1. BBA II
Auditing
Syllabus
Unit – I
Meaning , Objectives & Advantages of Audits. Types & Conduct of Audit – Various types of Audit , Audit
Program me .
Unit – II
Internal Check System – Meaning Definition , Objects , duties of auditor in regard internal check internal
control , Internal Audit , Difference between internal check , internal control & internal audit . Internal check in
regard cash tractions . Vouching of cash transactions – Meaning & Importance of Vouching , Voucher , Vouching
of Opening Balance , Cash receipts , Cash payments , Capital Expenditure & Trading Transactions .
Unit – III
Verification & Valuation of Assets & Liabilities , Audit of Final Accounts .
Unit – IV
Audit of Limited Company – Qualification of Company Auditor , Appointment of Auditor , A Qualification ,
duties & Audit Report.
Unit – V
Audit of Banking , Insurance Company & Co-operative Society.

2. Meaning of Auditing
The word 'Audit' is originated from the Latin word 'audire' which means 'to hear'. In
the earlier days, whenever there is suspected fraud in a business organization, the
owner of the business would appoint a person to check the accounts and hear the
explanations given by the person responsible for keeping the account and funds. In
those days, the audit is done to find out whether the payments and receipt are
properly accounted or not.
The objective of modern day accounting is not only for the verification of cash but to
report the financial position of the undertaking as disclosed by its Balance sheet and
Profit and Loss account.

3. Definition of Auditing
A precise definition of the term 'Auditing' is difficult to give. Some of the definitions given by
different authors are as follows:
According to Montgomery, a well known author, "auditing is a systematic examination of the
books and records of a business or the organization in order to ascertain or verify and to report
upon the facts regarding the financial operation and the result thereof. “
Spicer and Pegler expanded the above definition as follows:
"An audit may be said to be such an examination of the books, accounts and vouchers of a
business as well enable the auditor to satisfy that the Balance Sheet is properly drawn up, so as to
give a true and fair view of the state of affairs of the business and whether the Profit or Loss for
the financial period according to the best of his information and the explanations given to him
and as shown by the books, and if not, in what respect he is not satisfied."

4. Definition of Auditing
According to Lawrence R. Dicksee, "an audit is an examination of accounting records undertaken
with a view to establishing whether they correctly and completely reflect the transactions to
which they relate. In some instances, it may be necessary to ascertain whether the transactions
themselves are supported by authority."
R. K. Mautz defines auditing as being "concerned with the verification of accounting data, with
determining the accuracy and reliability accounting statement and reports."
It is clear from the above definitions that auditing is the systematic and scientific examination of
the books of a accounts and records of a business so as to enable the auditor to satisfy himself
that the Balance Sheet and the Profit and Loss Account are properly drawn up so as to exhibit a
true and fair view of the financial state of affairs of the business and profit or loss for the financial
period. The Auditor will have to go through various books and accounts and related evidence to
satisfy himself about the accuracy and authenticity to report the financial health of the business.

5. Objectives of Audit
For a better understanding we could classify the objective of audit as:
1. Primary Objectives
2. Secondary Objectives.

6. Primary Objectives: To determine and judge the reliability of the financial statement
and the supporting accounting records of a particular financial period is the main
purpose of the audit. As per the Indian Companies Act, 1956 it is mandatory for the
organizations to appoint a auditor who, after the examination and verification of the
books of account, disclose his opinion that whether the audited books of accounts,
Profit and Loss Account and Balance Sheet are showing the true and fair view of the
state of affairs of the company's business. To get a true and fair view of the
companies affairs and express his opinion, he has to throughly check all the
transactions and relevant documents of the company made during the audited period.
Which will help the auditor to report the financial condition and working result of the
organization. While carrying out the process of audit, the auditor may come across
certain errors and frauds. But detection of fraud or errors are not the primary
objective of the audit. They are come under the secondary objectives of audit.
Audit also disclose whether the Accounting system adopted in the organization is
adequate and appropriate in recording the various transactions as well as the setbacks
of the system.

7. Secondary Objectives:
In order to report the financial condition of the business, auditor has to
examine the books of accounts and the relevant documents. In that process
he may come across some errors and frauds. We may classify these errors and
frauds as below:
1 Detection and prevention of Errors
2. Detection and prevention of Frauds.

8. Detection and prevention of Errors: Following types of errors can be detected in the process of
auditing.
1. Clerical Errors
2. Errors of Principle
Clerical Errors: Due to wrong posting such errors may occur. Money received from Microsoft
credited to the Semens's account is an example of clerical error. Even though the account was
posted wrongly, the trial balance will agree. We can classify clerical errors as below:
i. Errors of Commission
ii. Errors of Omission
iii. Compensating Errors.

9. i. Errors of Commission: These errors are errors caused due to wrong posting either wholly or partially of in the
books of original entry or ledger accounts or wrong totaling, wrong calculations, wrong balancing and wrong
casting of subsidiary books. For example Rs. 5000 is paid to Microsoft for the supply of windows program and
the same is recorded in the cash book. While posting the ledger the Microsoft's account is debited by Rs. 500.
It may be due to the carelessness of the accountant. Most of these errors of commission are reflected in the
trial balance and can be identified by routine checking of the books.
ii. Errors of Omission: When there is no record of transactions in the books of original entry or omission of
posting in the ledger could lead to such errors. Sales not recorded in the sales book or omission to enter
invoices in the purchase book are examples of Errors of Omission. Errors due to entire omission will not affect
the trial balance. Errors due to partial omission will affect the trial balance and can be detected.
iii. Compensating Errors are errors committed in such a way that the net result of these errors on the debit
side and credit side would be nullify the net effect of the error. For example, Ram's account which was to be
debited for Rs. 5000 was credited for Rs. 5000 and similarly, Sita's Account which was to be credited for Rs.
5000 was debited for Rs. 5000. These two mistakes will nullify the effect of each other. Unless detailed
investigation is undertaken such errors are difficult to locate as both the sides of the trial balance are equally
affected.

