Notes

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Chapter 2 - Types of Auditing

* Kinds of Auditing

* Final Audit

* Advantages of Final Audit

* Disadvantages of Final Audit

* Continuous Audit

* Advantages of Continuous Audit

* Disadvantages of Continuous Audit
Kinds of Auditing

Continuous Auditor Running Audit
Continuous auditor also known as running audit or detailed audit. In large-scale business it is not possible
for the auditor to get the true and fair view about the business in a short time period. So for the purpose of
finding the correct information the continuous audit is conducted. Continuous audit is the audit that is
conducted throughout the year with the fixed or non-fixed period.

Interim Audit
In normal word Interim means half yearly. It is conducted usually between two annual general meetings and
only one time, not in intervals.

Final Audits or Complete Audit or Balance Sheet Audit
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.
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Kinds of Auditing

Continuous Auditor Running Audit
Continuous auditor also known as running audit or detailed audit. In large-scale business it is not possible
for the auditor to get the true and fair view about the business in a short time period. So for the purpose of
finding the correct information the continuous audit is conducted. Continuous audit is the audit that is
conducted throughout the year with the fixed or non-fixed period.

Interim Audit
In normal word Interim means half yearly. It is conducted usually between two annual general meetings and
only one time, not in intervals.

Final Audits or Complete Audit or Balance Sheet Audit
Final audit is also called as the Balance sheet audit or the Periodical Audit. Final audit is started when the
Final Audit

Final audit is also called as the "Balance sheet audit" or the "Periodical audit". Final audit is started when the

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.

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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.
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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.

21. Technical Knowledge
According to the law all the companies are bound that a qualified and experienced person who must be a
chartered accountant can conduct the audit. He is a qualified person and there are no chances of fraud or
errors.

22. Element of Friendship
In final audit there is a short time for the auditor staff. So, in the auditor staff or accountant staff no
friendship or soft corners created because their understanding is up to some limits. So there are no chances
of fraud created by the both staffs.

23. Beneficial for Client's Staff
As final audit is conducted at the close of the books of Accounts. The client's staff is not distributed as in
continuous audit. They can easily complete their work and the records are provided at the proper place.

24. Protection
In any business the directors can change the figures according to their interest but the final audit protect the
rights of the shareholders by providing them correct information.

25. Guidance
The auditor not only provides the true and fair information but also guide the management how can they
improve their accounting systems.

26. Thread of Work
In the final audit there is no interval in the work of auditor and it is carried on till its completion. So the audit
staff cannot loose the thread of the work, which is performed by them.

27. Moral Check
In the final audit there is moral check of the person who performed the work. The signatures are specified on
that work.
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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.
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Continuous Audit

The audit that remains continue throughout the financial year is called continuous audit.

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.

21. Even Work Load

Due to even workload, the audit staff feels the satisfaction. The books of accounts are maintained as the
routine matters. And there is less chances of errors and frauds.

22. Auditor Advice

In the continuous audit the auditor can find the weakness of the business during the year and he can make
the suggestion for the improvement of the business.

23. Close and Extensive Check

As the auditor visits the client's office after a month or so, but at regular intervals, a detailed close and
exhaustive cheek can be possible. If the audit is to be under taken after the end of the year, such detailed
checking will be difficult.

24. Technical Detail

In a continuous audit, the auditor is more in touch with the technical details and business affairs. So, the
auditor can help his clients by giving him the valuable suggestions to improve business.

25. Distribution of Work

Continuous audit is also helpful in distribution of load of work on the staff. The work of audit continues the
whole year. The audit staff can easily make the audit programme according the time required.
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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.
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Chapter 3 - Internal Control

* Internal Audit

* Internal Control

* Internal Check

* Various Types of Internal Control

* Principles of Internal Control

* Objects of Internal Control

* Limitations of Internal Control

* Principles of Internal Check
Internal Audit

Internal audit is an evaluation and analysis of the business operation conducted by the internal audit staff.
(who are employee of the business)It is the part of over all system of internal control established in an
organization. "Internal audit is the independent appraisal of activity with in an organization for the review of
accouting, financial and other business practices as a protective and constructive arms of management. It is
a type of control which functions by measuring and evaluating the effectiveness of other type of controls."
Professor Walter B Meigs define internal audit

Internal auditing consist of a continuous, critical review of financial and operating activities by a staff of
auditors functioning a full time salaried employees.

Internal Control

The concept of internal control has evolved gradually over the years, with the greatest development
occurring at the beginning of 1940. Not only the complexities of modern business techniques but also the
increased size of business units have encouraged the adoption of methods which, while increasing the
efficiency of the business, also act as a safeguards against errors and frauds. Furthermore, the regulation of
business activities under an efficient system of internal control may obviate the necessity of protracted
detailed work by an independent auditor with beneficial results to all parties concerned. Thus the inpetus for
development of internal control has come from both management and auditor. The effect on auditing has
been to reduce the need of routine mechanical verification of book-keeping, accuracy, permitting
substitution of a less time-consuming approach that involves reasoning and judgment and stress on such
activities as review, analysis, evaluation and statistical sampling.
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Internal Check

Internal check is an arrangement of duties allocated in such a way that the work of one employee is
automatically checked by another. These are no separate staff engaged to carry out the system of internal
check. It, in fact, represents only the arrangements of duties of the staff in a way. The system of internal
check is devised in such a way that the possibilities of errors, frauds and irregularities are minimized.
Following matters are included in the internal check
Matters relating to allocation of power.
Division of work.
Methods of recording transactions
Internal Check

Internal check is an arrangement of duties allocated in such a way that the work of one employee is
automatically checked by another. These are no separate staff engaged to carry out the system of internal
check. It, in fact, represents only the arrangements of duties of the staff in a way. The system of internal
check is devised in such a way that the possibilities of errors, frauds and irregularities are minimized.
Following matters are included in the internal check
Matters relating to allocation of power.
Division of work.
Methods of recording transactions

Types of Internal Control

1. Organization
Organization is concerned with placement of workers on their jobs. Authority and responsibility go together.
The workers are responsible for their activities. The head of department is responsible for looking after the
worker of his own department.

2. Segregation of Duties
The segregation of duties is necessary. There are many employees. All aspects of a transaction are not
complete by one person. The recording of transaction by many persons can reduce the risk of errors and
frauds. The division of duties can improve the working of workers.

3. Physical
The physical internal control is desirable to safeguard assets. The access to assets must be limited. The
authorized persons can be allowed to examine the assets. The persons may visit the warehouse or they may
release the assets through requisition slips. The assets require lockers, iron safe possession of keys and
use of passes of warehouse.

4. Approval
All transaction in any business requires proper approval of responsible person. The limit for approval may
be fixed. The creditor recovery officer can approve credit sales. The foreman can approve overtime wages.
Purchase officer can approve the purchase of goods.

5. Accounting
The accounting control is concerned with approval of transactions, accurately processing and correctly
recording. The control of total, preparation of trail balance reconciliation's and control accounts is
necessary. There is examination of vouchers that every aspect is not over looked so far this type of control
is concerned.

6. Management
The top-level management can apply certain controls beyond the routine working of business. The
management control, include internal audit review of management accounts comparing actual result with
budgets, supervisory control and many other review procedure of business functions.
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Principles of Internal Control

1. Simple Record and Books
The principal of the internal control is also the simple records such as the record of employees, plant
register list of shareholders etc are kept in usual simple manner books should be kept up to date and at
regular internals these should be balanced. He different persons should make handling of cash transactions.
For instance the cashier should not be allowed to record the cash in the accounts book. He should have no
concern with written ledgers.

2. Independent Checking
Another person should independently and automatically check work performed by one person.

3. Principle Relating to Staff
It is also the part of the internal control. The employees are placed on the business according to their ability.
The employees are bound for the duties for which they are assigned. Duties of each staff member should be
clear and there should be no confusion and doubt in this regard. In case of any staff member absence duties
arrangements should be made in advance.

4. Changing
It is also an important principle that no one should handle the transaction from beginning to end, because in
this situation there is a chance of fraud. Generally most of the frauds are committed due to this reason.

5. Proper Supervision
It is also a principal of the internal control. All the senior officers have a right to supervise the activities of
their juniors. It is necessary for the benefit of the business.

6. Clear Rules
All those rules relating to cash stock receipts and issuance of goods should be very clear and well defined. It
should be also checked that the employees should follow their rules properly.

7. Instructions in Writing
All the instructions should be in written form according to the best internal control system.

8. Qualified and Competent Staff
For the better internal control system the qualified staff is necessary. And it should also necessary that the
stuff is placed at a proper place.

9. Double System of Accounting
For the internal control the double accounting system is very helpful. No doubt, it is an expensive system but
it helps a lot for the internal control.

10. Incentive for Honest Worker
Honest and hardworking person must be encouraged. He should be given some reward in the shape of
promotion and cash. This principle is also very effective in improving the internal control.

11. Use of Machines
It is also the principal of the internal control how to use the machines. He has to check either the proper
machines have been installed and if it does so the work can be completed in time.

12. Performance of Duties Record
For the best internal control it is necessary that the performance of all the employees must be recorded.
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13. Record of Goods and Assets
All the companies assets and property record should be maintained properly. There should be also the
security measures for the property.

14. Surety Bonds
To protect the company from fraud and to make the internal control more effective surety bonds can be
taken from the employees.

15. Division of Duties
Division of duties is a part of internal control. The employees can be placed on jobs according to their
abilities. The duties are assigned to which they are accountable.

16. Rotation of Duties
Rotation of duties is a principle of internal control. An employee must be from one seat another. It is
necessary for increasing the efficiency and avoiding the chances of errors and fraud.

17. Division of Work
Division of work is a principle of internal control. The total amount of work is determined. It is divided among
the department's branches and sections. It has become possible due to specialization and division of
labour.

18. Subsidiary Record
Subsidiary record is a principle of internal control. The detail every account is maintained. Stock of goods
may consist of many items. As a whole it is called stock account or stock control account and every group of
items can be stated in subsidiary record.

19. Confirmation From Outsiders
The confirmation from outsiders from outsiders is a principle of internal control. The letters may be written to
debtors to confirm their accounts balances. There may be positive or negative approach in collecting
information from sundry debtors.

20. Checking Physical Existence
The auditor can check the physical existence. He can see the asset in the possession of a responsible
officer. He can touch, court and check the items at business premise.

21. Dependent Work
Dependent work is a principle of internal control. One person cannot be allowed to do every aspects of a
transaction. The work depends upon many persons. Every person is dependent upon others to perform his
duties.

22. Supervision
Supervision is a principle of internal control. The officer, foreman or supervision has the right to look after
activities of junior workers. The supervisory control is essential to make the business effective.

23. Internal Audit
Internal audit is a part of internal control. The management can ask expert employees to examine the
accounts of the business. It helps the concern to check and frauds. The progress of the entity is disclosed
through it.

24. Fidelity Bond

It is an agreement between the issuance of company and the employee. In case of loss the insurance
company can pay compensation for loss of cash or goods. The cashier can get insurance from the insurance
company.

25. Control Accounts
Control accounts are proposed to check the accuracy of the accounting books and other record. The total
debtors accounts and total creditors accounts or sales ledger adjustments and purchase ledger adjustments
accounts are prepared
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Objects of Internal Control in Detail

1. Assets Protection
The assets are the backbone of any business. These assets are in the custody of some specific officers of
the business. The internal control system checks the valuation and protect the assets of the business.

2. Accurate Record
The main object of the internal control is to maintain all records and transactions of the business according
to the generally accepted accounting principal.

3. Follow Policies
The purpose of internal control is follow policies of management. The policies are guidelines for obtaining
the business objectives. All employees try their best to follow the rules of the game.

4. Prevention of Error
The purpose of internal control is to prevent errors. There may be unintentional mistake due to overwork or
carelessness. There is normal load work with every person. Others check the work of one person.

5. Prevention of Frauds
The purpose of internal control is to prevent fraud. It is an intentional misrepresentation of financial
information by one or more individuals among management, employees or their parties.

6. Best Use of Resources
The purpose of internal control is the best use of resources. There is a need of optimum combination of
resources for maximizing profits. Internal control can point out weakness, which can be removed.

7. Nature of Audit Test
The purpose of internal control is to determine nature and extent of audit test. When there is effective
internal control there will be few audit test other wise there is need of through checking.

8. Reliable Record
The purpose of audit is to maintain reliable accounting record. The equal distribution of work among the
employees provides complete and reliable record, as it is free from error and fraud.

9. Reduces Work Load
The purpose of internal control is the reduction of workload. The effective internal control can be useful for
auditors. They can check few items and remaining items will be treated as checking by the auditor.

10. Location of Errors
The purpose of internal control is the location of errors. There are many types of error, which may be found
in the accounting record. The internal control procedures are useful to locate the error in accounting.

11. Detection of Fraud
Detection of fraud is the purpose of internal control. The compliance procedure and substantive procedures
can be applied to detect the fraud. Basically it is a management responsibility.

12. Record of Business
Internal control system is also required for the maintainers of the reliable accounting record. Due to the
internal control the records are without the errors and frauds.

13. Record of Expenditures
Same way the internal control system keeps the records of all the expenditure of the business and there are
fewer chances of errors and frauds.

14. Recording of Transaction
Due to the internal control system all the transactions are recorded properly in the correct account in the
proper period.

15. Actual Comparison
The assets and the other records, which are recorded, can be easily compared with the actual existed
information.

16. Preparation of Statement
Another object of the internal control is to ensure about the preparation of the financial statement at the
proper time as the balance sheet or profit and loss.

17. Management Objectives
The objectives of the system of internal control are to ensure the achieving of the other important
management control
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Limitations of Internal Control

1. Cost

The management thinks that cost of a control procedures must not be in excess of potential loss due to error
or frauds.

2. Transactions

The internal control tends to be directed a anticipated types of transactions and not at unusual transactions.

3. Error

There is possibility of human error due to carelessness distraction, mistake of judgement or the
misunderstanding of instructions.

4. Circumstances

There may be collusion with parties outside the entity employees of the entity. Due to such collusion there is
possibility of circumvention of control.

5. Responsibility

There is chance that a person responsible for exercising control could abuse that responsibility, for example,
a member of management overriding a control.

6. Conditions

There is possibility that procedure may become inadequate due to changes in conditional and compliance
with procedure may deteriorate.

Principles of Internal Check

1. Sufficient Staff

The principle of internal check is sufficient staff. The employees can be appointed according to the workload.
The management can determine the amount of work, which is distributes among the departments. The
persons are hired to perform their duties. The overloading can creates trouble for management.

2. Division of Work

Division of work is a principle of internal check. The management can determine the total amount of work.
The whole work is divided among departments. The heads of such department are responsible for
completion of work according to timetable.

3. Co-Ordination

Coordination is a principle of internal check. All departmental managers are bound to coordinates with other
in order to achieve organization objectives. When there is fault in one department, the work of other
department suffers. The objectives cannot be achieved. Internal check determines the degree of coordination
among the managers.

4. Rotation of Duties

Rotation of duties is a principle of internal check. The workers feel bore by doing the same work from year to
year. There is a need of rotation of duties. It is in the interest of concern as well as employees. The efficiency
is improved due to changes is duties.

5. Recreation Leave

The recreation leave is a principle of internal check. The employee can check recreation leave. It is necessary
for mental health. He can commit fraud as the new employee in his place can disclosed teh matter. The
internal check system can work in the interest of business. The weakness is of one person is disclosed due
to leave.

6. Responsibility

The responsibility is a principle of internal check. The employee can enjoy recreation leave. It is necessary
for mental health. He can enjoy recreation leave. It is necessary for mental health. He cannot commit fraud as
the new employee in his place can disclose the matter. There internal check system can work in the interest
of business. The weakness in of one person is disclosed due to leave.

7. Automatic Machines

The principles of internal check is that machines must be used to do accounting work if permissible. The
machines can do a lot work without delay. The changes of fraud and error are reduced to a minimum. The
working of machines improves efficiency of accounting staff.

