required revenue stamp or not?
10. Case Of Cancelled Voucher:
The auditor should not accept the cancelled voucher. Because it has already served the purpose of
payment. There will be a danger of double payment if it is accepted.

11. Important Notes:

The auditor should take some important notes about those items which need further evidence or
explanation.

12. Payment:
The auditor should check that whether payment is described partially or for complete transaction of
sale.

13. Agreements:
These provide the basic information to the auditor. He should check the agreements,
correspondence and other relevant papers.

14. Printer Vouchers:

Printer vouchers are considered true and these are legally acceptable. If these are not printed then
these are useless.

15. List Of Missing Vouchers:

Auditor should prepare the list of missing vouchers. This list will be helpful in detecting the fraud and
errors.
Procedure of Verification of Assets and Liabilities
Procedure:

1. The auditor should verify the records (accounting books) with reference to the documentary
evidence. Physical verification of fixed assets is the primarily the responsibility of the the
management.

2. The opening balance is to be verified from schedule of fixed assets, ledger or fixed asset register.

3. Assets acquired during the year or improvements done during the year should be verified on the
basis of purchase orders, invoices, material receipt notes, and title deeds.
4. Capital assets built inside (self-constructed fixed assets) and capital work-in-progress should be
verified by reference to work-order records, contractor bills.

5. For fixed assets fully depreciated during the year of acquisition, the auditor has to examine
whether they were recorded in the fixed assets register.
6. In the case fixed assets registered, the auditor should examine
(i) the authorisation procedure
(ii) sales process (calling for quotations etc.)
(iii) adjustments to the account of the asset
(iv) accounting for the proceeds of the sale and
(v) adjustment for the gain or loss on the sale.
7. Ownership of assets such as land and buildings should be verified by examining the title deeds. In
case the title deeds are with other parties such as bankers (mortages or safe custody) and solicitors,
confirmation should be obtained directly by the auditor through a request mailed to the concerned
persons signed by the client.

8. Physical verification is the responsibility of the management and they need to ensure that it is
carried out at appropriate intervals in order to ensure assets are in existence. The auditor has to
ensure that physical verification was done. For this purpose, he should observe the verification being
conducted. He should examine the instructions given by the management for physical verification
and working papers of physical verification. It is to be ascertained that the persons carrying out the
physical verification has the necessary competence.

Why company needs to Verify its Assests and Liabilities?

1. Confirm that the assets were in existence on the date of the balance sheet.

2. Ascertain that the assets had been acquired for the purpose of the business and under proper
authority.

3. Confirm that owner ship of the asset rests with the organisation.
4. Ascertain that no charge has been created on the asset.

5. Ensure that the current book value of the asset is determined after providing correct amount of
depreciation for various years.

6. Ensure that values reflect current physical condition of the asset.

7. Ensure that disclosures regarding assets are adequate.

Valuation and Verification of Assets from an Auditor’s

Point Of View
It is an important duty of an auditor to see that assets and liabilities are reasonably valued. The
accuracy of the Balance Sheet and Profit and Loss Account entirely depends upon the correct
valuation of assets and liabilities. Balance Sheet will not disclose the true financial state of affairs if
the assets are in appropriately valued.

Though valuation is done by the responsible officers of the concern, auditor must use his common
sense in finding out if the assets have been valued on the basis of some scientific principles. An
auditor cannot be taken to be an expert in valuation. In his work, he can rely on the valuations put by
the responsible officers of the business or to the certificates of component persons such as valuers,
surveyors etc. He would do well to disclose the basis of valuation of assets in the Balance Sheet. He
is more concerned in checking the values of the assets to see that they represents their real worth to
the business as a going concern on the date of Balance Sheet.

He must impress upon the business that assets should be valued on some reasonable basis and
scientific principles. According to London and General Bank case and Kingston Cotton Mills Co.
Case, though it is no part of an auditor’s duty to value assets and liabilities, yet he must exercise
reasonable skill and care in scrutinising the basis of valuation. He should test correctness of the
values as put by the officers of the business. In any case, the auditor cannot guarantee the accuracy
of the valuation.