10. 2. Errors of Principle: While recording a transaction, the fundamental principles of accounting is not properly
observed, these types of errors could occur. Over valuation of closing stock or incorrect allocation of
expenditure or receipt between capital and revenue are some of the examples of such errors. Such errors will
not affect the trial balance but will affect the Profit and Loss account. It may occur due to lack of knowledge of
sound principles of accounting or can be committed deliberately to falsify the accounts. To detect such errors,
the auditor has to do a careful examination of the books of account.
Detection and Prevention of frauds: To get money illegally from the organization or from the proprietor frauds
are committed intentionally and deliberately. If it remain undetected, it could affect the opinion of the auditor
on the financial condition and the working results of the organization. Therefore, it is necessary for the auditor
to exercise utmost care to detect such frauds. It can be committed by the top management or by the
employees of the organization. Frauds could be of the following types:
1. Misappropriation of cash
2. Misappropriation of goods
3. Falsification or Manipulation of accounts
4. Window dressing
5. Secret Reserves

11. Misappropriation of Cash: Since the owner has very limited control over the receipt and payments of cash,
misappropriation or defalcation of cash is very common specially in big business organizations. Cash can be
misappropriated by various ways as mentioned below:
a. Recording fictitious payments
b. Recording more amount than the actual amount of payment
c. Suppressing receipts
d. Recording less amount than the actual amount of payment.
There should be strict control over receipts and payments of cash known as "Internal check system" to prevent
such frauds. The auditor should check the Cash Book with original records, bills register, invoices, vouchers,
counterfoils or receipt books, wage sheets, salesman's diary, bank statements etc. in order to discover such
frauds.
Misappropriation of goods: Companies handling with high value goods are pray to this kind of
misappropriation. Without proper records of stock inward and stock outward, it is difficult for the auditor to
find out such fraud. Periodical and surprise checking of stock and maintaining the proper record of inward and
outward movement of stock can reduce the possibility of such fraud.

12. Falsification or manipulation of accounts: In order to achieve certain specific objectives,
accounts may be manipulated by those responsible persons who are in the top management of
the organization. They prepare accounts such a manner that they disclosed only a fake picture
not the true picture. Some of the ways used in manipulating the accounts are as follows:
1. Inflating or deflating expenses and incomes
2. Writing off of excess or less bad debts.
3. Over-valuation or under-valuation of closing stock.
4. Charging excess or less depreciation
5. Charging capital expenditures to revenue and vice-versa
6. Providing for excess or less doubtful debts.
7. Suppressing sales and purchase or showing fictitious sales and purchases etc.

13. Window dressing: is the way of presenting the financial data in a much better position than the
original position. It is known as window dressing. Some of the reasons for doing window dressing
are as follows:
1. To win the confidence of share holders
2. To obtain further credit
3. To raise the price of shares in the market by paying higher dividend so that shares held may be
sold
4. To attract prospective parters or shareholders.
5. To win the confidence of shareholders.
.

14. Secret Reserves: In secret reserves, accounts are prepared in such a way that they disclose worse
picture than actually what they are. The objectives of preparing accounts in this way are:
1. To conceal the true position from the competitors.
2. To avoid or reduce the tax liability
3. To reduce the price of shares in the market by not paying dividend or paying lower dividend so
that the shares may be bought at a much lower price.
It is very difficult to detect such frauds since these frauds are committed by those persons in the
organizations who are at the top positions like directors, managers, financial controllers etc. To
detect these kind of frauds, the auditor must be vigilant and should make searching inquiries to
arrive at the true position.

15. Advantages of Auditing
It is compulsory for all the organizations registered under the companies act must be audited. There are
advantages in auditing the accounts even when there is no legal obligation for doing so. Some of the
advantages are listed below:
1. Audited accounts are readily accepted in Government authorities like income Tax Dept., Sales Tax dept.,
Land Revenue departments, banks etc.
2. By auditing the accounts Errors and frauds can be detected and rectified in time.
3. Audited accounts carry greater authority than the accounts which have not been audited.
4. For obtaining loan from financial institutions like Banks, LIC, HUDCO, HDFC, IFCI etc., previous years audited
accounts evaluated for determining the capability of returning the loan.
5. Regular audit of account create fear among the employees in the accounts department and exercise a great
moral influence on clients staff thereby restraining them from commit frauds and errors.

16. 6. Audited accounts facilitate settlement of claims on the retirement/death of a partner.
7. In the event of loss of property by fire or on happening of the event insured against, Audited
accounts help in the early settlement of claims from the insurance company.
8. In case of joint Stock Company where ownership is separated from management, audit of
accounts ensure the shareholders that accounts have been properly maintained, funds are
utilized for the right purpose and the management have not taken any undue advantage of their
position.
9. To determine the value of the business in the event of purchase or sales of the business,
audited account will be the treated as the base for the evaluation.
.