8. Checking

The principle of internal check is to check the work of other employees. Many persons perform the work. The
officers can put his signatures to verify the work done by his subordinate. In this way one work passes many
hands. The changes of error and fraud are minimized due to checking and counter checking.

9. Simple

The principle of internal check is simples in working the employees can understand the working of internal
check system. A person can work under the supervision of other employees. The line of authority moves
from top to bottom level. All workers can understand their duties in the organization.

10. Documents Classification

The classification of documents is the principles of internal check. The business documents are prepared,
collected, recorded and placed in proper files. The index is prepared to compile the data. The filing system is
useful to place the latter. In case of need the documents are traced at once.

11. Dependent Work

Dependent work is a principle of internal check. The work of one employee is dependent upon others. One
work passes in the hand of two or three persons till it is complete. Another person checks the passes done
by one person. No person is all in all to start and complete the transactions.

12. Harmony

The principles of internal check are harmony among the employees and departments. The understanding is
essential for business goals. The management is to achieve other social and national objectives. The
harmony is basis for successful internal check.
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Chapter 4 - Vouching

* Vouching

* Principles of Vouching

* Techniques of Vouching

* Objectives of Vouching

* Procedures of Vouching

Introduction

It means to test the truth of items appearing in the books of original entry. It is an important part of an
auditor's duty to certify as correct the transactions recorded in the looks of accounts. The Accountant of a
business is responsible for passing entries in the books of prime entry. The question arises how and on
what basis such entries have been passed. The auditor's primary duty is to check these entries and only then
certify the accounts as correct and free from any error or fraud.

Definition

A careful examination of all original evidence such as invoice receipt of correspondence minutes, contracts
etc.

Vouching is very useful in proving the accuracy of the entries in the books of accounts. It also indicates
about that transaction, which is omitted from the books of account.

Importance

Vouching is called the essence of auditing. So audit is not possible without vouching. The object of
vouching is to find out the accuracy of the entries appearing in the books of accounts and detect that no
entry has been omitted from the books of account.

Principles of Vouching

1. Arranged Voucher

In the books of accounts the vouchers are based an entry. A voucher is helpful to support any transaction,
which may be cash memo fill, voucher, ticket or others.

2. Checking of Date

The voucher date can also be checked; it must be related to the current year. The date of the last or future
year must not be adopted.

3. Checking of Authority

The vouchers are considers correct only when the proper authority signs on them. For the approval of the
dealing the owner or the management must put the signatures for the approval of dealing if the vouchers are
without the signatures of the proper authority. They are not considers the true.

4. Cutting or Change

There should be no changes in the vouchers. Any person for making the fraud can change the time, date,
amount and name of concern. So, these changes cannot be acceptable till the approval authority has made
the signature.

5. Compare the Words and Figures

The auditor should satisfy himself amount written on the vouchers, it figures and words are same or not.

6. Transaction Must Relate to Business

For the correctness of the vouchers it is necessary that it relate with the business. Concern, the vouchers
must be in the name of the business and also the manager. If it does not the vouchers are not acceptable and
doubtful.

7. Case of Personal Vouchers

The auditor should not accept the voucher in personal name. There is a chance than 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 in which cash is deposited and drawn. He should
examine the documentary evidence in these regards.

9. Revenue Stamps

For the stamps, the stamps act 1899 is applicable while fixing the revenue stamps. The stamps are required
according to the valuation of the amount or cash memo. There is no need of vouchers if amount is less than
twenty rupees.

10. Case of Cancelled Voucher

The auditor should not accept the cancelled vouchers because it has already served the purpose of payment.
There will be a danger of double payments, if it is accepted.

11. Important Notes

For finding the correct decision, the auditor can also take help from the working papers of the previous year
and others paper or note related to business and available with the management.

12. Minutes Book

When the meeting of shareholders is held. All the resolutions and decisions of the directors and
shareholders are recorded in the minute's book. This minutes book must be examine by the auditor. He has
to check that these decisions have been implemented in the books of accounts or not.

13. By Laws

In case of company the article of association and memorandum are basically the rules and regulations. But
on the other hand in the societies and clubs the by laws are used to determine the powers of management.
The auditor goes through these rules and regulations to find the true and fair view.

14. Agreements

The auditor must examine all the related papers of the business such as the agreement, correspondence and
others. The basic information can be received to the auditor by such papers.

15. Deed of Mortgage

Some times, you are the sale or purchase of any assets, the management can enter into the agreement is
prepare in this case. If the agreement is prepare in this case. If the agreement is made for a loan against the
immovable property then the mortgage deed is signed. It is compulsory for the auditor to study the content
of the deed.

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Techniques of Vouching

1. Correct Accounts

The auditor can check the accounts debited and credited are correct in all respects. The rules of debit and
credit can be followed for dividing the transactions into accounts.

2. Agreements

The auditor must examine the agreements, correspondence and other papers relating to business activities.
Such agreement provides basic information to the auditor. He can vouch the transactions based on such
agreements.

3. By-Laws

The memorandum and articles of association are rules and regulations in case to company. The by-laws of
societies and clubs and used to determine management power. The auditor has the right to go through these
rules and regulation.

4. Mortgage Deeds

The management may enter into agreement with any party for the purpose and sale of assets. The deed or
agreement is prepared. In case of loan against immoavable property mortgage deed is signed. The content of
deed must be situated.

5. Minutes Book

The auditor should examine the minute's book. The resolution and decision of directors and shareholder are
recorded there. He can see that such decision have been implemented in the books of accounts.

Objectives of Vouching

1. Proper Evidence

The purpose vouching is to note that proper evidence is available for every entry. The signatures, initials and
rubber stamp are evidence that document has been authorized and checked.

2. Proper Authority

The purpose of vouching is to note that there is proper authority behind every transaction. In the absence of
any signature of manager the transaction are not acceptable at all.

3. Right Period

The purpose of vouching is to check that date of the vouchers relate to accounting period. The adjustments
in books are made on the basis of current year record of transactions.

4. Correct Amount

The purpose of vouching is to check that correct amounts have been recorded in the entry. The vouching is
useful to record only correct amounts in the books of accounts.

5. Capitals and Revenue Analysis

The purpose of vouching is to examine the analysis of transaction into capital and revenue. The expense
relating to one year is treated as revenue other wise it is called capital.

6. Purchase for Business

The purpose of vouching is to check that purchase relate to the nature of business. The private purchase
cannot be recorded as business due to vouching.

7. Arithmetical Accuracy

The purpose of vouching is to see the arithmetical accuracy of books of accounts. The auditor to confirm
that books are accurate can check the total subtotals, casting and posting.

8. Postings

The postings of total from journal to the ledger can be voucher by the auditor. He can see through vouchers
that posting are complete and correct.

9. No Error

The purpose of total vouching is to check that there are no errors in the books of accounts. The errors are
the result of carelessness or over work. But audit staff is not over loaded so they can locate error.

10. No Fraud

The purpose of vouching is to examine that no fraudulent payments are made. The fraud can be committed
due to matching of minds of employees and customer. The auditor can vouch the entries top disclosed such
frauds.

11. Castings

The purpose of vouching is to check castings or loads. The auditor can calculate all total by himself. He can
compare the totals with books to maintain accuracy.

12. Cast at Bank

The purpose of vouching is to determine true cash at bank. He can vouch receipt and payments. The result is
that he can check whether cashbook is correct or not.

13. Cash Balance

The purpose of vouching is to check that cash in hand figures are facts. The cash can be counted. He can
compare it with cashbook. He can apply test checking to determine accuracy.

14. Reporting

The purpose of vouching is to form an opinion for the purpose of reporting. In case of true and fair view
there is good report. In the absence of such result there may be qualified report.

Procedures of Vouching

1. Reading Out

The vouching is a task of the auditor. The junior audit can read out the contents of the vouchers. He can
inform the senior auditor about the data name of organization, number of voucher and amount of vouchers.

2. Comparison

The senior can head the contents called out by junior auditor. He tally each and every item stated in the
voucher with entries in the books of accounts. Thus comparison is a part of vouching procedure.

3. Ticking

The senior auditor can use various ticks or symbols to clear the items checked. The ticks may be an
abbreviation of words. Such ticks or symbols may differ from auditor to auditor because these are code
words.

4. Stamping

The senior auditor instead of signature or initials he can use stamps for checking the vouchers can use the
rubber stamps. The rubber stamp may have the wording checking and cancelled on it.

5. Signatures

The senior auditor can vouch the entries with the help of vouchers. He can put his signature or initials on
every voucher for safety measures. The signed vouchers cannot be presented again for another entry.

6. Query

The voucher may be missing. The entries may be doubtful due to over writing and erasing. The audit staff
can make the word "Q" against such entry. This entry is recorded in working papers.

7. Management

The audit staff can be giving sometime to the management for clearing the objections. The doubtful entries
are handed over in written form. The management can examine the record in detail.

8. Reply

The management may reply after one or two days about the doubtful entries. The auditor can examine the
reply of the managers. The auditor can judge whether the reply is right or wrong.

9. Clearance

The audit staff can clear the query for which proper answer is made available. The auditor may not be
satisfied with the answer of objections. He can inform the management about this query.

10. No Satisfactory

The auditor may reject the unsatisfactory reply. He has skill, training and experience. He can use all available
means to test the truth. He can note down poor clarification in working papers.

11. Objections

The objection stated in the working papers can be discussed with the management at the end of audit. He
can form an opinion on the basis of such objections. He can submit his report either clear or qualifie
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* Liabilities of an Auditor

Liabilities of an Auditor
(A) Civil Liabilities

Civil liabilities arise when there are dispute between two parties for a loss caused to one due to the act of
another. In this case, the auditor is called upon to pay damages as decided by the court. These may be of the
following types

1. Liability of Negligence

Negligence means acting carelessly or failing to perform a duty enjoyed upon a person. An auditor is
expected to perform his duties as an agent of the shareholders by exercising care and diligence in the
implementation of statutory requirements for the maintenance and presentation of the financial statement.
Auditor must be kept himself up to date with the information if he commits some negligence the purpose of
audit is failed.

2. Liability of Liable

In the report the auditor may criticize any person. If it is based on the fact there is no liability of the auditor.
On the other hand the auditor is liable in order to avoid this liability the auditor should take care that the
report is based on facts and is prepare with good intention.

3. Liability of the Third Party

The auditor is expert in finding out the errors and frauds and is aware how to check the books of accounts.
Many third parties as the shareholders, investors, tax authorities, creditors and government rely upon his
reports. So if he makes any type of error or fraud, he is liable to pay the damages.

4. Misstatement in Prospectus

According to section 59 The civil liability of an auditor arises due to misstatement in prospectus. Where a
prospectus invites person to subscribe for shares or debentures of a company, the auditor shall be liable to
pay compensation to every person who subscribe for a purchase any shares or debentures on the faith of
the prospectus for any loss or damage be may reason of any untrue statements.

5. Breach of Contract

If the auditor fails to fulfill the term of the contract the civil liability arises of an audited. In case if he omits
the all or some conditions of contract, if he cannot make the secrecy, if fails to provide the true and fair view
to the owner, he is liable to pay to the owner if sustain any finacial loss.

(B) Criminal Liabilities

Since for certain purpose of the companies Act, and auditor is deemed to be an officer of the company, he is
a liable for such. Act of omission or commission constituting offence under the Act.

6. Misstatement in Prospectus (Sec-63)

Here a prospectus containing any untrue or misstatement is issued with the consent of auditor who shall be
punished the with imprisonment which may extend up to two years or with fine which may extend up to Rs.
5,000/- or both.

7. Requirements of Reports (Sec-225)

Here the auditor does not confirm to the requirement of reports as per sec-229 he shall be punished with
fine, which may extend up to Rs. 1,000.

8. Assistant to Investigate (Sec-240).

Auditor has statutory duty to assist any investigator appointed by the central Government in collecting any
information of the company otherwise he shall be punished with imprisonment which may extend up to six
month or with a fine up to Rs. 2,000/- or both for continuous default Rs. 200/- per day may also be charged.

9. Assistance to Prospectus (Sec-242)

On the basis of report of an inspector control Government may prosecute any officer. Auditor is to assist in
such prosecution otherwise he is to be punished for contempt of court.

10. Return Books, Papers Property etc. (Sec-477)

At the time of winding up of a company, court may ask the auditor to return any property books or papers of
the company otherwise he can be arrested.

11. Public Examination (Sec-478)

On the report of official liquidation, the audition of the companies to the publicly examined. Notes of such
examination shall be used as evidence in any civil or criminal proceeding against the auditor.

12. Falsification of Books of Accounts (Sec-539)

Where the auditor is guilty of destruction, multilation, alteration, falsification of any books papers securities,
he shall be imprisoned which may extend up to 7 years and shall also be liable to fine.

13. Prosecution of Auditor (Sec-545)

Where auditor is found be guilty of any criminal offence by the liquidator of the company, he shall be
prosecuted.

14. False Statement In Any Return

Where the auditor makes any false statements in any material respect in any return report, certification,
balance sheet etc, he shall be imprisoned which may extend up to 2 year and shall also be liable to fine.

15. Disqualified Auditor (Sec-254(6))

The company ordinance has clearly stated the persons who are not qualified as auditor, but if an unqualified
auditor may act as auditor of the company. He is liable to fine up to Rs. 5,000/- rupees.

16. Non-Compliance (Sec-260)

In case when the auditor makes any report or signed against the legal requirement and the report may be not
true the auditor is liable to fine for Rupees 2,000/- if it is willful fault.

17. Auditor Report

If the auditor make the report with the extent to profit himself and the third party for any loss for a material
consideration it is a criminal liablity. He may be punished for six months and fine upto 2,000/- rupees.

18. Assist Inspector (Sec-268)

The auditor has to give all the necessary assistance in connection with investigation to the inspector. Some
times the auditor may fail to give it. In this case he shall be punishable up to one year and fixed up to ten
thousand rupees.

19. Auditor Account (Sec-384(4))

The auditor is liable to submit his report after or within he two months at the end of the period to which
account relates. If he fails there is a fine up to rupees 5,000/-

20. False Evidence (Sec-419)

If any person provides false evidence he is punishable up to two years and liable for fine also. The evidence
may be affidavit oath or some affirmation etc.

21. Winding (Sec-420)

The criminal liability of company officers including auditor may be composed may year before or during
liquidation of company of criminal offences like concealing or removing property, concealing or falsifying
document and papers. The liquidation can go to the court of law for proving the breach of duty.

22. False Statement (Sec-492)

Whoever makes a statement false or incorrect or omits any material fact shall be punishable with
imprisonment for a term, which may extend to three year and shall be liable to a fine not exceeding twenty
thousand rupees.

23. Pakistan Penal Code (Sec-197)

Whoever makes a statement false or incorrect or omits any material fact shall be punishable with
imprisonment for a term, which may extend to three year and shall be liable to a fine not exceeding twenty
thousand rupees.

24. Professional Misconduct

If the auditor fails to follow the rules of their own profession he is liable for the criminal liability. For this
default the council can with draw the certificate of practice. The council can also go to the court of law for
prosecuting the concerned auditor. The auditor can suffer the jail or fine or both.

(C) Other Liabilities

25. Honorary Audit

The auditor on the honorary basis may also accept an audit work. After the completion of the audit work he
is bound to submit his report.

26. Joint Audit

When the two auditors carried out the work of audit it is called as the joint audit. It is possible by the two
independent auditors under the agreement. Sometimes, a business concern may have two or more than two
business places in different cities or countries conduct the audit by one auditor. So this audit is conduct the
responsibilities lies on the head of every auditor who had done the work of audit. It is also stated in the audit
report.

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Chapter 6 - Audit Working & Audit Note Book * Definition of Audit Note Book * Advantages of Audit Note
Book * Definition of Test Checking * Essentials of Test Checking * Advantages of Test Checking *
Disadvantages of Test Checking * Routine Checking * Essentials of Routine Checking * Advantages of
Routine Checking * Disadvantages of Routine Checking
Definition of Audit Note Book

Audit notebook is a diary on which auditor scribble down all important inquiries to avoid the possibility of
unquestioned material facts.