Since the coming into force of the new Company Ordinance, the auditor is required to see that the
Balance Sheet represents the financial state of affairs of the company truly and fairly. Auditor should
therefore, in no case permit under-valuation or over-valuation of assets. He should not allow the
creation of secret reserves, final accounts prepared by the company’s accountants must not be
certified by him as correct unless they are fair to all the parties interested in the affairs of the
company. Auditor must be careful to see that one party has not been given preference over the
other. All the objects discussed above cannot be achieved until the assets are shown in the books at
their proper and real values.

In spite of the fact that auditor is not an expert valuer, he must be cautious and painstaking in
verifying the values of the assets at which they are shown in the books. All the relevant facts and
evidences may be taken into consideration in ascertaining the fair value of the assets.

Verification
Verification of the existence of an asset is very much different from the vouching of the expenditure
incurred in the purchase of an asset. Vouching of an entry in the books goes to prove that the asset
ought to exist. It is the duty of an auditor to satisfy himself that the asset actually does exist.

Verification entails the inspection of such evidence as well satisfy the auditor that such assets are
actually in the possession of his clients on the date of Balance Sheet. False assets should not be
created and real assets should not be suppressed. The auditor must also guard against substitution
of assets, an auditor would not be able to detect misappropriations and may be held liable for
negligence in the performance of his duties as was decided in the case of “The London Oil Storage
Co. Vs. Sean Husluch & Co.”

To sum sup, the verification of assets involves the following points:

1) To compare the ledge accounts with the Balance Sheet;
2) To verify the physical existence of assets as on the date of Balance Sheet and to see that these
assets are acquired by proper authority and for business purposes;
3) To satisfy that the assets are free from any charge or mortgage or encumberence and that the
business under audit is the real owner thereof and that they are under proper custody;
4) To verify that it is properly valued and correctly stated in the Balance Sheet, to ascertain their
relation to the corresponding items at the end of the previous year and where necessary, earlier
year;
5) The suitability of the description used;
6) Adequate disclosure of information.
Fixed Assets are those of a permanent nature, by means of which are held for the purpose of
earning income, and not for the purpose of sale.
Current assets are these in which the business deals, and which are acquired for the purpose of sale
and the subsequent stages of their conversion into cash.

Although, it is not possible for an auditor to inspect each and very asset, e.g. all the items of stock,
yet he remains liable for all undetected errors and frauds. The fact that certain assets of the
business at the date of Balance Sheet are in the hands of third parties will not in any way diminish
the auditor’s responsibility in relation there. However, he can rely upon the responsible officers,
because if this duty is imposed on him, it may take weeks and months for him to actually inspect
each and every asset. It was also held in the case of Kingston Cotton Mills, that “it is no part of an
auditor’s duty to take stock. No one contends that it is. He must rely on other people for the details of
the stock-in-trade in hand.” But, by adopting different indirect methods of checking the accuracy of
stock sheets, he can verify this item and such other items also. Auditor must exercise reasonable
skill and care in accepting certificates from third parties or the responsible officers of the business.

Difference between Verification and Vouching

Verification is made on the basis of vouching. So, verification is a part of vouching. Even though they
have some differences which are as follows:

1. Meaning
Verification is the act of checking title, possession and valuation of assets but vouching is the act of
checking the records with the help of evidential documents.

2. Nature
Verification is specially related to the assets and liabilities but vouching is related to all the
accounting documents.

3. Person
Generally, assistant staff or auditor performs the work of vouching but auditor himself performs the
work of verification.

4. Time
Vouching is made at the beginning of auditing but verification is made at the end of auditing or at the
time of checking balance sheet.
Methods of Valuation of Assets
 Valuation of various assets can be made by using different
methods. Valuation of fixed assets can be made in different
ways. Some of the major methods are as follows:

1. Cost Method

In this method, valuation of assets is made on the basis of purchase price of the assets. It is very simple method
of valuation of assets. Sometimes, existence of one assets depends on the existence of another. Then it is
difficult to use this method.