17. 10. The audit of accounts by a qualified auditor also help the management to understand the
financial position of the business and also it will help the management to take decision on various
matters like report in internal control system of the organization or setting up of an internal
audit department etc.
11. If the accounts have been audited by an independent person, disputes between the
management and labor unions on payment of bonus and higher wages can be settled amicably.
12. In the event of admission of a new partner, audited accounts will facilitate the formation of
terms and conditions for joining the new partner. Last 3 years audited accounts and balance
sheet will give a general idea about the growth and financial position of the business to the new
partner.

18. Types of Audit
A) Based on Authority
B) Based on Scope
C) Based on Time
D) Based on Object
E)Based on Object

19. A) Based on Authority
1. Statutory Audit
2. Non – Statutory Audit
3. Internal Audit
B) Based on Scope
1- Complete Audit
2- Partial Audit
C) Based on Time
1. Continuous Audit
2. Final Audit
3. Interim Audit
4. Concurrent Audit
5. B/S Audit

20. D) Based on Object
1- Special Audit
2. Cost Audit
3. Management Audit
4. Service Audit
E) Other Types
1- Occasional audit
2- Audit in Depth
3- Cash Audit
4- Operational Audit
5- Tax Audit
6- Efficiency Audit

21. A) Based on Authority
1. Statutory Audit
It is the audit which is compulsory under the law , appointment of auditors , removal , remuneration ,
rights , duties , liabilities are governed as per the provisions of the respective law applicable to the
organization . Scope of audit work & all other terms are as laid by the law . It can be conducted only by
qualified chartered Accountant . Audits are compulsory in the following cases .
1. Companies registered under the companies act 1956.
2. Banking companies governed by the Banking Companies Act 1949.
3. Insurance Companies governed by the respective insurance act .
4. Cooperative societies registered under the Cooperative societies act.
5. Public & Charitable trusts registered under concerned act .
6. Local authorities , government undertaking s & departments .
7. All business organizations having annual sales over Rs. 40 lakhs .

22. Essentials of Statutory Audit
1) It is mandatory in nature .
2) The auditor must be qualified C.A. or Cost & Work Accountants .
3) The auditor must not incur any prescribed disqualification during the
course of audit .
4) Appointment of auditor is made as per the provisions of the relevant acts .
5) It is always a complete audit .
6) It enables the appointing authority to get full disclosure of all material facts
.

23. 2. Non – Statutory Audit
It is a voluntary audit . It is a optional & not compulsory . It is carried at the
discretion of the proprietor . There is no specific law which govern the
conduct of such audit . Terms & conditions of audit are determined as per
the agreement made between the auditor & the proprietor . For example ,
audit of individuals , firms , private trusts etc.
1) Private Audit
2) Audit of Sole Proprietor
3) Partnership Audit
4) Audit of Trusts

24. 3. Internal Audit
It is an independent management function which involves a continuous & critical
appraisal of the function of the entity . This type of audit is also optional . It is
conducted by the internal auditor who is appoint by the proprietor . Even the
employee of the organization may be appoint as an internal auditor to examines the
books of accounts .
The purpose behind internal audit is to assure the management that the accounts are
being properly maintained & the system provide adequate safeguards for detection &
prevention of any frauds .It is more managerial than accounting . It is a part of the
system of internal control .

25. Objectives
1. To verify the accuracy of the records .
2. To ensure that the transactions have a proper authority .
3. To facilitates prevention & detection of frauds & errors .
4. To ensure that purchase & sale of fixed assets is authorized .
5. To improve the system of internal check .
6. To examine the protection given to fixed assets .
7. To make investigation for managements .
8. To review the entire system of working & make it more effective .

26. B) Based on Scope
1. Complete Audit
2. Partial Audit
1. Complete Audit – In this type of audit , the auditor is required to check each &
every transaction recorded in the books of accounts . He has to examine each & every
voucher , documents or correspondence relating to transaction . This type of audit is
not possible for large sized organization .
2. Partial Audit – In this type of audit , the auditor is not required to examine all the
books of accounts . Only a part of accounts or some transactions as desired by the
clients may be scrutinized . It may be followed in case of non – statutory audit . It can
not be followed in case of statutory audit .This audit is not convenient when the audit
is legally required .

27. C) Based on Time
1) Continuous Audit
2) Final Audit
3) Interim Audit
4) Concurrent Audit
5) B/S Audit

28. 1) Continuous Audit – It is defined by R.C. Williams as “one
where the auditor , or his staff , is constantly engaged in
checking the accounts during the whole period or where the
auditor or his staff attends at regular or irregular intervals during
the periods.”
When audit is carried out during the accounting period with
some interval is called as continuous audit . In continuous audit ,
the audit staff remains occupied continuously on the accounts
during the whole year where they attend at frequent intervals .

29. Features
1. It carried out throughout the year .
2. It is conducted at regular or irregular intervals .
3. The accounts are subject to scrutiny as & when prepared .
4. Full verification of assets & liabilities is left until the balance
sheet is prepared .
5. Trial balance , profit & loss account & balance sheet are
audited at the end of the year .

30. This type of audit is more appropriate in the
following situations or organizations .
1) Where the business is large , complex & involves numerous
transactions .
2) Where the system of internal control & internal check are not
satisfactory .
3) When the interim dividend is to be declared .
4) Sometimes continuous audit becomes necessary for self survival
against cut-throat business competition .
5) Where the management requires monthly or quarterly audited
statements of accounts or the statements of accounts are required
immediately after the accounting year .