Importance

Justice William throws light on the importance of audit notebook in the following words,

The audit notebook that contained detailed information proved to be very helpful to the auditor in every
critical moment.

For preparing the audit report it is very useful for that auditor.

In case of negligence charge against the auditor, but note book good evidence can be presented. It may be
also used for future guidance and reference. It also enables to auditor to know that what work his assistant
at each audit has done.

Advantages of Audit Note Book

1. Audit Report

The audit notebook is helpful to prepare audit report. The auditor can record the weakness of accounting
records. The queries not properly answered are started in the audit report when the auditor is satisfied he
can submit a clear report.

2. Staff Honesty

The audit notebook is used to determine the integrity and honesty of audit clerks. The moral and ethical
value can be examined through audit work. When a person completes his work in time. Time period auditor
can appreciate him. If there is pending work after the expiry of time period, he can be held responsible for it.
The audit staff must be honest in his work.

3. Helpful For Memory

The audit notebook is help to keep things fresh in memory. The auditor can read the book on daily basis. He
can note the weakness on fingertips. The auditor can retain the data in his memory for a longer period of
time. He can ask the management to clear the doubtful points before preparing audit report.

4. Reference

The audit notebook is useful for reference. In future it can provide information to the audit staff. The past
data gives an insight into business matters. The auditor can note the changes. He can form an opinion about
the changes in the nature and size of the business.

5. New Auditor

The audit notebook is useful for new auditor. They can see the weakness of previous years. The old weak
points may not be repeated this year.

6. Court Cases

The audit notebook is helpful to defend an auditor in court cases. The people can go to court of law in order
to fix liability for negligence of duty. The audit notebook is a written proof of work performed by an auditor.

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Definition of Test Checking

According to Professor Meigs,
"Test Checking means to select or examine a representative sample from a large number of similar items."
It is clear that test checking is sample checking. The whole data must cannot be examined. The audit staffs
can statistical technique to check the facts and figures. A certain percentage of transaction can be selected
for through examination. The remaining transactions are supposed as checked.

Essentials of Test Checking

1. Sample
The sample items selected from whole data must be representative. The selection can be made by any
method. The entire data must be presented in the form of sample.

2. Last Month
The last month of the accounting year is most important. The items appearing in the last month must be
given maximum importance at the time of selecting the sample.

3. First Month
The first month of accounting year provides essentials information. The transactions recorded in the first
month must be assigned high weight age in order to select the sample.

4. Surprise Testing
The auditors include the element of surprise in selection of test. The accounting staff must be unaware of
test checking so that he should not make arrangement for test checking.

5. Checking Method
The auditor can change his method of selecting the sample. At one time he can one use alternate method.
The selection method must be charged in time to time.

6. Every Type of Transaction
The auditor must select every type of transaction in test checking. There is a need to include each type of
dealing in the sample.

7. Every Employee
The auditor can select the work of every employee. The test checking can be used to examine the work of all
employees in the organization.

8. Through Out The Year
The test checking can be applied to all items appearing in the books through out the year. The recurring
items are most suitable for test checking.

9. Cash Book
The cash book entries must not be used for test checking. There is a need of cent percent checking of all
cash items appearing in cashbook. The control over cash is essential for efficient business working.
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Advantages of Test Checking

1. Time Saving
The benefit of test checking is available in the shape of time saving. A simple of items is checked and
remaining items are treated as checked. In this way there is saving in time.

2. Less Labour
The test checking is useful for saving in labour. A lot of work requires many clerks for completing the audit.
But test checking is used to test few items so there is less labour work.

3. Accurate Books
The test checking is useful to note the accuracy of accounting books and other record. There is a demand of
error free books. The test checking is a step in the right direction to prove accuracy.

4. Staff Efficiency
The efficiency of accounting staff improves due to test checking. The weakness of employee is reported to
management. The employees try to improve their work by overcoming their deficiencies.

5. Timely Report
The benefit of test checking is that timely report can be submitted to the management. The large number of
figures can be checked in short period of time so there is no delay.

6. Many Audits
Test Checking is useful to complete many audits in one year. It saves sufficient time, which can be used to
check the books of new clients. The auditor is able to raise more income.

7. Special Attention
The auditor can pay special attention to important matters. Test Checking reduces the labour work on the
part of audit staff. There is sufficient time period to settle the important matters.
Disadvantages of Test Checking

1. Errors
The demerit of test checking is that errors are not disclosed by it. In the presence of error true and fair view
is not possible. No doubt the location of errors is the duty of management but it effects the audit work.

2. Frauds
The demerit of test checking is that planned frauds may not be disclosed. The fraud discovers is the
responsibility of management. The audited accounts cannot show true and fair view when fraud exists in
books.

3. Responsibility
The demerit of test checking is that auditor cannot shift his responsibility of management. The errors of
fraud can be discovered through cent percent checking. So auditor is responsible for test checking.

4. Report
The auditor report may fail to disclose true and fair view of business matters. After test the auditor signs
checking the auditor report. The auditor is responsible for audit report based on test checking.

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Routine Checking

The auditors check the arithmetic accuracy of journals and ledgers. It is called routine checking. The
purpose is detected the error and fraud of simples nature. The audit staff can check the balance appearing in
journal and ledgers. The sub-total and total are examined. The differences are calculated. These balance are
transfered from one page to another. The amounts carries forward should be the same. The checking is
useful for determine the accuracy of the books of accounts. The accounting staff cannot chance the figures
after routine checking. The ledger posting is also tested by means of routine checking. The errors may be
locked and frauds may be disclosed by it. The auditor is able to give his opinion about the fairness of the
financial statements. The auditor can fix the responsibility of the accounting staff for negligence of dut

Essentials of Routine Checking

1. Sub-Cast
Sub-Cast is a part of routine checking. Sub-total is possible in accounts matters. The sub-cast must be
correct.

2. Casts
Cast is part of routing checking. Total in journal and ledger accounts should be examined for accurate
results.

3. Carry Forward
Carry forward is a part of routing checking. The balance of one page can be transfered to the next page.

4. Posting
Posting is a part of routing checking. The entries are posted in to the ledger accounts. Posting must be
properly examined.

5. Balancing
Balancing is a part of routing checking. Taking the difference of debit and credit in the accounts is called
balancing.

6. Carry Down
The amounts in an account can be transferred to next page. The carry down is a part of routing checking.

7. Transfer
Transfer is part of routing checking. The amount is one accounts can be transferred to another account.
dvantages of Routine Checking

1. Accuracy

The benefit of routine checking is that there is accuracy of accounting books and records. The sub-total,
casts and carry forward posting, balancing and transfer are stated as correct.

2. Frauds

Routine checking is useful to checking fraud in the books of accounts. The responsibility lies on the head of
management for location of fraud. The management can use this tool to meet its duty.

3. Positive Verification

Routine checking helps to verify positive made in the ledger. The correct posting can provide true and fair
view of financial statements. The management can verify posting through it.

4. No Change in Figures

Routine checking is useful to eliminate the alternation of figures. The management can meet its obligation
with the help of routine checking. The employees cannot alter figures.

5. Final Checking

The benefit of routine checking is that final checking work is reduced. The final checking become early as
major work has already been completed through routine checking.

Disadvantages of Routine Checking

1. No Care

The work of routine checking is given to junior employee. They do not consider it as important matter.
Therefore the expected result cannot be produced for audit purpose.

2. Fraud

The demerit of routine checking is that planned frauds are not disclosed. The responsibility of fraud lies on
head of management. The audited accounts may fail to provide true and fair view.

3. Error

The demerit of routine checking is that errors of principle are not disclosed. The responsibility or error can
be placed on the head of management. The audited accounts may fail to provide true and fair view.

4. Monotony

The work is routine checking is boring and time consuming. The clerks go on checking the totals and sub-
totals and balances. It does not improve the performance of employee rather it bring monotary.

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Chapter 7 - Verification

* Verification

* Advantages of Verification

* Objects of Verification

* Techniques of Verification

Verification
It means to prove the fact and confirmation about the both sides of the balance sheet as the assets and
liabilities. The auditor not only checks the accuracy of the accounts in the arithmetic way but also check the
existence of the actual items and their actual possession.Advantages of Verification

1. Use of Assets
The merit of the verification is to check that management had used the assets of the business properly.
Through verification the auditor can find out if the management has misused the assets. By the verification
the efficiency of the business is improve because it is used properly for the business purpose only.

2. True and Fair View
By the verification the auditor can show the facts of the business. For the report the auditor has to depend
upon the verification technique as well as on the other techniques.

3. Protection of Lenders
For the lender also it is beneficial, because the auditor has to check the ownership, existence and the
possession and valuation of the business assets. So the tender can rely upon this report.

4. Risk for Creditors
As the auditor accounts provide the true and fair view about the affair of business so it is also the protection
for the creditors. The creditors are those who provide the goods and services to the business. And for them
the risk of loss is eliminated.

5. Location of Assets
Through the verification the correct view about the assets of the business can be find out. The auditor can
visit the assets personally. He can cheek that the assets are not stolen or destroyed. So the auditor beings
the fair view about the assets.

6. Performance of Management
The verification is also very useful for the owners, because by the verification the auditor can check the
performance of the management. So the management can improve the efficiency of his work.

7. Loan Arranged
The verification is also helpful for the protection of the life of the business. Through verification the assets
are physically examined and these assets are used to take the loan from the financial institution, which save
the life of the business.

8. Manipulation of Accounts
The verification is also very useful to check that there is no manipulation of accounts and the figure are not
altered. It is the moral check on the management, which shows the true position of the business.

9. Embezzlement
The merit of the verification is also that there is no embezzlement. The management cannot misuse the
stocks or cash or any other asset and cannot use them for their personal use. So, the fair view of the
statement can disclose.

10. Recording of Assets
The assets are recorded in a proper way and manners. For the writing of all the information of the sale,
purchase and depreciation and other records. The GAAP (general accounting accepted principals) are used.
The auditor has to check that the rules are followed.

11. Valuation of Assets
The verification is also helpful for the valuation of the assets properly. The assets may be fixed or floating.
So the valuations of these are also made in different ways. The auditor can check the valuation of the assets
through the accounting principals.

12. Stability of Business
Another benefit of the verification is that it is also helpful in the disclosure of the true position of the assets
and liabilities. In the balance sheet the fictitious assets and liabilities are usually recorded. The business is
considered stable when the real assets are in excess over the real liabilities. On the other hand it is not
stable. So the verification discloses the facts.

13. Liabilities Valuation
The verification is also helpful for the owner by the verification they can come to know about the business.
Which must be valued under the accounting rules.

14. Proper Disclosure
It is also useful for the public. The true valuation and the position of the assets and liabilities are disclosed
and the public can come to know the proper position of the business.

15. Business Resources
There are many powers, which have a vital role in the running of the business as the man, machine material
and also money. In fact it is the deriving forces of the business. So, the reasonable rate of return puts on
them. In this way also the verification is helpful to determine the true value of profit.
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Objects of Verification

The object of verification of assets is the satisfaction by the auditor as to its existence, proper disclosure,
proper valuation and correct ownership on the balance sheet. The following are the main objects of the
verification.

1. Certify the Ownership
The object of verification is to certify the ownership. The document deeds, vouchers and agreements etc can
obtain the real ownership.

2. Position of Assets
The audit by the verification of the assets in the business the assets may be mortgaged or pledged for
borrowing money. The auditor has to check that the same has been written in the balance sheet in the proper
way.

3. Existence of Assets
The object of the verification is to ascertain the existence of the assets. The existence of assets is stated in
the proper but there may be the assets be sold, stolen or destroyed. In this case the auditor has to check the
assets physically.

4. Detect Fraud
Another purpose of verification is to find out the frauds if conducted. In come cases the assets may be stole
or misused. The auditor can verify the real position of assets. The responsibilities of fraud are to be the
management.

5. Verify Possesssion
The purpose of verification is to check the possession of the assets. The assets should be safeguarded the
assets of the business is used for the business only. The possessions of the assets are in the management.

6. True and Fair View
Another object of the verification is to determine the true and fair view about the business financial
statements. After the verification it is confirmed that the financial statements are according to the
requirements and is fact.

7. Depreciation Plans
Another purpose of the verification is the examination of the depreciation of assets of the business. The
auditor has to check that the proper state the depreciation is charge on the assets according to the
accounting principal. As the life of each assets is different, so the depreciation is charged as per rule.

The object of the verification is also to check the assets valuation. Which does the management value. The
auditor has to fine that the valuation is true and according to the accounting principal.

9. Valuation of Liabilities
The management determines the valuations of the liability. The object of verification is to check that the
valuation is the true and according to the accounting principals.

10. Evaluation Methods
The object of the verification is to the check the methods of evaluation. To evaluate the recorded items the
compliance and substantive test are applied. According to the business requirements the auditor can rely
upon anyone method from above.

11. Recording Methods
The object of the verification is to determine the method of recording of the both sides of the balance sheet
as the assets and liabilities. The auditor has check that all types of assets recorded separately and the
depreciation is deducted and the value of asset is charged according to the rule.

12. Internal Control
To evaluate the internal control is also the object of the verification. The business management is efficient if
the internal control is effective. And if the internal control is not effective the assets cannot be used
properly.

13. Arithmetic Accuracy
Another object of the verification is to note down the arithmetical accuracy of the balance sheet. All the
recording of the transactions, their posting of totals, sub-totals, addition and depreciation must required the
calculation. The auditor has to require the accuracy of the figure work.

14. Treatment of Items
The object of the verification is to check that the different items have been treated correctly as the treatment
of the taxes and discount etc.

15. Current Period
The object of verification is to check that the transactions of the business are related to the current year for
which the audit work is being done.
Techniques of Verification

In the process verification following techniques are used

1. Physical Existence of Assets
Verification techniques of an asset are to check the physical existence of the asset. The auditor can count,
measure and also the inspect of the various assets.

2. Proper Disclosure
It is also the techniques of the verification that the auditor has satisfied himself that the management has
disclosed all the assets and the liabilities as required by law.

3. Ownership of Assets
Another technique of the verification is to determine the ownership of business. The assets must be held in
the name of the business.

4. Assets in Possession
In the technique of the verification the auditor has to check the possession of the assets, which are in the
custody of the management. It is in the possession of the cashier and the stock in trade is in the fold of the
store officer. The auditor has to check the custody of different employees.

5. Proper Valuation of Assets
The technique is also to check the valuation of an asset. The assets may be fixed or circulating. The auditor
can check the valuation of assets, which are determined by the management. In this case the arithmetical
accuracy can be examined.

Auditors should also satisfy themselves about the liabilities that these are properly valued, which are shown
on the balance sheet, overstated or understated liabilities do not give a true picture about the financial
position.

7. Correct Valuation
Auditor should pay special attention to this point, because profit and loss account also depends upon the
accuracy of valuation of assets and liabilities. Valuation main object is that balance sheet should show a true
and correct view about the financial position of a client firm.

8. Purchase By Proper Authority
Another technique of the verification is that The Auditor satisfied himself that there is a proper authorization
for any acquisition or disposal or any other form of movement for the assets and liabilities which is stated in
the articles and memorandum of association.

9. Business Motive
Keeping in mind the business motive, the auditor has to be satisfied himself that all the assets, which are
purchased are for the business motive only and not for the use of personal requirements.

10. Charge Free
The technique of verification is the examination of charge on assets. In case of lend the loan the assets are
transfered in the name of the lender the auditor has to check that the assets are free.

1. Chapter 8 - Divisible Profit

* Divisible Profit

* Concept of Profit

* Principles of Divisible Profit

* Importance of Correct Profit

* Secret Reserves

* How Secret Reserves is Created

* Advantages of Secret Reserves
Introduction of Divisible Profit

Those profits are term as the divisible profit, which is legally distributed to the shareholders of a company as
dividend.

