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CONCEPTS IN AUDITING
Concepts In Auditing
Foundation Of Auditing Vouching Verification Valuation True & Fair Audit Errors & Frauds Secret Reserves Window Dressing Teeming & Lading
INTRODUCTION
Auditing
Auditing begins, where accountancy ends. An auditor examines the financial statements prepared by the accountant and verifies the items therein with the help of relevant documentary evidence and explanation and information given to him. In other words he examines analytically and critically the accounts and financial statements prepared by the accountant.
SCOPE OF AN AUDIT
AUDITOR SHOULD ASSESS THE RELIABILITY AND SUFFICIENCY OF INFORMATION CONTAINED IN UNDERLYING ACCOUTNING RECORDS AND SOURCE DATA BY
DECIDE WHETHER THE RELEVENT INFORMATION IS PROPERLY DISCLOSED IN THE FINANCIAL STATEMENTS
VOUCHING
Vouching consists of comparing the entries in the books with particulars in the voucher as regards date, amount, name of the party. But vouching is not a mere comparison of the entry with the supporting document. It is a critical examination of the supporting documents to understand the substance / essence of the transaction & to ensure that accounting of the transaction is done as per substance/ essence of the transaction.
VOUCHING
What are the Objectives of vouching ? 1. Transactions are authorized.
2. Transactions represented by the entries are not ultra vires the entity.
3. Transactions represented by the entries have : - actually occurred - during the period under the audit. - pertain to the entry under audit.
VERIFICATION
Verification of assets & liabilities. Introduction: Verification means confirmation of the truth , accuracy & existence of an item or entry. Verification of assets & liabilities implies obtaining and examining evidence in respect of assets and liabilities. Verification goes beyond books of accounts and documentary evidence. It is more than checking arithmetical accuracy of the record of assets & liabilities; it involves physical inspection of certain assets as shown in the balance sheet really exist.
VERIFICATION
Scope of verification/ verification includes: 1. Whether the assets are owned by the company.
5. Whether they are actually lying with the company or the balance sheet date.
6. Whether they are properly valued or the balance sheet date.
VALUATION
Valuation of assets means determining the fair value of assets on the basis of generally accepted accounting principles (GAAP). It is an important part of auditors duty. The auditor must satisfy himself whether all the assets shown in the balance sheet are at proper values. If the assets are over or under valued, the financial statement will not disclose true & fair view of the state of affairs & the profitability of the company . Thus, the main object of proper valuation of assets is to represent a true and fair view of the state of affair of concern through the balance sheet.
VALUATION
Methods of valuation of assets : 1. Cost price : In this method, the assets are valued at actual cost including installation charges if any. 2. Market value : Market value is the price which exits in the market on the balance sheet date . 3. Cost of market value whichever is lower : This method of valuation is generally used for valuation of current assets. 4. Replacement value: Here, the replacement value means the amount of money which could be required to replace an existing asset by purchasing a new asset of the same type . On arriving, at such a value, expenses such as commisions , freight etc are taken into account.
VALUATION
5. Realizable value:
It means the amount of money which will be realized in the market from the sale of assets. Under this, assets are valued according to be anticipated sale value of assets. 6. Scrap value: Scrap value means realizable value of assets which are receivable after long use. Under this, assets of no use to the business are valued at the amount for which they can be sold in the market as if they were scrap.
7. Going concern/ book value / written down value : Going concern value is the estimated present value of the asset. It is equivalent to cost less depreciation written off up to date. Generally , fixed assets are value at going concern value.
Normally, extensive vouching exercise is done during the depth test/cradle-to grave test. Vouching enable the auditor to know whether the transactions are genuine and valid to enable the auditor to report on the financial statements.
VERIFICATION Nature of work: It examines the assets & liabilities in the balance sheet
Time : It is done throughout the year Basis: It is based on documentary examination Valuation: It does not include valuation.
A true and fair view cannot be expressed by the auditor on the basis of accounts which have material misstatements resulting from errors and fraudulent manipulations.
Fraud refers to intentional misstatement which is material to the financial statements, management , employees or third parties may get involved in committing frauds to obtain an illegal advantage of personal gain. Fraud generally involves either misappropriation of assets that maybe called employee
SECRET RESERVE
In a dictionary for accountants Eric L- Kohler defines the secret reserve as, the amount by which the net worth has been deliberately understated a hidden reserve. Such a condition exists where the assets are omitted or undervalued or where liabilities are over-stated. The term does not represent any actual account bearing that name.
thus a reserve which is not disclosed in the balance sheet of the entities called a secret reserve, hidden reserve or an inner reserve .
SECRET RESERVE
Some of the ways of creating secrete reserves are given below:
WINDOW DRESSING
Window dressing is the art of showing a substantially better financial position of the company that it is in reality. A sound financial position is painted on the face of the balance sheet by concealing the actual state of affairs.
In window dressing, assets are over valued , liabilities are under valued and profits are over stated or, if there are losses they are under stated. It is one of the methods of manipulating accounts , but it does not necessarily involve misappropriation of cash or goods .
2. It helps in getting more remuneration to the managerial personnel when it is given on the basis of percentage of net profit. 3. It helps in getting easy finance facilities like bank overdraft or loan from bank and other financial institutions
4. It helps in getting more favourable credit terms on purchase from suppliers . 5. More goodwill can be demanded in the case of absorption and in the case of admission of a new partner .
TEEMING & LADING Teeming and lading is one of the methods of misappropriation of cash. Under this method, the money received from the first customer is misappropriated by the cashier. The money received from the subsequent customer is then credited to the account of the first customer and this process continues till such a time that the cashier is able to replace the money misused by him, or such time that the cashier is caught.
ii. The auditor should scrutinize the Debtors Accounts, especially those accounts which show part payment. iii. He should co-relate the dates of cash receipts from debtors with the date on which the amount is deposited into the bank.
CONCLUSION
BIBLIOGRAPHY
ACKNOWLEDGEMENTS We are heartily thankful to Professor Afsha Kirkire , Professor Ashok Vanjani and our co-ordinator Professor Deshpande, whose encouragement, guidance and support from the initial to the final level enabled us to develop an understanding of the subject. Lastly, We offer my regards and blessings to all of those who supported us in any respect during the completion of the project.
PRESENTED BY : JAPJIV SINGH ANAND SAHIL GANGWANI SHIKHA SACHDEV KOMAL RATANPAL JHANVI PATEL FAHAD HINGORA SHUBHDA VARDE 18 20 23 27 49 59 60