31. Advantages of Continuous Audit
- Quick Discovery of Errors
- Quick Preparation of Accounts
- Division of Labiur
- Moral Check on Staff
- Knowledge of Technical Details
- Quality of Works
- Preparation of Interim Accounts
- Effectiveness of Internal Check
- Audit Staff Kept Busy
- Valuable Advice

32. Disadvantages of Continuous Audit
1. Alteration of Figures
2. Costly
3. Dislocation of Clients Staff
4. Tedious
5. Absence of Link
6. Conflict
7. Dependence of Staff on Auditor
8. Likely Collusion between Clients Staff & Audit Staff

33. 2) Final Audit – It is also known as periodical audit . It generally
starts after the completion of accounting year when the books of
accounts are balanced & closed . Final audit is carried out continuously
until it is completed . It is a past accounts audit . In case of a final audit
, the auditor gets hold of all the books of accounts & the vouchers for
the accounting period . This type of audit is appropriate for smaller
business concerns because it is less expensive . It is also suitable where
the chances of frauds are less .
This type of audit is generally preferred by the auditor because the
chances of alteration of figures are less . Besides the final &
continuous audit , there may be two more types of audit , viz. Interim
Audit & Balance Sheet Audit .

34. Advantages of Final Audit
1. No disturbance of routine work .
2. It is less expensive .
3. Proper planning of audit work is facilitated .
4. Maintenance of link in work becomes easy .
5. Elimination of all limitations of continuous audit work can be completed
without any break .
6. There are no chances of alteration of figures .

35. Disadvantages of Final Audit
1) Consequences of errors are experienced by clients first .
2) Difficult to detect frauds committed with proper planning .
3) Delay in finalization of accounts .
4) Less moral force on the clients staff .
5) Not convenient for large sized business concerns .
6) It becomes difficult for the auditor to arrange audit when many
clients have the same financial year .

36. 3) Interim Audit – It is kind of audit which is
conducted between two annual completed or final
audits . It is conducted to find out the interim profit &
know the financial position at the end of a part of the
accounting year .
Interim audit should not be confused with continuous
audit . The scope of interim audit falls within the
purview of final audit or the annual audit which is
carried out later .

37. Advantages of Interim Audit
- Publication of interim figures
- Speedy final audit
- Moral check
- Detection of errors & frauds
- Interim dividend
- Removal of defects
- Up-to-date A/C
- Utilization of audit staff
- Reducing risk of missing material facts

38. Disadvantages of Interim Audit
- Alteration of figures
- Additional work
- Detailed notes
- Missing query
- Expensive
- Dislocation of work

39. 4) Concurrent Audit – It is a system of audit which is
prevalent in large banks . It is an examination which is
contemporaneous with the occurrence of transactions or
examination which is carried out at the earliest .
Object
The object is to ensure adherence to prescribed systems &
procedures & timely detection of irregularities .

40. Scope
1 Checking daily cash transaction with special reference to abnormal
receipts & payments if any .
2 Ensuring appropriate accounting of cash receipts & payments .
3 Verifying the purchase & sale of investments & that hey are within
the powers of the central office .
4 Verifying that advances are in accordance with the guidelines of
central office & R.B.I.
5 Verification of stock declaration statement & timely payment of
installment .
6 Verification of timely reconciliation & confirmation of accounts .

41. Auditor
Any bank officer or external auditor can be appointed
as concurrent auditor . He has to report services
irregularities to the head office . Minor cases should be
brought to the notice of the branch manager .

42. 5) B/S Audit – It is an American term which means verification of
the items appearing in the balance sheet . It includes verification
& valuation of assets & liabilities appearing in the balance sheet .
Profit & loss account is given much importance in this type of
audit . Balance sheet audit is also referred as ‘Limited Audit’. In
this type of audit balance sheet accounts are verified & tests are
imposed only on those items in Profit & Loss Account which are
directly related to assets such as depreciation , repairs , bad
debts etc.

43. Procedure to Conduct Balance Sheet Audit
1) Before commencing the audit see that the system of internal control is effective & qualified
staff is appointed .
2) Examine the minute book & consider those items which have bearing on final accounts .
3) Compare the profit & loss account & balance sheet of the current year with that of the
previous year & find out any material difference .
4) Compare the increase & decrease in each item appearing in profit & loss account & balance
sheet .
5) Investigate into the causes of any variations in gross profit & consider the valuation of stock .
6) Examine reconciliation of material consumed & Stock .
7) Examines the details of material consumed & find out its ratio to production .

44. 8) Find out whether there is any change in depreciation & see its effects on the profit & loss
account & balance sheet .
9) Investigate into the terms of non-recurring nature & see that profit or loss on sale of fixed
asset is properly ascertained .
10) Get the details of assets & liabilities as on the date of balance sheet .
11) Verify the statement of fixed assets addition made & deduction made . Also verify
changes if any .
12) Pay attention to the valuation of fixed assets .
13) Consider the details of current assets & enquire into the variations in currents assets .
14) Consider , in detail , any substantial changes in items of balance sheet from the normal
figure.
15) Verify the assets & properties held & liabilities arising .

45. 16) See that adequate provision is made for all the known liabilities .
17) Ascertain any capital commitment .
18) Scrutinize contingent liabilities .
19) See that adequate provision is made for actual liability .
20) Collect a list of contingent liabilities from the officer of the company .
21) See the resolution regarding transfers .
22) Obtain a copy of all units filed by the company or against the company .
23) Evaluate the system of internal control & see how far it is effective .
24) See whether the presentation of financial statements is done properly as per the
provisions of law .
25) Check the statement of sources & application of funds .