Factors of Divisible Profit

The following are the main factors, which influence the divisible profit.

1. Capital Profit

The divisible profit ca be paid, if there is some capital profit or gain.

2. Capital Loss

If some part of the capital is lost or there is capital loss the dividend can be paid out of the current profits
without making any provisions for any capital loss.

3. Depreciation

The depreciation is charged before the distribution of the divisible profit

4. Transfers of Reserves

Under company ordinance 1984,

Before declaring dividends the directors have powers to make such reserves as they may think proper.

Concept of Profit

Like the term "value" in economics accountants have used the word. "Profit" for many years without
assigning a definite meaning to it. This state affairs has given rise to much informed criticism of accountants
and their work added to this is the difficulty caused by the divergence that exists in the concept of the profit
between the economist and an accountant for the purpose of settlement of claims of parties to their shares
in the profit of a business.

Principles of Divisible Profit

1. Articles of Association

The articles of associations are the rules of the company for managing the business activities. The articles
prescribe the rules for divisible profit. The directors are entitled to distribute the profits under the rules. The
cannot exceed the prescribed limits.

2. Companies Ordinance

The companies ordinance 1984 states the rules and regulation for distribution of the profits to the
shareholders. The dividend can be paid out of revenue profit. The directors must follow the rules of
companies for distributing profits. They cannot violate the law.

3. Accountancy Principle

The accountancy principles must be followed for calculating the divisible profits. The going concern,
consistency, conservation matching concepts is applied. These principles must be applied other wise the
reliable result cannot be expected from the accounting books and records.

4. Legal Decision

The legal decision must be kept in mind which calculating the divisible profits. The court cases relating to
auditing must be followed if applicable to the conditions of business. The auditor must know the decision
announced by the courts from time to time.

5. Capital Maintenance

The principles of capital maintenance must be applied. The capital cannot be used to pay dividend. The
revenue profits can be utilized for payments of dividend. The capital account must remain intact. It is illegal it
the directors pay dividend out of capital during any year.

6. Shareholders Approval

The divisible profits can be used to pay as dividend after approval of shareholders. The annual general
meeting is called and the shareholders approve rate recommended by directors. The rate of dividend
proposed cannot be increased at all.

7. Capital Profit

The capital profit can be used to pay dividend under certain conditions. The capital profit should be realized.
All the assets should be revalued and even then there is surplus. The articles of association allow the
distribution of capital profit as dividend. The depreciation on the revalued assets has been recorded in the
books of accounts.

8. Directors Proposal

The directors have the right to propose the rate of dividend under certain conditions. The capital profit
should be realized. All the assets should be revalued and even then there is surplus. The articles of
association allow the distribution of capital profit as dividend. The depreciation on the revalued assets has
been recorded in the books of accounts.

9. Capital Loss

The dividend can be paid out of revenue profits even there is capital loss. There is no need to adjust old
capital loss before payment of dividends. The current year revenue profit can used to pay dividend. The
capital profit must be used to eliminate capital loss finest and then surplus can be used to pay dividend.

10. Depreciation

The dividend can be paid out revenue profits. The depreciation on fixed assets must be charge to profit and
loss before declaring revenue profits. In case of manufacturing company it is compulsory to charge
depreciation before declaration of profit or dividend.

11. Past Losses

The company may sustain a loss in one year. It can earn profit in the next year. The company may adjust loss
of previous year. The remaining profit of current year can be pay dividends. In 1918, Ammonia Soda Co. V
Chamberlain case the court decided that under the articles of association the directors can pay dividend out
of current year profit with out adjustment past losses.

12. Transfer to Reserve

The dividend can be paid of revenue profit remaining after transfer to reserves. The articles of association
empower the directors to create at a certain rate. In case of banks and financial institutions it is obligatory to
set up statutory reserves.

13. Secret Reserves

Management creates the secret reserves by various techniques. The financial institutions need such
reserves to develop the confidence of customers and owners. The reserves can be created and used to pay
dividend if allowed under the articles. The misuse of such reserves must not be allowed.

14. Undistributed Profit

The directors for declaring dividend can use undistributed profit or profit and loss appropriation balance. It
is revenue of the previous years. It is a right of the directors to used such profit for payment of dividend at
the end of the year.

15. Profit Prior to Incorporation

The profit prior to incorporation is a capital profit. It cannot be used for payment of dividend. It is a profit
earned before the registration of the company. It can be used to write off capital loss or issue of bonus share
by the company management.

16. Asset Revaluation

The management can revalue the assets. The surplus on revaluation of assets can be started on liability side
of balance sheet. It can be used after realization. The assets may be sold and profit may be realized.

17. Solvency of Company

The solvency of the business is very important than payment of dividend. The management must determine
cash needs of the company. If cash is surplus than business requirements then dividend then can be paid is
cash. In cash of storage of funds dividend should not be paid in cash.

18. Creditors Protection

It is a principle of divisible profits that dividend must be paid out of revenue profits. The correct calculation
is essential for all who depend upon business. The overstatement can disturb one section of investors while
understatement can upset another group.
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Importance of Correct Profit

1. True Disclosure

The accounting principle requires true disclosure of profit. The purpose of audit is also same. The auditor
can form and opinion of the financial statement when true disclosure is there. The true disclosure may lead
to show correct profits.

2. Consistency

The importance of correct profit is felt to settle the dispute among various sections of society. The owners
need high profits. The debentures holders demand low profits. The principle of consistency can solve the
problem by declaring true and correct profit instead of high or low profits for the year.

3. Follow Law

The calculation of correct profit is essential for the business. The calculation of profit depends upon law.
When the law is followed there is true profit available for the shareholders. The memorandum, articles of
association and companies ordinance must be followed to arrive at correct profit.

4. Protect Creditors

The calculation of true profit is necessary for protection of creditors. The true profit does not reduce the
value of assets. The creditors can collect their amount of loan and interest in goods and services.

5. Correct Valuation

The fair value of assets and liabilities is recorded. The correct valuation is desirable for other parties who
want to buy such business. The admission of new partner is possible. The amalgamation and merger can
take place on the basis of correct valuation of business concern.

6. Stable Share Prices

The benefit of correct profit is available in the shape of stable prices. The investigators in shares can depend
on the policies of the company. The management can attract large funds for expansion of business activities.
The auditors must try to calculate true profit every year.

7. Manager Remuneration

The benefit of correct profit is available in the shape of true remuneration of management. The manager's
commission may be based on profits. The correct profit can pay correct commission to the managers. They
can review their progress through their remuneration received.

8. No Undue Favour

The correct profit is useful for all sections of society. There is conflicting interest of shareholders manager,
creditors, lenders, investigators and debenture holders. The correct profit favours all parties according to
their interest in business.

9. No Dividend Out of Anticipated Profit

The anticipated profit cannot be used for dividends. The profit means profit realized. The unrealized profits
are excluded for calculation of correct profit. The shareholders can be allowed dividends out of true realized
profits only.

Secret Reserves

A secret reserve is a reserve that is created but not started in the balance sheet. There are various ways
secret reserves. The banks, insurance companies and other financial institutions want to win public
confidence for their successful working. These business concerns can create secret reserves. It is a
technique to show poor financial position to rivals and in case of need such reserves are available to meet
crisis. There are merits and demerits of such reserves. The auditor can examine the existence of such a
situation. The amount may not be high. The director's intention may be good. The auditor may not disclose
such reserves in the audit report. When the amount is high and directors misuse such reserves the auditor
must inform the shareholders through his report.

How Secret Reserves is Created

1. Under Valuation of Fixed Assets

The management can create secret reserves by under valuation of fixed assets. In fact the value of fixed
assets is much higher but it started at less value. The reserves of the same amount are created. There
reserves do not appear in balance sheet.

2. Eliminating Fixed Assets

The management may decide to eliminate any fixed asset. In preparing balance sheet such assets are not
stated. The value fixed assets can be used to create secret reserve of the same amount. As the reserves are
secret there is no need to show it.

3. Under Valuation of Current Assets

The current assets may be recorded in balance sheet at less value. In this way under valuation of current
assets helps the management to conceal profits and reserves from liabilities. The management can be such
reserves in times of financial needs.

4. Excess Provision For Bad Debts

The excess provision for bad debts means decrease in the value of debtors below the real value. Stating
excess provision for bad and doubtful debts creates the secret reserves. It is only possible when
management is selling goods on credit.

5. Charging Capital Expenditure to Revenue

The management can play trick for creating secret reserves. The capital expenditure can be treated as
revenue. The profits will be understated. The secret reserves are created to meet the demand of the business
management.

6. Overstating Liabilities

The management can over state the value of any liability. This action leads to creation of secret reserves.
The profit and reserves are reduced by equal amount.

7. Grouping Dissimilar Items

The different items appearing on liability side may be grouped. The creditors, reserves and provisions may
be stated under the heading Sunday creditors and other credit balance.

8. Contingent Liabilities

The management can show contingent liability as actual liability in order to create secret reserves. In fact
contingent liability is stated as footnote. But its inclusion in balance sheet met the objective of the
management.

9. Including Fictitious Liabilities

The management can show fictitious liabilities as actual liabilities. In this way the reserves and profits can be
eliminated for the same amount. The secret reserves are creating in order to obtain certain objectives.

10. Showing Good Will At Nominal Value

The goods will have high value. It may state at nominal value. The secret reserve is created equal to the
difference between actual value and nominal value. The directors can create secret in order to meet business
objectives.

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Advantages of Secret Reserves

1. Increase Working Capital

The purpose of creating secret reserves may be increasing working capital. The shortage of working capital
may be lead to failure of business. But use of secret reserves help to improve the financial strength in order
to make the business successful.

2. Dividend Equalization

It is a benefit of secret reserve that dividend can be paid at equal rate. When there is sufficient profit there is
no need to use secret reserve. In case of low profit or loss the secret reserves can be used to pay dividend.
Thus fluctuating profit cannot affect dividend rate.

3. Face Competition

The benefit of secret reserves is available to the management. It can face competition in the market. In order
to eliminate or shrink the size other business concern it can become loss leader. The use of secret reserves
is helpful to remain in market for long period.

4. Keep Rivals Away

The benefit of secret reserves is that management can keep rival away. The financial position does not look
attractive. The new entrants are discouraged. They decide not to enter the field.

5. Meet Financial Exists

The benefit of secret reserves is that management can meet financial crisis in case of emergency. The loan
facility may not be available but such reserves are useful for meeting crisis.

6. Win Public Confidence

The management is in a position to win the public confidence. The equal rate of dividend provides
confidence to the shareholders. The general public is happy over the reserves.

7. Low Profit Years

The management can use secret reserves in low profit years. Due to poor business activities there may be no
profit. Such reserves helps the management to follow the same policies of dividend.
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Chapter 9 - Audit Standards

* Audit Standards

* International Auditing Standards

* Principles of Auditing

* Auditing Standards and Auditing Procedures

* Audit Techniques

* Functions of Audit
Audit Standards

A standard is quality of work, which can be used to measure the performance of auditors. The audit staff can
follow the stated principle and practice in the conduct of an audit. The business world is ever changing. In
order to meet the business needs the professional accountants are busy in improving the rule of business
audit. The audit standard applied in the early period is not acceptable at present. The introduction of
computer in accounting separation of management from ownership, the establishment of big companies has
increased the responsibilities of auditors. The association of professional accountants has framed rules for
the guidance of their members. The International Federation of Accountants issues international auditing
guidelines. The Chartered Accountants have also framed rules at national level. Anyhow with the passage of
time further improvements will be made to meet the new challenges of auditing work.
International Auditing Standards (ISA)

1. Objectives and Scope of the Audit of Financial Statement
This standard state that objective of audit is to express an opinion. The management is responsible is
responsible for preparing financial statement. The scope of audit is determined by an audit in according with
the requirements of legislation regulation or relevant professional bodies.

2. Audit Engagement Letters
This standard relates to audit engagement letter, which is written by an auditor to his client for acceptance of
the appointment. This letter confirms the objectives and scope of audit. This standard also states the
possible contents of audit engagement letter. An example of audit engagement letter is also given at the end
of it.

3. Basic Principle Governing An Audit
This standard describes the basic principle, which govern auditor's responsibilities. The auditor is bound to
follow their principle during audit work. These principles include integrity, objectivity, independence,
confidentiality skills and competence, work performed by others, documentation planning, audit evidence,
accounting system and internal control, audit conclusion reporting.

4. Planning
This standard deals with the planning of audit work. Work auditor planning must be helpful to complete an
audit work in an efficiency and timely manner. The plans should include accounting system, policies and
internal control procedure, degree of reliance on internal control, the nature timing and extent of audit
procedures to be performed and coordination of audit work.

5. Using the Work of an Other Auditor
This standard states procedures for using the work of other independent auditors with respect to the
financial statements of one or more divisions, branches, subsidiaries or associated companies included in
financial statements of one or more divisions, branches, subsidiaries or associated companies included in
financial statements of an entity. This guideline also applies where the principle auditor report on other
financial information.

6. Studies and Evaluation of Accounting System
The standard deals with accounting system and internal control. The management is responsible for proper
accounting system and related internal control. The auditor require assurance system is reasonable and all
accounting information has been recorded internal control contributes to the assurance.

7. Control of the Qualities of Audit Work
The high standard of audit profession requires high quality of audit work. The guideline states the individual
audit and general quality control. There is relationship between these two. The general control facilitates
control over individual audit. The delegation of work to assistants is stated. In order to control quality of
work assistance is given to audit firm.

8. Audit Evidence
The audit evidence standard deals with information collected by the auditor. He can form an opinion about
financial statements. The nature and sources of audit evidence are described. The methods used are stated.
He can state whether it is sufficient and appropriate.

9. Documentation
The audit standard deals with documents. Guidance is provided about the contents and form of working
papers. The example of working is also stated. The auditor can know how to prepare working papers. The
ownership and custody of working paper remains with auditor.

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10. Using the Work of Internal Auditor
Business employees who have skill and experience conduct the internal audit work. The internal auditor can
check whether internal control is proper and effective. The independent auditor can use the work of internal
auditor. The procedure for assessment of internal auditor work is stated in this standard.

11. Frauds and Error
This standard states the definition of fraud and errors. The responsibility of fraud and error is linked with
management. The plan of the auditor must be effective to trace frauds and errors. When the auditor smells
fraud and errors the procedures have been suggested. The condition and events are stated when risk of
fraud and error increases.

12. Analytical Review
This standard provides detail of the nature of analytical review procedure. The purpose, timing and extent of
reliance to be placed is stated in it. The auditor can check the unusual fluctuations.

13. Auditor's Report on Financial Statements
The guideline deals with the form and content of auditor report relating to independent audit of financial
statement of a business concern. The wording for clean and qualified opinion is suggested. The examples
state the unqualified, qualified, adverse and disclaimer of opinion.

14. Other Information in Documents
The guideline provides guidance as to the auditor's consideration of other information on which he has no
obligation to report. When an auditor has an obligation to report specially on other information, his
responsibilities are determined by the nature of his engagement. The other information may be financial or
non-financial. It may include report of management on operations, financial summaries employment data.
Planned capital expenditure, financial ratios name of officers and directors.

15. Auditing in an EDP Environment
The guideline deals with the auditing through computers. The skill and competence needed by the auditor is
stated. He is responsible for delegating the work to assistants. he is not free from liability where he uses the
work of others.

16. Computer Assisted Audit Techniques
The guidelines provides information to audit for using computer assisted techniques especially software and
test data. The instances are stated when such techniques are to be used. The application in small business
is also possible.

17. Related Parties
The standard deals with audit evidence to be collected from relating parties. The transactions can take place
with debtors and creditors. The auditors can guidance to see whether management has properly disclosed
the related party relation ship and transactions with such parties.

18. Using the Work of an Expert
The guideline provides guidance to the auditor for using the work of an expert engaged by the client or
auditor. The examples of cases are stated when an auditor may depend upon experts. Guidance is also
providing relating to expert's skills, competence and objectivity. The way of evaluation of work of expert is
stated.