2. Market Value Method

Valuation of assets can be made on the basis of market price of such assets. But if same nature of assets is not
available in the market, it is very difficult to determine the value of such assets. So, there are two methods
related to it. They are:

i. Replacement Value Method

If same asset is to be purchased then on the basis of same value, valuation of assets can be done.

ii. Net Realizable Value

It refers to the price in which such asset can be sold in the market. But expenditure incurred at the sale of such
asset should be deducted.

3. Base Stock Method

Under this method of valuation, company should maintain certain level of stock and valuation of stock is made
on the basis of valuation of base stock.

4. Standard Cost Method

Some of the business organizations fix the standard cost on the basis of their past experience. On the basis of
standard cost, they make valuation of assets and present in the balance sheet.

5. Average Cost Method

It is a simple method for the valuation of such assets which cannot be distinguished. Like petrol,
petrol is kept in the tank but e cannot separate its stock on the basis of lot. So, valuation of stock is
made adding to all the cost and dividing by the quantity.

Objectives of Auditing
Basic objective of auditing is to prove true and fairness of results presented by profit
and loss account and financial position presented by balance sheet. Its objectives are
classified into two groups which are given below:

A. Primary Objectives Of Audit

The main objectives of audit are known as primary objectives of audit. They are as
follows:
i. Examining the system of internal check.
ii. Checking arithmetical accuracy of books of accounts, verifying posting, costing,
balancing etc.
iii. Verifying the authenticity and validity of transactions.
iv. Checking the proper distinction of capital and revenue nature of transactions.
v. Confirming the existence and value of assets and liabilities.
vi. Verifying whether all the statutory requirements are fulfilled or not.
vii. Proving true and fairness of operating results presented by income statement and
financial position presented by balance sheet.

B. Subsidiary Objectives Of Audit

These are such objectives which are set up to help in attaining primary objectives. They
are as follows:
i. Detection and prevention of errors
Errors are those mistakes which are committed due to carelessness or negligence or
lack of knowledge or without having vested interest. Errors may be committed without or
with any vested interest. So, they are to be checked carefully. Errors are of various
types. Some of them are:
* Errors of principle
* Errors of omission
* Errors of commission
* Compensating errors

ii. Detection and prevention of frauds

Frauds are those mistakes which are committed knowingly with some vested interest on
the direction of top level management. Management commits frauds to deceive tax, to
show the effectiveness of management, to get more commission, to sell share in the
market or to maintain market price of share etc. Detection of fraud is the main job of an
auditor. Such frauds are as follows:
* Misappropriation of cash
* Misappropriation of goods
* Manipulation of accounts or falsification of accounts without any misappropriation

iii. Under or over valuation of stock

Normally such frauds are committed by the top level executives of the business. So, the
explanation given to the auditor also remains false. So, an auditor should detect such
frauds using skill, knowledge and facts.

iv. Other objectives

* To provide information to income tax authority.
* To satisfy the provision of company Act.
* To have moral effect

Advantages of Audit
Auditing has become a compulsory task in the business organization. All the organizations like
business, social, industries and trading organizations make audit of books of accounts. Now-a-days,
owner of business and its management are separate. So, to detect and prevent frauds, auditing has
become essential. Its advantages are as follows:

1. Audit Helps To Detect And Prevent Errors And Frauds

An auditor's main duty is to detect errors and frauds, preventing such errors and frauds and taking
care to avoid such frauds. Thus, even though all organizations do not have compulsion to audit, they
make audit of all the books of accounts.

2. Audit Helps To Maintain Account Regularly

An auditor raises questions if accounts are not maintained properly. So, audit gives moral pressure
on maintaining accounts regularly.
3. Audit Helps To Get Compensation
If there is any loss in the property of business, insurance company provides compensation on the
basis of audited statement of valuation made my the auditor. So, it helps to get compensation.

4. Audit Helps To Obtain Loan

Specially financial institutions provide loan on the basis of audited statements. A business
organization may obtain loan considering the audited statement of last five years. So, an
organization should make audit compulsory to obtain loan.