46. Suitability
Balance sheet audit is suitable under the following circumstances
1) Where the volume of transaction's is very large .
2) Where the system of internal check / internal control is very
effective .
3) Where qualified accountants are employed to record the
transactions .
4) Where mechanized system of accounting is in operation .

47. Position of Auditor
In balance sheet audit ,the auditor checks the items appearing in balance sheet . He does not
follow the normal procedure of audit . He does not check all the transactions taken place . U/S
227 (3) the auditor is required to state in his report , “whether the balance sheet & the profit &
loss account dealt with by the report are in agreement with the books of accounts & returns.”
Now the question arises as to when the auditor can say so when he has not check all the
transactions . It may be informed that he has not done his duty honestly . However , the law does
not prescribe any procedure to conduct the audit . If the auditor is satisfied with the books of
accounts , he may say so . According to Mr. Irish , the Australian Accountant , balance sheet audit
is an American term which conveys two things .
i) It means limited audit since it is confined to the items connected with balance sheet .
Ii) In such audit tests are imposed on internal control . The test include scrutiny of records ,
comparison of income & expenses , investigation of material information & analysis of
appropriations .

48. D) Based on Object
1. Special Audit
2. Cost Audit
3. Management Audit
4. Service Audit

49. 1. Special Audit – Under section 233 A of the Companies Act , 1956 ,
the central Government has power to direct special audit under the
following circumstances .
1. When affairs of any company are not managed as per the sound
business principles .
2. When company is being managed in a manner which is likely to
cause serious injury or damage to the interest of trade or industry .
3) When financial position of the company is such as to endanger its
solvency .
The Central Government decides the terms & conditions & scope of
the audit work . The auditor appointed by the Government is required
to report to the government . The government gives directives to the
company on the basis of the auditors report .

50. 2. Cost Audit – It is a type of audit which involves verification of cost records maintained by the
organization . The Companies Amendment Act , 1965 introduced cost audit a statutory
requirement for specific companies . U/S 233 (B) of the Companies Act 1956, the Central
Government may direct an audit of cost records by a person who is qualified . Appointment of
auditor is done by the board of directors subject to approval of the Central Government .
The auditor reports to the government , the copy of the report is sent to the company . Cost
audit is prescribed for certain types of industries with a view to achieve the following objects .
1. To grant price concession to the company .
2. To fix up selling price .
3. To safeguard interest of customers .
4. To consider the question of protection to granted to the company .
5. To ascertain the causes of loss suffered by the company .

51. 3. Management Audit – It is the most modern technique
of audit . It is a type of audit which involves examination of
plans , policies , procedure , methods & strategies of the
organization with a view to improve organizational
effectiveness . This type of audit is a done with a view to find
out the weaknesses & inefficiencies of the management . It
does not look into the past , present but also in the future
.Management audit is not a statutory audit . It is necessary to
improve the profitability of the business . This is also known as
performance audit or value added audit .

52. Management audit is useful in the following situations
1) when incentive system is linked up with manager performance .
2) It is highly useful in result oriented input output analysis .
3) An outside agency may go for management audit in order to examine the
efficiency of management in a particular industrialization .
4) Financial institution may conduct management audit before giving a loan .
5) Foreign collaborators may resort to management audit in order to assess
the managerial abilities to their associates .
6) It is an effective tool of control .

53. 4. Social Audit – A business organization has a social
responsibilities to perform . Social audit is done to
evaluate the total performance in relation to society like
human resources contribution , public contribution ,
environmental contribution , product or service
contribution & net income of the enterprises . Such audit
is required for public reporting & for management
purposes .

54. The following principle factors are to be considered for assessing the social performance of
the organizations .
i) Contribution to national economic growth through expansion , employment generation .
Ii) Relation with people including cordial industrial relations , training & employment of
handicapped backward & minority people .
Iii) Product relations including quantity , quality & price of product supplied .
Iv) Environmental relations including improvement of ecology , control of environmental
pollution etc.
v) Quality of life including social & family welfare schemes , employees self reliance schemes ,
adoption villages ,upkeep of gardens & parks .
vi) Social or national development i.e. promotion of sports , music , games , art & culture ,
social audit enables the managers to keep in mind their social obligations . This would help to
improve the image of the organizations .

55. E) Other Types
1- Occasional audit
2- Audit in Depth
3- Cash Audit
4- Operational Audit
5- Tax Audit
6- Efficiency Audit

56. 1- Occasional audit – This type of audit is carried out occasionally as per the need of such
business . This is applicable to the proprietary concerns such as sole trader & partnership s. It
is just a need based audit . It is conducted at the desire of the owner of the business .
2) Audit in Depth – Taylor & Perry define auditing in depth as it implies the examination of
the system applied within a business entailing the tracing of certain transactions from their
origin to their conclusion , investigating at each stage the records created & their appropriate
authorization .
3- Cash Audit – It is a partial audit & not a complete audit . In this type of audit , the
auditor examines only the cash transaction . He examines cash & payment receipts . The
receipts & payments may be capital or revenue in nature . Cash transaction are checked with
the help of receipts & vouchers & other evidence .
.