19. Audit Sampling
The auditing guideline states the factors when an auditor can design and select and audit sample. The
evaluation of audit procedures is stated. The statistical and non-statistical sampling methods are provided.
The elementary guidance is provided about sampling risk, stratification selection methods and projection of
errors.

20. Date of Auditor's Report
The guidelines states guidance on date of auditor's report. The events may occur after balance sheet date.
The facts may be discovered after the issue of financial statements. The auditor can take steps to identify
subsequent events. The auditor can issue revised report about the audited financial statements after their
revised by management.

21. Going Concern
The financial statement are prepare under the accounting assumption as going concern. When such
assumption does not seem good the entity is unable to realize assets at recorded costs. The guideline
provides example when going concern assumption should be questioned. The collection of audit evidence,
following audit procedure and reporting about going concern is stated.

22. Materiality and Audit Risk
The auditing guideline states the concept of materiality and risk and their relationship. The auditor can use
these concepts in planning and conducting audit and evaluating the result of his procedures. The definition
of materiality and audit risk is given. The components of audit risk are explained. The interrelationship is
also stated.

23. Special Purpose Reports
The guideline state the issue of report other then issued in routing matters. The report may be issued on
compulsive basis other than accepted standards, specified accounts or any item of financial statements,
compliance with agreement and summarized financial statements. The examples are given at the end of it.

24. Audit of Accounting Estimates
The auditing guideline provides guidance to auditors on the audit procedures that should be performed in
order to obtain reasonable assurance as to the appropriateness of the accounting estimates contained in
financial information. An accounting estimate is an approximation of the amount of an item in the absence of
a precise means of management.

Principles of Auditing

1. Integrity
Integrity is a principle of auditing. The auditor is straightforward, honest and sincere in his approach. He
must be fair towards his work. The auditors are known for their discretion and tactfulness. The loyalty toward
his work and profession must be beyond doubt.

2. Objectivity
Objectivity is a principle of auditing. The auditor maintains an impartial attitude. He cannot allow prejudice or
bias to avoid the purpose of audit. He can protect the right of shareholders through this principle.

3. Independence
Independence is a principle of audit. The auditor maintains an impartial attitude. He should be an appear to
be free of any interest. No doubt he receive fee from his client even then independence is essential. His
personal views must not be included in his report.

4. Confidentiality
Confidentiality is a principle of auditing. The auditors can maintain secrecy of information acquired in the
course of his work. He can not disclosed any information to a third party without specific authority. He can
provide facts and figures to other under legal or professional duty.

5. Skill
Skill is a principle of auditing. The auditors must acquire skill of doing audit work. He must get training from
his principle. The experience of all audit steps must be obtained. It is a stage of learning by doing. This skill
will help him when becomes independent auditor.

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6. Competence
Competence is a principle of auditing. There is a need of best training in the field of audit. The competent
person has the right to sign the report. The practical knowledge and training with expert firm of auditors can
make the trainee as competent.

7. Work Performed By Others
Work performed by other is a principle of auditing. The auditor can rely on the work of other auditors. The
sole duty lies on the head of principle auditor who is depending upon of others. The information is available
for reliance on others.

8. Planning
Planning is a principle of auditing. The auditing should plan his work in an efficient manner. The audit
planning includes accounting system, internal control procedure and degree of reliance on internal control.
The nature timing and extent of audit procedures to be performed are part of planning.

9. Documentation
Documentation is principles of auditing. The auditor can document matters, which are important in providing
evidence that the audit was carried out in according with the basis principles. The working papers are
prepared at the time of audit. The auditor as proof of audit work can keep these papers.

10. Audit Evidence
Audit evidence is a principle of auditing. The auditor can collect audit evidence through working papers. He
can frame an opinion based on the audit evidence. The principle states the nature and sources of audit
evidence. The methods to be used are also stated.

11. Accounting System
According system is a principle of auditing. It is a series of tasks in an entity by which transaction are
processed for maintaining financial record. This system should recognize, calculate, clarify, post
summarized and report transactions.

12. Internal Control
Internal control is a principle of auditing. Internal control means all measures used with in an organization to
assure management that the organization is operating in accordance with planes and policies of
management.

13. Audit Conclusion
A conclusion is a principle of auditing. The auditing can draw conclusion based on the evidence obtained
from the books and records. He can note that accounting policies have been followed, financial information
relates to legal requirements, the financial statement show the affairs of business, the disclosure has been
made as required.

14. Reporting
Reporting is a principle of auditing. The auditing can report on the matters relating to business functions. A
report may be short or detailed. It may be conditional or unconditional. There may be disclaimer or adverse
opinion relating to business activities.

15. Disclosure
Disclosure is a principle of auditing. The facts and figures are disclosed for general information. The auditor
can note that financial information has been presented in full all disclosure formalities are complete. The
auditor must provide full information to the shareholders.

16. Capitals Or Revenue
The capital or revenue is a principle of auditing. According to the nature of business the accounting staff can
record the item as capital or revenue. The wrong allocation cannot provide true information. The auditor
must know the real position of each item in order to report the matter.

17. Compliance with Legal Formalities
The follow up of legal formalities is an auditing principle. The rules and regulation must be applied in order
to protect the rights of interested parties. The business activities can run on lines through compliance with
law.

18. Consistency
The consistency is an auditing principle. The accountant has the right to select the rate of depreciation,
provision for bad debts and valuation of stock. He must follow these rates for the year to come. The changes
are not acceptable at all.
Auditing Standards and Auditing Procedures

Auditing Standards

An auditing standard is a measurement of performance set up by professional authority and consent. A
standard is a measuring device of applied procedures resulting in general acceptability of the result of the
performance.

Audit Procedures

Auditing procedures are acts to be performed during the course of an examination. By applying perfect
technique, procedure lead to proof of accuracy of the accounts and financial statements. Audit procedures
constitute the course of acting available in determining the validity of standards and principles. In every
audit, there must be review and observation, inspection and count, evidence, proof, accuracy of proof and
reconciliation.

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Audit Techniques

1. Inspection
Inspection is concerned with review or examination of records, documents or tangible assets. The auditors
can check many documents in order to examine the business transactions. Vouchers support every entry.
Inspection of record is made note recording, authority and validity of data. The auditors commonly use this
technique.

2. Observation
Observation means looking at an operation or procedure being performed by others in order to determine
the manner of its performance. The auditor can observe the physical stock taking by management. He can
that accounting principles are applied in preparing accounting recorded. The audit staff commonly uses
observation.

3. Inquiry
Inquiry means obtaining relevant information either written or oral from resource persons within or outside
the enterprise through formal or informal manner. The auditor can collect data from management through
representation letter. He can inquire from debtors, creditors, bankers and other experts in the field to form an
opinion.

4. Confirmation
Confirmation is a reasonable to an inquiry to prove certain data recorded in the books of business concern.
The auditor can ask the management to inform the debtors for confirmation of their accounts balance. The
auditor can collect information from debtors to ensure the accuracy of data. He can write letters to bank for
supply of account balance kept by the bank.

5. Computation
Computation is concerned with checking the arithmetical accuracy of accounting records or doing
independent calculations. An auditor may follow the accounting procedure to check the accuracy of data.
The journal entry, position and balancing accounts can be compared with the vouchers to test the reliability
of data.

6. Sampling
Sampling is concerned with selecting few items from whole accounting information. Audit sampling is the
application of a compliance or substantive procedure to less than 100 percent of the items within an account
balance or class of transactions to enable the auditor to obtain and evaluate evidence of some
characteristics of the balance or class and to from or assist informing a conclusion concerning that
characteristics.

7. Compliance Test
Compliance tests are designed to obtain reasonable assurance that those internal controls on which audit
reliance is being placed are in affect. In obtaining audit evidence auditor is concerned with existence of
internal control, effectiveness and continuity of internal control.

8. Substantive Test
Substantive test are designed to obtain evidence as to the completeness accuracy and validity of the data
procedure by accounting system. They are of two types
test of details of transaction and balance
analysis of significant ratio and trends including the resulting
investing of unusual fluctuation and items.

9. Analytical Review
The analytical review consists of studying significant ratios and trends and investigation unusual
fluctuations and items. The application of analytical review procedures is based on the expectation that
relationship among data exists and continues in the absence of known conditions to the contrary.

10. Computer Assisted Audit
Computer assisted audit techniques include audit software test packs embedded audit facilities, system
software data analysis, application programme, examination, teaching, flow charting and mapping. These
techniques show how the computer has various uses in accounting.

11. Reliance on Auditors
Reliance on auditors is an audit technique. The independent auditor can rely on internal auditors or other
auditors for completing the work of his own audit.

12. Reliance on Experts
Reliance on experts is an audit technique. The auditor is no expert in every field. Basically he knows
accounting and audit work. He is not an engineer, architect, lawyer and valuers. He has relied on auditors for
seeking their expert opinion about business matters.

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Functions of Audit

The function of audit is to study accounting system. It can be stated as a series of tacks in an entity by which
transaction ahere processed as a means of maintaining financial records. Such a system should recognize,
calculate, clarify post summarize and report transactions. The auditor should understand the accounting
system in operation in order to determine the nature timing and extent of other audit procedures.

2. Internal Control
Internal control is a function of auditing. Internal control is a process, which determine that management
policies are carried out and accounting principles are followed. This functions helps to safeguards assets,
location and prevention of errors and frauds. Moreover the management is able to prepare reliable financial
statements in time. When the auditor notes that he can rely on internal control, the audit procedure may be
less extensive. The effectiveness of internal control is to be determined by an auditor.

3. Vouching
Vouching is the function of auditing. An auditor can inspect the document, which support and prove the
business transactions. The data amount and other details are checked. All entries in books of accounts are
made on the basis of relevant vouchers. This function is essential to determine the accuracy of accounting
records.

4. Arithmetical Accuracy
I is a function of auditing to check the arithmetic accuracy of account books and books and other papers.
The audit staff verifies the figures. The errors and fraud are discovered. The management can take steps to
rectify the mistakes. The responsibility of fraud can be fixed. This function helps the auditors to show true
and fair view of accounting statements.

5. Capitals and Revenue
It is a function of auditing to make different between capital and revenue items. The revenue items are
compared to determine income. The capital items are compared to note the financial position of any
business. The income and expense relating to many years can be divided into current and coming years.

6. Verification As Assets
The verification of assets is a function of auditing. Verification is concerned with determination of value,
ownership, possession and any charge on the assets of any business. The auditor can check the existence
of asset. The documents and books can show the purchase price. If any loan is taken on security of an asset,
such information can be collected. It is duty of an auditor to verify these assets.

7. Verification of Liabilities
The verification of liabilities is a function of auditing. The auditor can verify the liabilities from the books of
accounts. The auditors must receive a certificate from management that all liabilities are included in the
balance sheet. The auditors can write letters to creditors for verification of liabilities.

The valuation of assets is a function of auditing. The auditors can apply accounting conventions and
principles to examine and test the values of assets. The management calculates the value to assets. The
auditor must critically check the assigned values. He can get help from technical personnel.

The valuation of liabilities is a function of auditing. The value of liabilities is stated in the balance sheet. The
management can examine the value on the basis of dealing made. The auditor can examine the value of
liabilities from books of accounts and other papers. The auditor can confirm the value from outside sources.
Independent experts should determine the value of contingent.

10. Legal Requirements
The functions of auditing are to follow the legal requirements. There are various laws like companies
ordinance 1984. Income tax ordinance 1979 and stock exchange rules 1971. It is the duty of auditor to check
that financial statement are prepared under the legal requirements. The auditor can note this point in the
report that management has followed the legal formalities.

11. Reporting
The reporting is a function of auditing. It is the duty of auditor to submit his opinion in writing. The report
may be clean or conditional. An auditor is an independent person. If he is satisfied about true and fair view,
he can present clean report in case of some weakness he can give qualified report.
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Chapter 10 - Audit of Various Organization

* Textile Mill

* Sugar Mill

Textile Mill

Auditor should give special attention to the following points while auditing the Textile Mill.

Textile mills is a concern where cloth is knit with the help of thread.

In any Textile Mill the cotton is the basic material. Trend is prepared from cotton. Then the thread is rolled on
cones. These are used in knitting the clothes. In a textile mill there are many departments as spinning
department, dying department, printing department and etc.

Books of Accounts

The following are the main books, which are used to textile mills.

* Sales Books

* Sales Return Book

* Petty Cash Book

* Salary Books

* Stock Register

* Purchase Book

* Purchase Return Book

* Journey Day Book etc

Special Points

The following are the special points, which are used to audit in the textile mills.

1. Internal Control

The auditor can examine the internal control of the mills. If internal control is effective the auditor can easily
complete his work of accounted. In case of unaffected control. There is difficulty in the completion of work of
an auditor.

2. Raw Material

The auditor can examine in different ways, the all material that is purchased and consumed. The auditor can
check the ledger of the material to verify that the figures are fact or not.

3. Fixed Assets

The auditor can also ask the management for the fixed assets. The date is different for purchase the assets.
The purchase and sale of the assets is also possible. The auditor has to find out the actual value of the
assets.

4. Expense of Purchase

The expenses, which are related to the purchases are added in he material cost. So, the auditor has to check
that either these expense are related with the purchase or the nature of the business or not.

5. Closing Stock

The auditor during his audit has an authority to ask for the closing certificates so that the actual value of the
closing stock can be find out. He can also physically, examine the store or the place where the stock is kept.

6. Written Down Stock

The auditor has to check also that the stock is in its full reality and the damaged material is also recorded at
its minimum sale price.

7. Cash

The auditor should also check the cash in hand and in office. The cashier is responsible for the shortage of
cash balance.

8. Depreciation

The auditor has to check that the depreciation is correctly charged. The depreciation is charged on the fixed
assets for the prescribe rate. The principle of consistency must also be followed.

9. Prepaid Expense

The auditor has also be noted that the expense which are paid in advance are properly recorded in the books
of accounts. The current year expense are actual expense but remaining will be treated as the assets in the
balance sheet.

10. Outstanding Expense

The auditor can also check the outstanding expense. He can also check that the management has treated the
outstanding expense properly and according to the rules and regulations.

11. Balance in Bank

The auditor can also check the balance in bank. He can get the statement from the bank. The bank
reconciliation statement can also be prepared to find errors and frauds.


The auditor can also check that the assets are to be valued as per law. The management usually fixes the
valuation. If assets, which are circulating and price of fixed assets are their cost price. The auditor in this
way can judge that either the management has determine the cost value accordingly by or not.

13. Plant and Machinery

The auditor can also receive the schedule of plant and machinery. The auditor has to check that either the
plant or machinery is in safe hands and used for the business purpose only. The auditor has also to check
the purchase and sale procedure of the plant and machinery.

14. Verification

The auditor has an authority to check the goods personally to verify that the goods which exits in the
balance sheet are also present in the store. Moreover he can also verify the assets personally.

15. Vouching

The auditor can also vouch the transaction relating to the receipt and payment of the cash. The term
vouching is usually concern with the comparison of the entries with the vouching.

16. Cotton Purchase

The auditor should take the proper care in checking the inward documents. He should examine the purchase
quality and price and also that the purchases are according to the need.

17. Sales

The auditor should also take care about the sale. The sale may be of the thread yarn, or also fabrics. If the
goods are exporting, the auditor should also take care for it.

18. Sales Tax

The auditor has to check also that the company has correctly recorded the amount of sale tax and that the
sale tax is paid properly.

19. Export Quota

The textile mills are provided the allocated export quota. The auditor has to check that the company has
operated within the export limits or not.

20. Financial Charges

In our country, the textile mills are usually, provided the borrowing facilities from the bank. The auditor has
to check that either the interest or mark up etc is paid or classified properly or not.

21. Provision for Tax

The auditor should also take care about provision of tax. He can take help from the tax advisor of the
company.

22. Foreign Exchange Earning

The auditor has to check the utilization of foreign exchange earning for business will be acquired into any
possible misuse will be prepared to the qualified.