5. Audit Facilitates The Sale Of Business

Valuation of assets is made by the auditor. On the basis of valuation of assets and liabilities,
businessman can sell his business. It helps to determine the price of business.

6. Audit Helps To Assess Tax

Tax authorities assess taxes on the basis of profit calculated by the auditor. In the same way sales
tax authority calculates sales tax on the basis of sales shown in the audited statement.

7. Audit Facilitates To Compare

An auditor instructs an accountant in the same way which helps to compare books of accounts of
current year with the accounting of the previous year. So, comparing the accounts of current with
previous years helps to detect errors and frauds.

8. Audit Helps To Adjust Account Of Deceased Partner

Valuation of all the assets and liabilities of the business is made by the auditor while auditing books
of account. Such valuation helps to clear the amount of deceased partner.

9. Audit Helps To Present A Proof

If any case is filed against the auditor regarding negligence, auditor can present audited report as a
proof to settle such case. So, it helps to present proof to settle such cases.

10. Audit Provides Information About Profit Or Loss

A businessman wants to know profit or loss of his business after a certain period of time. So, the
owner of the business can get information about profit or loss after auditing the books of accounts.

11. Audit Helps To Prepare Future Plan

All the audited statements remain true and correct. Such true and correct account helps to prepare
for the future plans.

12. Audit Helps To Increase Goodwill

Auditing shows the profitability and financial position of an organization which creates faith of public
over the business. Thus, auditing helps to increase goodwill of an organization.

13. Audit Helps To Amalgamate The Company

 Auditing makes valuation of assets .amalgamated Sometimes, same nature of organization may be
the company. Purchaser of the company can accept such amalgamate and liabilities which helps to
business organization on the basis of valuation made by the audit

Definations for Auditing

Auditing:
It is a bit difficult to give a precise definition of word audit in a word or two, Originally its meaning and
use was confined merely to cash audit and the auditor had to ascertain whether the person
responsible for the maintenance of accounts had properly accounted for all the cash receipts the
payment on behalf of his principle. But the word, audit, had a wide usage and it now means a
through scrutiny of the books of accounts and its ultimate aim is to verify the financial position
position disclosed by the balance sheet and the profit and loss account of a company. The following
are the some of the definitions of audit given by some writers:

Spicier and Pegler

An audit is such an examination of the books, accounts and vouchers of a business as it enable the
auditor to satisfy that the Balance Sheets is properly drawn up, so as to give a true and fair view of
the state of the affairs of the business and whether the profit and loss accounts gives a true and fair
view of the profit or loss for the financial period according to the best of his information and
explanations given to him and as shown by the books, and if not, in what respects he is not satisfied.

Montgomery
Auditing is a systematic examination of the books and records of a business or other organization, in
order to ascertain or verify and report upon the facts regarding its financial operation and the result
thereof.

Lawrence R. Dicksee
An audit is an examination of records undertaken with a view to establishing whether they correctly
and completely reflect the transactions to which they relate. In some circumstances it may be
necessary to ascertain whether the transactions are supported by authority.

F.R.M De Paula
An audit denotes the examination of Balance sheet and profit and loss accounts prepared by others
together with the books, accounts and vouchers relating there to in such a manner that the auditor
may be able to satisfy himself and honestly report that in his opinion, such Balance sheet is properly
drawn up so as to exhibit a true and correct views of the state of affairs of the particular concern
according to the information and explanations given to him and as shown by the books of acconts.

A.W. Hanson
An audit is an examination of such records to establish their reliability and the reliability of statement
drawn from them.

R.B. Bose
Audit may be said to the verification of the accuracy and correctness of the books of accounts by
independent person qualified for the job and not in any way connected with the preparation of such
accounts.
Taylor and Perry
An audit is an investigation by an auditor into the evidence from which the final Revenue Accounts
and Balance sheet or other statement of an organization have been prepared, in order to ascertain
that they present a true and fair view of the summarized transactions for the period under review and
of the financial state of the organization at the ending-date, so enabling the auditor to report thereon