57. 4- Operational Audit – It is conducted to see that the business operations
are improved in future . Operational audit goes beyond financial audit . It is
conducted for the following purposes .
1. To improve the profitability
2. To guide the management in achievement of organizational objectives .
3. To examine the efficiency of the management in conducting various
operations
4. To evaluate the management policies & procedures .
5. To advice the management on business operations

58. 5- Tax Audit – It is the audit done for assessing the correctness of
calculation of taxable profits . It is done to ensure compliance with
provisions of the income tax act 1961 . The income tax act has made
tax audit compulsory for special persons under section 44 AB . The
assessing officer is empowered to direct the assesse to get his
accounts audited by an accountant nominated by the Commissioner of
Income Tax .
6- Efficiency Audit – It is a pert of performance audit . It is
concerned with evaluation of performance . The auditor may give
suggestion for improvement of the performance . Performed audit is
closely related to management audit .

59. Audit Programme
“An audit programme is a flexibly planned procedure of examination .”
Holmes .
“An audit programme is an outline of all procedures to be followed in order to arrive at an opinion
concerning a clients financial statements.”
Howed Stettler .
“An audit programme is a detailed plan of applying the audit procedure if the given circumstances with
instructions for the appropriate techniques to be adopted for accomplishing one audit objectives .” The
preparation of such a programme involves mainly three things .
i) How much work is to be done ?
ii) Who is going to do a particular portion of the work ?
Iii) What is the duration of time by which the work is to be finished ?
Thus , idea behind preparation of audit programme is to insure the auditor of a complete grip over his staff ,
over the procedure & over the portion of work to be performed by his staff .

60. Prior to the commencement of the Audit Work the Auditor
has to take the following steps :
1) To decide the scope of work
2) To obtain appointment letter
3) To obtain information about business
4) Staff list
5) Documents
6) Study of rules

61. 7) Internal check
8) Examination of books
9) Retiring auditor
10) Audit programmes
11) Consider all possibilities of error
12) Determine the evidence reasonable available & identify the
best evidence for deriving the necessary satisfaction .
13) Co-ordinate the procedures to be applied to related items .

62. 1) To decide the scope of work :- At first , he should decide what he is required to do .
2) To obtain appointment letter :- He should obtain the formal appointment letter & see that
his appointment has been made according to law .
3) To obtain information about business :- He should obtain the detailed information about the
nature & routine working of the company .
4) Staff list :- He should obtain the list of the clients staff & their distribution in the various
section .
5) Documents :- He should obtain the copies of the annual accounts & the audit reports of the
previous year .
6) Study of rules :- He should study the memorandum of association & article of association in
case of the companies & partnership deed in case of partnership firms .

63. 7) Internal check :- He should examine the system of internal check
which is in force .
8) Examination of books :- He should obtain the complete list of all
the books & examine the system of accounting followed by his
clients .
9) Retiring auditor :- If an auditor is appointed to take place of
another auditor he should be known reasons for the change .
10) Audit programmes :- He should draw up an audit programme .

64. Features of an Audit Programme
1. It should contain full details of the work to be conducted .
2. It should be in writing .
3. It should be drawn by the auditor .
4. It should be flexible .
5. It should state the responsibility of the clients staff .
6. It should refer to the distribution of work with the staff .

65. Contents of an Audit Programme
1. Name of the company / client / place of business .
2. Objects of the undertakings .
3. Date of the commencement of the audit .
4. Duration of audit .
5. System of Accounting adopted by the client .
6. System of internal check & its effectiveness .
7. Reports of the previous auditor & the remarks .
8. Date-wise-schedule of the Examination of the various books .

66. Advantages of Audit Programme
1) Progress of audit work
2) Increase the efficiency of his Staff
3) Determines the responsibility
4) Serves as an evidence
5) Smooth work of an Audit Work
6) Serves as guide
7) Uniformity in Audit Work
8) Saves the time of Chief Auditor

67. Disadvantages of Audit Programme
i) Unnecessary for a small business
ii) Uneconomical for the auditor
iii) It may not cover everything
iv) Not useful for all business concern
v) No chance for suggestions
vi) Mechanical work

68. Unit – II
Internal Check System
Internal Check System – Meaning Definition , Objects , duties of auditor
in regard internal check internal control , Internal Audit , Difference
between internal check , internal control & internal audit . Internal
check in regard cash tractions . Vouching of cash transactions – Meaning
& Importance of Vouching , Voucher , Vouching of Opening Balance ,
Cash receipts , Cash payments , Capital Expenditure & Trading
Transactions .

69. Introduction
Internal check is a part of internal control . It is arrangement
of routine book-keeping where the work of one person is
automatically checked by another without any financial
burden . Similarly no employees is allowed to do a job from
the beginning to the end & also not allowed to deal with one
book through out the year . Internal check enjoys the version
of labour & it is a built in part of the accounting system & it
is mechanical .

70. Definitions
1 “Internal check may be define as such arrangement of the accounting routine that errors &
frauds are automatically prevented or discovered by the very operation of book-keeping itself.”
2 “An internal check means practically a continuous internal audit carried on by the staff itself ,
by means of which the work each individual is independently check by the other members of
the staff.”
From the above definitions , the internal check involves four things :
a) The work is properly divided in such a way that all the duties are assigned to different clerks .
b) The clerks get the work load according to their capabilities & qualifications .
c) One person does not perform any single task from the beginning to the end .
d) The work done by one clerk is checked independently & automatically by another .

71. Difference between Internal Check & Internal Audit
Internal Check Internal Audit
Nature Of Work
Internal check is the process Internal audit is related with
of checking the work of each the examination of account
individual by the other books by the employees of the
members . concern .
Time
Internal check is done in Internal audit starts after
operation during the course of the entry of the transaction in
transaction . the account book .
Appointment of the employees
Internal check is done by the Internal audit is a separate set
same set of employees . of employees .