23. Excise Duty

The payment was properly made and any aversion to be qualified production schedule prepared in an
explanatory manner.

24. Sale of Scrap

The auditor should see that the sale of the scrap is properly maintained or not.

25. Wages and Salaries

The auditor has also to check that the wages or salaries are properly paid to the workers or not and verify
them.

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Sugar Mill

The auditor should keep in mind the following points while auditing the accounts of a sugar mill or
company.

Books of Accounts

The following are the main books of accounts, which are used in the industries.
Day Book
Sales Book
Journal Ledger
Purchase Book
Sales Return
Purchase Return
Cash Book
Petty Cash
Stock Register
Form Register

Special Points

1. Internal Control
The auditor has to check the internal control system of the mill. If the internal control system is properly
maintained the auditor can easily fulfil his work. On the other hand he has to work greatly.

2. Purchases
The auditor has to check the purchases, which are made by the management. The sugarcane is the main
product, which is purchased for the industry. There is need to be checked the auditor all the detail about the
purchase to know the nature of the purchases

3. Cash Balance
The auditor can also examine the cash balance in the office and can also note the usage of petty cash book.

4. Sales
The auditor can also examine the sales of the mills from the sales ledgers. Usually the main item of sales is
the sugar but the molasses candies chipboard and also the mills management sells the wine.

5. Vouching
The auditor can verify the entries with the actual vouching. This is done to check the accuracy of the
accounts.

6. Loans
The auditor has to check also either the management of sugar mill has provided loan to the sugarcane
suppliers. And if so then the loan either is adjusted against the payment to cultivators. The auditor has also
an authority to check the vouchers for loan.

7. Depreciation
The auditor can also vouch the depreciation on the fixed assets. Their rates and also the way of calculating
the depreciation. The depreciation is charged the same rate from year to year.

8. Carriages of Railway
The auditor can also examine the expense, which are to paid or still payable to the railway company.

9. Farming
Sometimes, the sugar mills may have their own agriculture farms. In this case the auditor can check and
verify the income and expense of that farms.

10. Prepaid Expense
The auditor has to check also the expense, which is paid in advance by the management. The auditor has to
verify that either these expenses are paid accordingly or not.

11. Unpaid Expense
The auditor has to check also if there are some unpaid expenses. The auditor should be pointed out that the
adjusted entries are made and the amount can be verified from the financial statement.

12. Accrued Income
The auditor has to see if there is some accrued income. He can vouch the income statement and balance
sheet for this purpose.

13. Unearned Income
The auditor can also point out the income, which is not earn still. For this purpose he can check the financial
statements. The account books are also helpful for this purpose.

14. Costing
The auditor can also check the totals, sub totals, cost and carry forward of the balances. It is done to check
that the figures are fact and according to the documents.

15. Research and Developments
Some sugar mills have better development and research on the seeds and plantation of the sugarcane. The
scientist discovers new types of the seeds and also the better varieties of sugar cane. The auditor checks
and verifies that expense and their adjustment.

16. Sales of By Product
The molasses is the main by product of the sugar cane. The auditor can check and verify the sale and its
treatment in the accounts.

17. Seasonal Workers
A sugar mill operates on seasonal basis. Only in the seasonal period workers are employed. The auditor can
check the record for attendance etc.

18. Fair Price Shop
In usually the sugar mills have the fair shops. In these shops the sugar is sold at the subsides rate. The
auditor checks the sale of the year and stock at the end of the year.

19. Excise Duty
First of all it will be checked where these sales were understand. The auditor can evasion of excise duty on
the part of the management is discovered.

20. Exports
The auditor can point out if there are some exports. He can be judged them by the valid letter of credit.
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Chapter 14 - Investigation

* Meaning of Investigation

* Kinds of Investigation

* Objects of Investigation

Meaning of Investigation

Investigation implies an inquiry into the accounts and records of a business concern. It is an examination of
accounts and records of an undertaking with some special purpose in view. The main purpose of such
inquiry is to ascertain the true financial position of the business concern or its normal profit earning capacity
or the extent of fraud, if any or to inquire about the suspected mismanagement etc. So, the investigation is a
sort of special audit with a particular job in view.

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Chapter 15 - Auditor's Report

* Audit Report

* Essentials of Audit Report

* Qualified Report

* Auditor's Duties

Audit Report

Auditor's report is the expert's opinion expressed by the auditor as to the fairness of financial statements.
The audit report is the end product of every audit. It is the medium through which an auditor expresses his
opinion on the financial statements. Audit report is an important part of audit process since it summarize the
results of the examination work conducted by the auditor. The report shows the scope of the work done and
the responsibility assumed by the auditor regarding the fairness or otherwise of hte financial statements.
The auditor draws appropriate conclusions by examining the various statements and accounts, which he
conveys through the audit report. It is a formal communication by the auditor to the shareholders throwing
light on the state of affairs of the company. Audit report is addressed to the members of the company and is
considered at the Annual General meeting of the company. Audit reports should be so drafted that they
remain simple and intelligible to a common man. The audit report should be explicit so as to provide greater
information and protection to the interest of shareholders and others.
Essentials of Audit Report

1. Title
An auditor report must have appropriate title, such as "Auditor's Report". It is helpful for the reader to
identify the auditor's report. It is easy to distinguish it from other reports. The management can issue any
report about the business performance. The title o the report is essential.
2. Addressee
The addressee may be shareholder or board of director of a company. The auditor can audit financial
statements of any business unit as per agreement. The report should be appropriately addressed as required
by engagement letter and legal requirements. The report is usually addresses to the shareholders or the
board of directors.

3. Identification
The audit report should identify the financial statement that have audited. The financial statement may
include trading profit and loss accounts, balance sheet and statement of changes in financial position and
sources and application of frauds statement. The report should include the name of the entity. Moreover the
data and period covered by the financial statement are also stated in it.

4. Reference to Auditing Standards
The audit report should indicate the auditing standard or practice followed in conducting the audit. The
international auditing guidelines need assurance that the audit has been conducted as per set standards.

5. Opinion
The auditor's report should clearly state the auditor's opinion on the presentation in the financial statement
of the entity's financial position and the result of its operations. The statement give a true and fair view is an
auditor's opinion. This opinion is usually based on national standard or international accounting standards.

6. Signature
The audit report should be signed in the name of the audit firm, the personal name of the auditor or both as
appropriate.

7. Auditor's Address
The address of auditor is stated in the audit report. The name of city is stated in the report for information of
the readers.

8. Date of Report
The report should be dated. It informs the reader that the auditor considered the effect on the financial
statements and in his report of events or transactions about which he become aware the occurred up to that
date.
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Qualified Report

A qualified opinion is given when the auditor fells the he cannot issue an unqualified opinion. The effect of
disagreement or limitation on scope is not so material as to require an advance opinion or a disclaimer of
opinion. A qualified opinion should be expressed as being except to the effects of the matter to which the
qualification relates.

1. No Proper Books
A qualified repeat is issued when proper books of accounts have not kept by the business concern. The law
estates the number of books to be maintained by the companies by the companies. The failure to keep
necessary books of accounts induces the auditor to mention the fact in the reports.

2. Informal Statement
The law states the formal for financial statement. The fourth schedule and fifth are given in the companies
ordinance 1984. The companies must prepare their statement according to schedule otherwise the auditor
can mention weakness in the report.

3. Disagreement Between Books and Statements
The financial statement figures must tally with figures recorded in journal and ledgers. The different in
figures is not acceptable as it may lead to receive the shareholders. The auditor can qualified his report that
figures of books and statement are different.

4. Inconsistent Accounting Policies
The accounting policies must remain the same from year to year. The changes in depreciation rate valuation
of stock and provision for bad debts can disturb the financial statements. The auditor can state the
inconsistency in accounting policies toward by the management.

5. Ultra Vires Payments
The management can misuse the power of doing the business. They may not followed articles of association
or companies ordinance 1984. The payment of dividend out of capital is an example. The auditor must report
to the shareholders about the misuse of powers.

6. Expenditure Incurred
The expenditure incurred during the year must be to the purpose of business of company. The expenses
incurred objective may be state by the auditor in the report. The management is responsible to these wrong
payments.

7. Business Conducted
The business conducted investment made and the expenditure incurred during the year may not meet the
requirement of memorandum of association, articles of association and the companies ordinance. The
auditor can inform the owners about the violation of law.

8. Scope Limitations
The management may have valued closing stock prior to date of appointment of auditors. There is a scope
limitation as auditor was absence at the time of stock valuatio. The auditor can qualify his report as to the
valuation of stack talking.

9. In Appropriate Accounting Method
The auditor may note that depreciation has not been charged on building. The depreciated on plant and
machinery may be recorded at fewer rates. The difference in actual and recorded expenses may be stated in
the report.

10. Inadequate disclosure
The management may have entered in to an agreement for issue of debentures for plant and expansion. The
agreement may restrict the right to pay dividend to shareholders for next years. The auditor can disclose
such agreement to the owners of the company.

11. Departure from Accounting Practice
The qualified report is issued when an auditor is not satisfied with the management policies. The company
may not record the provision for loss on long-term contract. The disagreement with management can be
recorded as adverse opinion in the report for the information.

12. Breakdown of Accounting System
The auditor can issue the qualified report when he is unable to form an opinion about the financial
statements. There may be fire at computer center business office. The figures may be estimated so auditor
can disclaim his opinion.

13. Failure To Prove Case Sales
The auditor can check the internal control system. The company may be dealing on cash basis. All sales may
be in terms of cash. The poor internal control system may create hurdle to verify cash sales. The auditor can
submit qualified report with out opinion.

14. Contingency
The auditor may qualify his report where there is contingency (tax dispute court case) which is significant to
affect the financial statement of the company. The auditor has the right to report the matter to the
shareholders. The items must be stated in the footnote as well as audit report.

15. No Zakat Deduction
The Zakat may be deductible at sources under the Zakat and usher ordinance 1980. The auditor may examine
the relevant law. He can not the weakness of the management for deduction of Zakat. This weakness may be
present in the audit report.

16. Incomplete Information
The auditor may not obtain complete and full information and explanation for the purpose of audit. The facts
can be presented to the owners that he is unable to collect necessary information. He can submit qualified
report in order to draw attention. He can submit qualified report in order to draw attention of owners.

17. No Access to Books
The auditor may be refused to have access to the books of accounts and other relevant record. In this case
the auditor is unable to collect true information necessary for the purpose of audit. The qualified report can
be presented to the shareholder due to non-availability of all or any book.

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Auditor's Duties in Respect of Statutory Report

1. Statutory Report
The report, which is submitted by the directors in the first general meeting of the shareholders is called
statutory report. The auditors should duly verify it. The auditor will take following important steps before
certifying the statutory report.

2. Study of Legal Documents
The company Memorandum and Articles as also the prospectus should be carefully studied and notes
should be made of items affecting terms of share capital issue, minimum subscription, brokerage on shares
or underwriting commission, acquisition of assets and liabilities from vendors, mode of satisfaction of
purchase consideration etc.

3. Checking of Shares
A complete and exhaustive audit should be made of share capital and debentures issue, including checking
of entries in the Register of members and he Register of Debenture holders.

4. Checking of Cash in Hand and Cash at Bank
In order to ascertain the correct balance of cash in hand and in bank, it would be necessary to include in the
checking the revenue receipts and payments also.

5. Verify the Capital Receipts and Payments
A through vouching and checking of the cash book transactions for the purpose of verifying the capital
receipts and payments will be necessary.

6. Checking of Commission
Auditor should check all types of commission paid or unpaid with the issue or sale of debentures to any
one.

7. Verify the Borrowing Power
It should be seen that the limit, if any placed on the borrowing powers of the company is not exceeded.

8. Verify the Minimum Subscription
The auditor should ascertain that the requirements of the law as to minimum subscription have been duly
complied with.

9. Checking of Bio Data
Auditor should also verify the names, addresses and descriptions of the directors manages agents and
auditors.

10. Verify the Arrears
Auditor should verify the arrears due on calls from directors, managers and agents etc.

11. Scrutiny
Auditor should examine very carefully all the items, which are included in the preliminary expenses account.

12. Checking of Minutes
Director's minutes will have to be referred to in order to see that the allotment of shares and debentures is
properly done and that all capital expenditure and loans borrowed are duly sanctioned.

13. Examine the Passbook
Auditor should examine the bank passbook and verify the receipts and payment with it.

14. Specimen of Auditor's Certificate
If the undersigned being the auditor of the company, hereby certify that so much of the report are relates to
the shares allotted by the company and the cash received in respect of such shares and receipts and the
payments of the company is correct.
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Chapter 16 - Audit Evidence

* Meaning of Audit Evidence

* Importance of Audit Evidence

* Objectives of Audit Evidence

* Procedure of Audit Evidence

* Key Points for Collecting Evidences

Meaning of Audit Evidence

Any document, piece of information, voucher written or oral statement of any procedure which assists an
auditor in forming his opinion in regard to the accuracy of data under audit.

The role of the auditor is that of an independent professional critic who investigates, analyses and evaluates
the information underlying the statement as a means of reaching a conclusion as to their fairness. Before
and auditor can express an opinion on financial statements, he must have sufficient evidence that
The items in the financial statements are supported by the
balances in the ledger accounts.
The balances in the ledger account summarize correctly the
numerous debit and credit entries.
These debit and credit entries in the accounts represent
proper accounting interpretation of all the transaction
entered into be the business.
Importance of Audit Evidence

While accepting the appointment, an auditor accepts to discharge certain legal obligations and
responsibilities. In discharging his responsibility, the auditor should convince himself, in the first instance,
that the accounts, he is reporting upon, are correct and the financial transaction recorded are duly supported
by the documentary evidence. If he is not satisfied with the accuracy of the accounts or the authenticity of
evidence, there is no point in certifying the accounts as correct. The examination of evidence is therefore
necessary, so that strength would be based for independent, impartial and expressed opinion of the auditor.
On auditor's opinion, the Directors, Shareholders and other initiative action.
Objectives of Audit Evidence

The objects of verifying evidence are
To ensure that the errors, if any, in the data would be
discovered by verifying the evidences.
To facilitate the completion of audit programme scheduled
and undertaken.

I
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Procedure of Audit Evidence

The following procedure is generally followed for the verification of evidences
Verification of accounts of account balances shown in the
financial statements or the accounting reports
To ensure that the procedure installed for control purposes
is properly followed
Looking at the evidence for the balance amount shown in the ledger, the auditor has to work backwards in
order to ensure that all those transactions responsible to give rise to that balance is also duly supported with
evidences.
The auditor should also carefully ensure that procedures being followed by the organization are effective and
do not have any room for leakages. In the area where the financial involvement is heavy, the auditor should
carefully review internal control procedures and the implementation of procedures designed and installed for
an effective control of function.
Key Points for Collecting Evidences

1. Physical existence of the assets
2. Authoritative documents
3. Statement by third parties
4. Calculation by the auditor
5. Satisfactory Internal Control
6. Subsidiary or detailed records
7. Subsequent action of the company
8. Formal statement by company's officers
9. Interrelationship with in the data examined.
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Chapter 13 - Auditor

* Qualification of an Auditor

* Appointment of an Auditor

* Removal of an Auditor

* Rights Or Power of an Auditor

* Qualities of a Professional Auditor
Qualification of an Auditor (Section 226 (1) and (2)

Following persons are qualified to be appointed as auditor of a company.

1. Practicing Chartered Accounts (Sec 226 (1)J)
A person shall not be qualified for appointment as auditor of a company unless he is a chartered accountant
within the meaning of the chartered accountant act 1949.
A chartered accountant means a person who is the member of the institute of chartered accountant of
Pakistan. He will be Deemed to be in practice. When individually or in partnership with other chartered
accountants in practice he for consideration received or to be received.
Practice of Accountancy
He engages himself in the practice of accountancy.
Verification
He offers to perform or performs the services involving the auditing or verifications of the financial
transactions, books of accounts or records or the preparation, verification or certification of financial
accounting and related statement or holds himself out to the public as an accountant.
Professional Services
He renders the professional services or assistance in or about matters of principal or detail relating to
accounting procedure to the recording, presentation or certification of financial facts or data.
Renders the Services
Renders the services as, in the opinion of the council are or may be renders by a chartered accountant in
practice.