72. Objects of Internal Check
1. Determination of Employees Responsibilities
2. Giving Completeness to Accounts
3. Reliability of Books of Accounts
4. Minimization of Errors & Frauds
5. Increase in Efficiency
6. Quick Operation of Final Accounts
7. Facility in Auditing
8. Moral Check

73. 1. Determination of Employees Responsibilities :- To allocate duties & responsibilities in such a way so that
every clerk may be held responsible for a particular error or fraud .
2. Giving Completeness to Accounts :- To distribute the work in such a way so that no business transaction
is left from recoding .
3. Reliability of Books of Accounts :- If an enterprise operating an effective system of internal check, its
books of accounts & other records are readily relied upon by interested parties .
4. Minimization of Errors & Frauds :- To minimize the possibilities of errors , frauds or irregularities because
of effective check on the tendency of one who is careless at his work .
5. Increase in Efficiency :- To increase the efficiency of accounting staff as internal check system is based on
the principle of division of labour i.e. work .
6. Quick Operation of Final Accounts :- To help in the preparation of the final accounts .
7. Facility in Auditing :- To simpilify the work of the auditor .
8. Moral Check :- To exercise moral check on staff .

74. Essentials of An Effective system of Internal Check
1. Fixed Responsibility
2. Rotation of Employees
3. Mechanized System
4. Safeguards
5. Standard Forms
6. Strict Supervision
7. Review

75. 1. Fixed Responsibility :- In internal check system , the responsibility of each individual should
be fixed properly .
2. Rotation of Employees :- In case of a large concern , the auditor should suggest the rotation
of duties of the various employees without prior notice .
3. Mechanized System:- Mechanized system of accounting should be adopted so that the eraser
or over-writing can be avoided .
4. Safeguards :- Adequate safeguards should be prescribed to keep up used receipts , cheque
books , files & securities ,etc. .
5. Standard Forms :- There should be standard forms & accounting records with proper
numbering be maintained by the client .
6. Strict Supervision :- Auditor should ensure that the internal check system & its procedures
are fully operative .
7. Review:- The system of internal check should be reviewed from time to time to suggest some
improvements .

76. Advantages of Internal Check System
1) Proper division of work
2) Efficiency & Economy
3) Early detection of errors & frauds
4) Prevention of errors & frauds due to moral check
5) Early preparation of final accounts
6) Increased profitability for owners
7) Convenience to auditor

77. 1) Proper division of work:- Work is allocated among the members of staff
keeping in view their qualification & experience .
2) Efficiency & Economy :- Division of work based on expertise promoters
efficiency of the staff & leads to overall economy in operations .
3) Early detection of errors & frauds :- As the work of each worker is in the
ordinary course checked by the another , errors & frauds are detected early .
4) Prevention of errors & frauds due to moral check :- Assurance as to
subsequent checking of each employees work by another , act as an effective
impediment to commission of errors & fraud .

78. 5) Early preparation of final accounts :- It is easy to place reliance on the books
& accounts or an enterprise with a strict system of internal checks . Consequently if
can prepare its final accounts , without going into the veracity of the data all over
again .
6) Increased profitability for owners :- Overall efficiency & economy of
operations leads to increased earnings for the owner of the enterprise .
7) Convenience to auditor :- Where an enterprise operators an effective system
of internal check , the external auditor can safely undertake test checking of selected
number of representative transaction & documents to determine the type & extent of
audit tests & procedures to be applied on the basis of his findings .

79. Disadvantages of Internal check System
a) Slackness in the employees
b) Slackness among employer
c) Slackness in the auditor
d) Not suitable for small business
e) Fraud possible by collusion
f) Duplication of work

80. a) Slackness in the employees :- The employees may also become
careless when they feel that the employers depend upon them & does
not go through the books himself .
b) Slackness among employer :- The owner of the firm may become
careless . He may depend on his staff for the accuracy of the account
books . He does not feel to go through the account books himself . Thus
, frauds & errors are remained undetected .
c) Slackness in the auditor :- The auditor may also become careless in
his work . He may rely on this system only .

81. d) Not suitable for small business :- This system is quite expensive &
time consuming & hence not suitable for small business houses .
e) Fraud possible by collusion :- There may be a possibility of collusion
among the employee it decreases the utility of this system .
f) Duplication of work :- In this system , the work of an employee is
again examined by other employees . It means that there is a
duplication of work .

82. Principles Or Characteristics of Internal Check System
1. Appointment of Employees
2. Determination of Work
3. Control on Important Work
4. Control on Letters
5. Use of Machines
6. Safe Custody of Vouchers
7. Compulsory Leaves
8. Control on Cash
9. Contacts with Debtors & Creditors
10. Division of Work
11. Use of self Balancing Ledger
12. Strict Supervision

83. 1. Appointment of Employees :- Employees should be appointed to carry on
different work according to their abilities & there should be no room left for
interference .
2. Determination of Work :- Every employee should be aware of his own
responsibility how his work is related to other work .
3. Control on Important Work :- There should not be control of a single person
only , on the important work .
4. Control on Letters :- Letter , registered envelops & money orders should be
entered in a proper register & received by responsible person .
5. Use of Machines :- Labour saving devises as cash register , calculating machines
, time recording clocks etc. should be used in the internal check system .