2. Certified Auditor (Sec 226 (2))
A part from practicing chartered accountants, a person holding a certificate under the restricted auditor's
certificate rules, 1965 is also qualified to be appointed as auditor of a company. Such certified auditors are
subject to the rules framed in this behalf by the central Government.
The object of the provisions as to qualified is to ensure that only persons of proven worth and standing and
under the discipline of a statutory body, are appointed as auditor.

Disqualification {Sec 226 (3)(4)(5)}

The following person cannot become the auditor of the company according section 254.
A body corporate
An officer or employee of the company
A person who is the employment of an officer or employee
of the company.
A person who is indebted to the company for an amount
exceeding Rs. 1000 or who has given any guarantee of any
third person to the company for an amount exceeding Rs.
1000.
The spouse of a director of the company.
A person who was a director other officer or employee of
the company at any time during the preceding three years.
A person who is a partner of a director, officer or employee
of a company

According to Section 226(4) a person shall not be qualified for appointment as auditor of any body corporate.
Further if the auditor already holds the appointment as auditor in the specified number of companies as per
Section {Section 224(1-13)}, he will be disqualified for further appointment as auditor in any other company.
Appointment

Section 252 throws light upon the appointment of an auditor:

Appointment of First Auditor By Directors
First Auditor
The co-operative law authority can appoint the first auditor of a company if the company in the general
meeting does not appoint the first auditor within 120 days of the date of incorporation of a company.
Casual Vacancy
The board of directors is empowered to fill any casual vacancy in the office of an auditor except one, which
is caused by prior resignation.

Appointment By Shareholders
In case the board of directors fails to appoint the auditor, the company can appoint the first auditor within
120 days of the date incorporation of the company.

Removal of an Auditor

According to Section 224(3)of the Companies Act, any auditor may be removed from the office before the
expiry of his term but it can be done only by the company in it general meeting and with the previous
approval of the control Government.
The auditor may be removed in the following cases.

1. Removal of First Auditor
The first auditor can be removed by the members in the general meeting of the company. It is immaterial
whether the auditor has completed his term of appointment or not. Another person can be appointed in place
of first auditor in the general meeting. Notice of nomination of such other person to be appointed, as auditor
must be given at least 14 days prior to the general meeting.

2. Removal of Other Auditor
Other than the member in the general meeting of the company prior approval of the central Government to
remove can remove the first auditor the auditor must be obtained in that behalf.
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Rights Or Power of an Auditor

Following are the important rights of the auditor

Access To Books
According to Section 227(1) the auditor of a company has a right of access, at all items to the books and
accounts and voucher of the company, whether kept at the head office of the right of access to books etc is
an absolute right and is not subject to any restriction exception or qualification. This means that the auditor
can examine the books vouchers etc at any time during normal working hours.

Right of Inspection
It is a right of the auditor that he can inspect the record of the company at any time. He can visit without any
notice and verify the cash or any document.

Right of Information
According to Section 227(1) the auditor has the right to obtain any information and explanation from the
officers or directors of the company as he may think necessary for the performance of his duties as an
auditor. If any information or explanation is refused on the ground that it is not necessary for the
performance of his duties as auditor. He may report to the members accordingly.

Access to Branches
According to Section 228(2) the auditor has aright to visit the branch office of the company if any, if a duly
qualified auditor has not audited the accounts of company branch and if he deems it necessary to do so for
the performance of his duties as auditor.

Receiving Notices
According to Section 231 a company auditor has a right to receive all notices and other communications
relating to any general meeting of the company, which any member of the company is either to have sent to
him.

Right of Attending the Meeting
According to Section 231 the auditor has a right to attend any general meeting and to be heard there at any
part of the business, which concerns him as auditor, however, the right to attend a general meeting and to
speak there at in not mandatory.

Report to Member
According to Section 227(2) the auditor has a right to make a report to the members on the account
examined by him and to state whether the said account give the information required by the companies act
in the manner which is required.

Sign Audit Report
According to Section 229, the auditor has a right to sign the auditor's report or authenticate any other
document of the company.

Seek Legal and Technical Advice
The auditor has a right to seek opinions of experts in different fields whenever he feels it necessary as he is
not expert in all the areas.

Receive Remuneration
According to Section 224(8) the auditor has a right to receive remuneration for auditing the accounts of the
company after he has completed the work of audit even if he is dismissed in the middle he has a right to get
full remuneration of the year.

Speak
The auditor has a right that he can speak in the annual general meeting for the explanation of some matters,
which are related, with the accounts of business.

Present in Meeting
For the safeguard of his right the auditor has a right to remain present in the meetings of the company.
Sometimes the business accounts may not be presented before the shareholders for the approval. In this
time the auditor can protect himself.

Opinion
The auditor has also a right to consult the experts for some matters. In order to clear the doubt he may get
the help of the technical services. So the auditor has also a right of seek the opinion.

Correction
The auditor has also a right of correction. He can make correction in the written or spoken matters. Even that
he can make a revised statement if he founds any written mistake in it.

Representation
The auditor has also a right to defend himself if he is asked to leave the office in the meeting. So he can
make the representation in meeting. He has a right to remain in business for the full tenure.

Important Note
It is clear that the right of an auditor cannot be limited either by the articles of association or by the
resolution of the members

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Essential Qualities of an Auditor

Following are the essential qualities of an auditor:

1. Professionally Competent

It is the basic quality of an auditor. He must have a complete and thorough knowledge of the accountancy.
To understand the accounting details he can apply his knowledge and skill. It is only possible if he has a
sound background in accountancy and he is professionally competent.

2. Honest

This is the personal quality of an auditor. He should have the high moral standard. It is his duty to report on
the fact basis. The auditor must be honest and sincere with his profession. He is responsible not to sign any
paper which is no correct under his observation.

3. Up to Date Knowledge

An auditor's knowledge of auditing must be up to date. He must know the techniques of auditing. He must
have the knowledge of other subjects relating auditing.

4. Knowledge of Business/Mercantile Law

It is the professional quality of an auditor to aware of the mercantile law, he has a complete knowledge of
Contract Act, Sales of Good Act, Agency, Negotiable instruments Act, Partnership Act etc.

5. Knowledge of Taxation Law

It is also a professional quality of an auditor. He is aware of income tax ordinance 1979, sales tax and excise
act and wealth tax etc this is helpful in checking the correct return of income etc.

6. Intelligent

It is also important quality of an auditor that he should be intelligent.

7. Qualification

For a professional auditor it is necessary that he should be charted accountant. According the company's
ordinance 1984 it is essential qualification for auditor.

8. Tactful

It is also the personal quality of an auditor. Technical information is required to comment and criticize the
policies of management. In case of missing can collect it from the client.

9. Maintain Secrecy

It is another basis personal quality of an auditor. In the business world there is a keen competition and if the
auditor does not care of the secrecy of the business, then the client of the auditor has to face a lot of
difficulties. So, the auditor must maintain the cent percent secrecy among the clients.

10. Patience

It is also the personal quality of auditor when any document is received by him he cannot make hurry to sign
it or express or implied promise to provide the proof later on. In spite of it he personality check the records
to know the true views.

11. Critical Attitude

The attitude of an auditor must be positive. By this quality he can get the desirable results due to favourable
thinking. If he is confused about some matters he can go into the details to clear it.

12. Bold and Courageous

Auditor should be bold and courageous person. Any authority should not influence him. He should possess
the courage to face the difference of opinion between him and client on any issue.

13. Courteous

It is an important quality, which the auditor should possess. His attitude towards the staff of client should be
very humble and polite. He should also stress on his own staff to be courteous with the client.

14. Budget Preparation

The auditor has a quality of preparing the budget. According to the facts and figures of the Previous year, the
estimates are established for the next year. The auditor can check that these budgets are according to their
facts and corrects.

Personal Qualities

15. Independence

Independence is the personal quality of an auditor. This quality is desirable for independent opinion on
business activities. He cannot be influence directly or indirectly by other people. An auditor must be
independent at the time of programming investigation and reporting. He cannot change his programme due
to management interference.

16. Vigilance

This is also the quality of an auditor. By this quality the auditor can discover the errors arid frauds. The
auditor can also watch and check that if accounting staff has made any fraud or error. Because he has to be
alert minded so that he cannot avoid errors and work well.

17. Judgement

An auditor must have the qualities of judgement. Judgement is involved in selecting depreciation, provision
for bad debts, inventory valuation. The auditor can apply professional knowledge; experience and ethics to
make decisions, which have no, prescribe areas.

18. Common Sense

An auditor must have common sense. He can make difference between essential and non-essential
information. An item, which can influence the decision of other people, is considered as material. The auditor
can use common sense to declare it as important rather then application of principles.

19. Prudence

Prudence is the personal quality of an auditor he can be asked to give advise on financial matters. He can be
allowed to suggest improvement in accounting methods and techniques. There is a need to use prudence for
guiding the businessman when he is asked to do so.

20. Practical

An auditor must have practical training. He can seek training in the field of finance, management and
business organization. An audit staff is able to pass through a comprehensive training. This practical
training is part of this professional life.

21. Self Control

An auditor must have qualities of self-control. The balance work shows regular progress on the part of audit.
There is no over work or less work every day. A discipline is created in every work. The quality of audit work
is improved due to discipline.

22. Initiative

An auditor must have the quality of initiative. He can start and complete an audit work without any help. The
auditor must have experience, qualification and courage to complete the auditor work. He has courage to
deal with audit work even in difficult situations.

23. Leadership

An auditor must have leadership. He is the working under his leadership. He must have communication
ability. He can motivate and control the audit staff. As a team leader he can guide the auditor through
practical-demonstration.

24. General Knowledge

It is also a professional quality of an auditor. He is aware of the economic and political conditions. He is also
aware of the latest knowledge, which affects the business concern.

25. Electronic Data Processing

The auditor should also aware of the use of computer in the business for getting the information. He is must
also trained in handling the data through the computers
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Chapter 12 - Internal Audit & Internal Check

* Internal Audit

* Objectives of Internal Audit

* Essentials of Internal Audit

* Functions of Internal Audit

* Advantages of Internal Audit

* Limitations of Internal Audit
Internal Audit

Internal audit is an evaluation and analysis of the business operation conducted by the internal audit staff.
(who are employee of the business). It is the part of over all system of internal control established in an
organization.

Internal audit is the independent appraisal of activity with in an organization for the review of accounting,
financial and other business practices as protective and constructive arms of management. It is a type of
control which functions by measuring and evaluating the effectiveness of other type of controls.

Professor Walter B. Meigs define internal audit

Internal auditing consist of a continuous, critical review of financial and operating activities by a staff of
auditors functioning as full time salaried employees.

1. Proper Control

The purpose of internal control is to keep proper control over business activities. When there is proper
control there is maximum efficiency. The internal control can determine the degree of control over work.


The purpose of internal audit is to evaluate the accounting system. It is concerned with checking proper
authority for transactions like purchase, retirement and disposal of fixed assets. The voucher can be
compared with entries on order to determine that figures are facts.

3. Help Management

The purpose of internal audit is to help the management. Internal auditor can point out the weaknesses. The
internal audit can be used as a tool to correct the situation. The management functions can be performed
properly.

4. Working Review

The purpose of internal audit is to review the working of business. The working of current year can be
reviewed in detail just the successful area of working. There is a need to locate the weak points. The
corrective measures can be taken for proper working.

5. Asset Protection

The purpose of internal audit is to protect the assets. The proper record of assets must be there. Internal
auditor can examine the valuation, verification and possession. The purchase and sale of assets must be
made under properly authority.

6. Internal Check

The purpose of internal audit is to evaluate the internal check system. There is division of duties among the
emp is to loyees. When all staff member are working properly it means there is effective internal check
system. The work of an auditor is reduced. He can apply test checks to complete audit duty.

7. Fair Statements

The purpose of internal audit is to detect the error in the accounting records. The work of internal audit can
help the management to see that accounting record is in order.

8. Check Error

The purpose of internal audit is to detect the errors in the accounting records. The work of internal auditor
goes side by side there fore there are minimum chances of errors. The accounting staff can rectify mistake to
prepare accounts at the end of year in order to help the external auditor.

9. Detect Fraud

The purpose of internal audit is to detect frauds in the books of accounting. As the work of accounting staff
is over the internal audit is started. Accounting staff remains alert because there is no time gap between
recording and checking. Thus detection of fraud is possible with it.

10. Determine Liability

The purpose of internal audit is to determine liabilities of employees. The duties are divided among the staff.
It is easy to note the negligence on the part of employees. The internal audit can pin point the person
responsible for carelessness.

11. Help in Independent Audit

The purpose of internal audit is to help an independent audit. The external auditor can rely on internal
auditor and there is no need of cent percent checking. In this way there is saving of time and money due to
internal audit.

12. Performance Appraisal

The purpose of internal audit is to check the performance appraisal. The management must achieve the
targets fixed in budgets and plans. The internal audit is a tool to evaluate the working of each management
function.

13. Provide Suggestions

The purpose of internal audit is to provide suggestions for improvement of business activities. The internal
audit staff can suggest the ways and means to remove the difficulties. Anyhow the audit cannot compel the
management to implement suggestions.

14. New Ideas

The purpose of internal audit is to seek new ideas relating to procedures, marketing, financing and other
business matters. The internal audit staff can provide new ideas about various business matters. The viable
ideas can be put in to practice for the benefit of business.

15. Use of Resources

The purpose of internal audit is to determine the proper use of resources. The misuse of resources can
increase the cost of doing the business. The proper use of resources means there is efficiency on the part of
management.

16. Accounting Policies

The purpose of internal audit is to examine the accounting policies. The understanding of accounting system
and procedure is helpful to device the effective audit plans procedures. The internal auditor may find any
weakness in the internal control. He can comment on the accounting policies.

17. Special Investigation

The purpose of internal audit may be to conduct special investigation about any business matter. Internal
audit can be used as a tool to note the effectiveness of management function

1. Essentials of Internal Audit

1. Planning

Planning is an essential feature of internal audit. The auditor can plan to
check the accounts system. The plan may relate to accounting functions like
purchase, sales, income, expenses and shares. The planning includes
degree of risk and extent of audit. It also states the nature of audit work.

2. Controlling

Controlling is an essential feature of internal audit. The auditor examine the
operation of accounting system. He can control audit work through audit
programme. The whole work is distributed among audit staff.

3. Recording

Recording is an essential feature of internal audit. The auditor can record
the facts and figures in order to express his views in the business activities.
The auditor notebook and audit working papers are used to record the
information.

4. Independence

Independence is essential element of internal audit. An employee of the
company does the work of internal audit. Management must not influence
him. He must be free in developing audit programme, audit investigation and
audit reporting.

5. Staffing

Staffing is an essential part of internal audit. The trained staff is needed to
conduct internal audit. The reasonable number of persons can perform the
work of examination. The inadequate and untrained staff cannot serve the
purpose of checking efficiency of managers.

6. Training

The internal audit staff must be trained. In order to achieve better results
there is a need of training in audit work. Proper arrangements should be
made to provide training to internal audit staff.

7. Relationship

The internal audit staff must have friendly relations with management,
external audit staff and consultants. There is a need of complete harmony
among various groups of people.

8. Evidence

Evidence is essential part of internal audit. The evidence must be reliable,
relevant and sufficient. The business documents are sources of entries in
accounting books and records. The reliable can be seen through signature
of manager. The relevant documents show the name of concern.

9. Due Care

Due care is an essential part of internal audit. The auditor must use skill,
care and judgement. He should have technical knowledge, honesty and
integrity.

10. Reporting

Reporting is an essential part of internal audit. The auditor can inform the
management through audit report. It may be long or short report. The finding
of the auditor is put before the management. There is a need to act upon the
advice of the internal auditor for better result.

Functions of Internal Audit

The function of internal audit is concerned with analysis of internal check.
The internal auditor can look in to the duties of each employee. All
employees are provided jobs on the basis of their abilities.

2. Application of legal Requirements

The function of internal audit is the examining of the application of legal
requirements. The accounts are prepared under certain legal framework. The
Company's Ordinance 1984, the Stock Exchange and Security Rules 1971,
the Banking Companies Ordinance 1962, The Insurance Act 1938. The
Modaraba Ordinance 1980 and similar other laws are followed for preparing
finance statement.

3. Verification of Accuracy

Verification of accuracy is a function of internal audit. The accuracy of
accounting books and records can be verified with the help of auditing
techniques. The audit techniques include inspection, observation, inquiry,
confirmation, computation and review. An auditor can check the accuracy
through these techniques.

4. Confirmation of Liability

Confirmation of liability is a function of internal audit. The internal auditor
can determine the work done by every person. The careless or negligence
on the part of worker is noted. The concerned person is given a chance to
explain his position. If the reason is not justified, the liability is confirmed.

5. Examination of Assets Protection

The function of internal audit is to examine the assets protection. The proper
record is to be maintained. The possession must be in the hands of senior
officer. The assets are used for business only. There is proper purchase and
disposal of these assets. The internal auditor can check that assets are
protected.

6. Detection of Fraud

Detection of fraud is a function of internal audit. The work of accounting and
auditing go side by side. When accounting work is over it is checking by
audit staff. There is not time gap so fraud is detection at an early date. The
plan of fraud requires time to think. When time is not allowed it is detected
on the spot.

7. Ascertain Proper Authority

The function of internal audit is to ascertain the proper authority. The
shareholders, partners and single owners have full authority. They can
delegate such authority to managers. The signature of owners or managers
must be noted on every voucher in order to ascertain that transaction is
proper.

8. Detection of Errors

The function of internal audit is to detect errors in the accounting records.
The audit staff can check the records in detail. There is not time limit. There
is possibility of disclosed of error due to cent percent checking. The
corrections can be made as early as possible to reflect the true and fair view.

9. Make Investigation

The function of internal audit is to make investigation. It is an inquiry in to
business activities by specially assigned staff. The facts and figures are
collected; analyzed and true position is put before the management. The
grey area can be spot lighted by an auditor in the interest of business.

10. Performance Appraisal

The function of internal audit is to note the performance of business
employees and management. The standard are fixed and performance is
compared with standards. The management can feel satisfaction if the
performance is at standard.

11. Give Suggestion

The function of internal audit is to give suggestion for business problems.
These suggestions are not costly. In the long run there may be large number
of benefits from such ideas. The management has the right to accept or
reject the ideas.

12. Reporting

Reporting is a function of internal audit. The auditor can find out the
weaknesses of various functions. The report is submitted to the
management. There is a need to go through the report. The weakness and
proposal can be examined in detail.
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Advantages of Internal Audit

1. Proper Accounting System

The benefit of internal audit is that proper accounting system is introduced. Accounting system is a chain of
activities in an entity by which transactions are processed for maintaining financial record. There is a need of
orderly devices to achieve desirable results.

2. Better Management

The benefit of internal audit is that there is better management of business concern. The auditor can point
out the weak areas of management. The goals of business can be achieved if there is proper internal control,
internal check and internal audit. It should be noted that management could rely on internal audit for best
results.

3. Progressive Review

The internal audit is beneficial to review progress of a business concern. The figures of previous years are
compared with this year. Moreover the performance result of similar companies can be compared to
determine the progress made by the entity. The management can review progress through internal audit.

4. Effective Control

The internal audit is helpful to have effective control over business activities. Control is a management
function, which related to supervision and direction of on going activities. The manager concerned can
remove the difficulties for smooth working internal audit alerts the management for effective control.

5. Assets Protection

The assets protection is possible through internal audit. The management can use the assets for the benefit
of business only. The assets cannot be used for private purposes. The embezzlement of cash,
misappropriation of stock and misuse of other assets is not possible as the internal auditor keeps close
watch over assets.

6. Division of Work

The internal audit is helpful to apply division of labour. The division of labour is necessary to watch the
activities of all employees including management. The auditor can suggest the way and means improve the
performance of business.

7. No Error

The internal audit is used to protect accounting records from errors. The accounting and auditing go side by
side when accounting work is over there is start of audit. There is not time gap. In such situation the
accounting staff is not in a position to commit any error.

8. Fixing Responsibility

Internal audit is used to fix the responsibility of people having poor performance. The management
establishes the performance standards. The internal auditor can evaluate the result of all persons. The
people can be help responsible for below standard work and action can be taken against them.

9. Helps External Auditing

The work performed by internal auditor can be helped for external auditor. The auditor procedure of internal
and external audit is almost the same. The auditor can go through the internal audit report at the time of
starting audit work. Anyhow external auditor is responsible for external audit.

10. No Fraud

The internal audit is beneficial to detect frauds in the books of accounts and other records. The auditor
provides no time tag lag to continue any fraud. The work of accounting staff is examined on daily basis. The
accounting staff has no time to plan any type of fraud.

11. Performance Improves

Internal auditor is helpful to improve the performance of the organization. The achievements of previous year
are the basis of preparing budget for the next years. The projected income statement and balance are drawn
up. An attempt is made to get the positive result. Thus internal audit improves performance of business and
employees.

12. Proper Use of Resources

Internal audit is used to check the proper use of resources. The misuse of resources can increase the cost of
organization. The optimum use of resources can be determined to control the cost of output. In this way
internal audit is a tool to use the resources in the best internal of the business.

13. Investigation

Internal audit is help to investigate in to the business matters. In case of doubt internal auditor can be asked
to examine the facts and figures to confirm or clear any doubt. The internal auditor can investigate the matter
in any manner. Such investigation can be made at the request of management or owners.

14. Suggestions

Internal auditor is used to suggest the ways and means for improving the business performance. The
management can rely on the internal auditor. The workable ideas of the internal auditor can be put into
practice.

Limitations of Internal Audit

1. Incompetent Staff

The limitation of internal audit is that audit staff may be incompetent. The purposes of internal audit fails to
help the management. There may be lack of experience and training on the part of internal audit staff.

2. Staff Shortage

The limitation of internal audit is staff shortage. There may be need of reasonable audit staff to examine the
record. The shortage of staff is a hurdle to get benefit of internal audit.

3. Time Lag

The limitations of internal audit starts when true is time lag between recording and checking of entries. The
accounting and internal audit must go side by side with minimum time gap.

4. Executive Function

The limitation of internal audit is that the internal audit may be linked with executive function. In this case he
cannot examine the accounting books and other records. He cannot find out his own weakness. It will be
wastage of time and money to conduct internal audit.

5. Error

The limitation of internal audit is that there may be error in the books of accounts. It depends upon the
expertise of internal audit staff. If audit staff is competent there is less chance of error. In case of poor audit
staff there is no guarantee that audited accounts are free from errors.

6. Responsibility

The limitation of internal audit is that management may not feel their responsibility in completing the audit
formalities. The audit staff may responsibility in completing the audit formalities. The audit staff may give
suggestion for proper working of business. The top-level management may not pay attention to suggestions.
In this way the audit work cannot help the business.

7. Duties

The limitation of audit is that there may not proper division of duties. In this case the internal auditor is
unable to fix the responsibility for negligence of duties. The management must be aware about division of
duties. The audit work can point out the weakness of business employee, otherwise whole arrangement goes
wasted.
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* Audit Programme

* Kinds of Audit Programme

* Contents of Audit Programme

* Advantages of Audit Programme
Definition

Audit programme is a list of work to be done by an auditor. The time period is started for completing the
work. The duties are assigned to audit staff. The procedure that will help to verify each time of financial
statements. The duplication of work is avoided and an pace of audit work. The auditor is able to have control
over the audit staff and their work. The cost of audit remains in line with the audit fee. The auditor can handle
audit of many concerns at the same time. Every aspect of financial activities require audit program. The
combination of all such programs is considered as master audit programme. The auditor can make changes
from time to time in order to meet the requirements of nature and size of business.
Kinds of Audit Programme

1. Standard Audit Programme

This type of audit programme is preprinted and suitable for all purposes. It saves time and gives added
assurance that no important procedure will be overlooked while in the opinion of some others, this type of
audit programme is too much mechanical. Due to complexities in the business conditions system of
accounting and internal control system, it is not possible to follow a standard audit programme.

2. Modified Standard Audit Programme

These type of audit programme contain the usual audit procedures, common to most business and provide
space for other specific procedures applicable to the business under examination. This modification of the
audit steps and the insertion of the steps that are peculiar to the audit in questions, make the audit
programme a modified standard audit programme.

3. Tailor-Made Audit Programme

This is individually written programme prepared specially for each audit. It is known as tailor made because
a tailor cuts the cloth according to the body of every person. The auditor should take care of such a
programme so that no important steps is overlooked or missed. It lists the procedures to be followed on any
specific engagement indication any departure from normal practices and specifying the extent of the test of
transaction.
Contents of Audit Programme

1. Name
The audit programme contains the name of client. The auditor can write the name of business. There is a
need of complete address of the concern in case of public limited company.

2. Objects
The audit programme contains the objects of the business enterprise. There are various objects of any
business unit. A small business has few objects while large companies have many objects.

3. Date
The audit programme contains the date of start of an audit. The auditor can consult the client before fixing
the audit date. It must be convenient to the management. The audit programme can show the details of audit
work date wise.

4. Duration
The audit programme contains the time limit of starting and completing the work. The duration of audit
period may be one month. The size of audit work becomes the basis of duration.

The audit programme contains information about accounting system. The auditor can examine the
accounting system and procedure in operation. The understanding of accounting system helps to develop
the audit programme.

6. Internal Check
The audit programme contains the effectiveness of internal check system. The effective internal check is
helpful for auditors. He can apply test checking due to proper internal check system. If the system is not
good it increases the duties of audit staff.

7. Old Reports
The audit programme keeps the contents of old audit report. The auditor can pay attention to old reports. The
weakness reported in previous reports must not be repeated in present accounting records. It is the duty of
the audit staff to note the performance of management.

8. Checking Books
The audit programme contains the details of checking accounting books. The number of
books kept is stated in the programme. The books are distributed among audit clerks so that whole data may
be examined.

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Advantages of Audit Programme

1. Supervision of Work
The editor can judge the efficiency of his audit team with the held of an audit program. 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. Division / Distribution of Audit Work
The division of audit works is very useful for the audit staff for maintaining the difference of works among
senior or junior clerks according to their ability and skill so that the work is divided to get better results.

3. Systematic and Uniformity of Work
Audit program helps in setting all the things in advance. So the systematic and uniformity of work is
necessary to achieved the desire.

4. Basic Instrument of Training
Audit program is infact a training instruments for the audit staff and also very useful for the new auditors. It
provides training and guidance to him. So, it is rightly called the basic instrument for training for the staff at
the right time of need.

5. Fixation of Responsibility
Audit programmes fixed the responsibilities of the staff. If any error or fraud remains undetected the
responsibility of negligence will fall on that particular assistant who has performed that job and no one can
blame on each other.

6. Several Audit May be Controlled
The auditor controls the audit of various companies at the same time. In the absence of audit program he
cannot supervise them effectively.

7. Easy Transfer
The principle auditor can transfer to any other person easily. If one assistant is unable to continue the work
given to him it can be given to another person. Audit program guides him that what is done and what is
remaining.

8. Final Review
Before signing the report, Final Review is made and for this purpose also auditing program is very useful
and any deficiency or missing in steps can be identified and completed.

9. Useful For Future
The audit programme is very useful in the future. On completion of an audit. It serves the purpose of audit
record that may be useful for future reference. In case of auditor is appointed for the same concern in any
future time the auditor can use the same audit programmes with some changes.

10. Progress of Audit Work
Audit programme is useful to note the progress of work. Audit programme is a timetable, which can show the
work done on any particular date. The pace of work is going on with the passage of time. The adjustment can
be made if there is more work and less time and vice versa. In this way work can be completed in time.

11. Supervision of Audit Staff
Audit programme is beneficial for auditor. He can supervise the activities of audit staff. He can use the audit
programme as basic of supervision. Every part of audit work can be complete as per schedule. He can
control the activities of audit staff through observation and direction when the audit work can be complete in
time.

12. Audit Staff Needed
Audit programme is helpful to determine the number of persons needed to do the work. The staff
requirement is essential for every auditor. The shortage of staff means slow progress. The exact number of
senior and junior audit clerk can be determined. In this way an auditor is able to handle the audit work
properly.

13. Same Work
The benefit of audit programme is that new instructions are not issued due to change in staff. The nature of
work remains the same. The audit clerks can know their job just by reading the written programme. The time
is saved due to written instructions.

14. Time Table
The benefit of audit programme is that work is complete with in stated time period, the saving of time means
saving of labour. The saving of time means saving can control the cost of audit due to fixed time. He can
arrange audit work of other business concerns.

15. Responsibility for Poor Work
The benefit of audit programme is that auditor can fix responsibility for negligence. Audit programme is a
timetable of whole audit work to be done by auditors. Every staff member is given some sort of duty to do
the audit work. The staff is responsible for completing of work. The performance is noted and responsibility
if fixed poor work.

16. Guide To Audit Assistants
The merit of audit programme is that it serves as a guide to audit assistants. The junior audit staff can start
and complete the audit work with the help of audit programme. There is no need to repeat the instructions
every time. Moreover it serves as a guide for future. The new audit programme can be developed can be
developed on the basis of old work.

17. Dealing with New Clients
The merit of audit programme is that it helps to deal with client. The spare time of audit staff can be used for
doing with new clients. The whole year time can be divided. The auditor can audit the accounts if various
concerns under audit programme.

18. Proof for Audit Work Done
The merit of audit programme is that auditor can use it as proof for work done. In court of law the auditor can
avoid liability for negligence. Audit programme is a permanent record of an audit process. The audit
programme shows the work performed date-wise. In this way he cannot be held responsible for
carelessness.
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Disadvantages of Audit Programme

1. Not Comprehensive
Auditors may have covered the whole fie but I cannot be said with certainty that all the necessary work has
been done.

2. Rigidness
Audit program looses its flexibility. While each business have a separate problems. So audit program cannot
be laid down for each type of business.

3. No Initiative
It kills the initiative of capable persons. The assistant cannot suggest any improvement in the plan.

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

5. Large Concerns / Not Suitable for Small Concerns
Audit programme is helpful in large business concerns. It has been proved that audit program is not suitable
for small business concerns.

6. New Problems Over Looked
In the audit programme there is no chances to accept the changes with the passage of time new problems
arise that may be over looked.

7. Changes
The drawback of audit programme is that changes in it are not acceptable. The nature of activities of concern
may change. There is a need to adjust the changes in the programme. A master programme cannot be
drafted.

8. Revision
The demerit of audit programme is that there is no revision in it. The business changes from year to year.
The working may expand or contract. The audit programme requires adjusting itself to the changing
circumstances.

9. Types
The demerit of audit programme is that is not suitable for all types of business concerns. A small business
may have few books of accounts. It is not necessary to prepare audit programming for small concerns.

10. Staff
The accounting staff can know the working of audit. The auditor applies various methods for checking the
accounting books. Having knowledge of auditing the accounting staff can devise means to record the
transaction. In this way they can avoid their responsibility.

11. Negligence
The demerit of audit programme is that it provides protection to inefficient audit assistant. The junior
auditors can protect themselves due to weakness of audit programme. The clerks feel responsibility for the
duties stated in the programme.

12. Errors
The drawback of audit programme is that it may fail to located error. The errors of principles cannot be
detected, as the double entry is complete in such case. No doubt the location of errors and fraud is the
responsibility of management. But owner depends upon auditors to protect their rights.

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Chapter 2 - Types of Auditing

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