84. 6. Safe Custody of Vouchers :- There should be a proper system of filing vouchers
correspondence , etc. in the business concern .
7. Compulsory Leaves :- Person dealing with cash , securities , cheques etc. should
be compelled to take annual holidays in unbroken periods .
8. Control on Cash :- All the cash received should be sent daily to the bank to
deposit in the bank account .
9. Contacts with Debtors & Creditors :- The task of dealing & corresponding
with debtors & creditors should be assigned to the responsible person .

85. 10. Division of Work :- The distribution of work should be such that no single
person is allowed to do a job solely himself from the beginning to the end . The
division of work should not be too expensive .
11. Use of self Balancing Ledger :- Self balancing system should be used to
make the system of internal check very effective .
12. Strict Supervision :- Important work like payment of wages , valuation of stock
, sale , bad debts & receipts of goods etc. should be done under strict supervision &
control .

86. Routine Checking
It is a part of vouching & it includes check of totals , sub-totals , posting
into ledgers & checking of ledger accounts regularly . Routine checking is
done by junior clerk only .

87. Objects of Routine Checking
1. It helps in ascertaining the arithmetic accuracy of the account books .
2. It helps to prevent the situations of altering figures of audited accounts .
3. It helps to see that the transactions are recorded in the books properly or not .
4. It helps to ascertain that the accounts are opened with the help of journals & the
balance of accounts are drawn up properly .
5. Routine checking makes the work of vouching satisfactory .

88. Vouching
“Vouching refers to the examination of entries made in the authority &
authenticity of transactions as recorded in the books of accounts .”
Dicksee
Vouching means the verification of the authority & authenticity of
transactions as recorded in the books of accounts . In short , vouching
means testing the truthness of items appearing in the books of accounts
.

89. Objects of Vouching
a) To verify that all transactions recorded in the books of accounts are supported by
documentary evidence .
b) To see that no fraud or errors has been committed while recording the transactions
.
c) No transaction has been recorded which does not relate to the business .
d) Every transaction recorded has been adequately authenticated by a responsible
person .
e) To see that the transactions are recorded on the proper date .
f) While recording transactions proper distinction is made between capital & revenue
items .

90. Importance of Vouching
1) Vouching is Essence of Auditing
2) If Checking is Backbone of an Audit Vouching is its Brain

91. 1) Vouching is Essence of Auditing :- Vouching tests the truthness
of the transaction recorded in the account books . Therefore , it is said
to the essence of the auditing .
2) If Checking is Backbone of an Audit Vouching is its Brain:-
Without a vouching , audit will be like a man without brain . If vouching ,
the auditor may not only see arithmetical accuracy but also ascertain
that the transactions entered in the books are for the purpose of the
business ,

92. Voucher
“A voucher has been defined as any documentary evidence in support of
a transaction.”
A.W.Holmes
“A voucher is a documentary evidence by which the accuracy of the
entire book may be substantiated.”
Lancaster
In simple words , A voucher is a written document to used in support of
an entry made in the account books .

93. Types of Voucher
a) Receipt
b) Invoice
c) Agreement
d) Explanations
e) Reports
f) Minutes
g) Prospectus

94. a) Receipt :- A receipt is a written acknowledgment that a specified article or sum of money has been
received. A receipt records the purchase of goods or service obtained in an exchange. A receipt, obtained in
a Swiss mountain restaurant on the top of the Grosse Scheidegg. Includes a list of meals with prices, Tisch
(table) number (7/01), total price information in two currencies (Swiss Francs and Euros), a note about the
7.6% tax, contact information and name of the cashier (Ursula).
In English speaking countries the term most frequently applies to the printed record given to a consumer at
checkout that lists the purchases made, the total amount of the transaction including taxes, discounts and
other adjustments, the amount paid and the method of payment. Increasingly, these receipts may also
include messages from the retailer, warranty or return details, special offers, advertisements or coupons.
Receipts may also be provided for non-retail operations such as banking transactions. A receipt is a legal
document. In many countries, notably the United States of America, it is mandatory by law for retailers, and
individuals, have to show receipts and store information about every receipt, so that the tax authority, or IRS
can check that sales are not hidden.

96. Thermal paper
Gift receipts
Barcodes
Non-printed
Related industries

97. Thermal paper
Wherever credit cards and most purchases are accepted, receipts are printed using thermal printing on
narrow rolls of thermal paper. Recent innovationshave led to multi-colored thermal printing technology and
the ability to print double-sided receipts.
Gift receipts
Receipts may be presented as proof of a transaction for the purpose of exchanging or returning
merchandise. Some retailers provide special "gift receipts" specifically for this purpose. Unlike a standard
purchase receipt, the gift receipt omits certain information, most notably the price that was paid for an item.
The receipt usually has a barcode along the bottom so that the retailer can call up the transaction
information from a database of previous purchases, authenticating a return.

98. Barcodes
Increasingly, retailers are using barcodes on receipts that allow them to identify the transaction in their
system later on. This is helpful for proving the authenticity of the receipt, especially when a customer is
returning or exchanging goods. Some retailers' point-of-sale systems allow the salesperson to see a
complete record of the customer's buying history, including information about other store locations the
customer has visited, what they purchased or returned, and total accumulated spendings, among other
things- all by scanning a receipt barcode. This kind of monitoring has led to considerable savings among
retailers by helping to prevent fraudulent

99. Non-printed
Hand-written or hand-completed receipts are more often used for infrequent or irregular transactions, or for
transactions conducted in the absence of a terminal, cash register or point of sale (for example, as provided
by a landlord to a tenant for receipt of rent money.)
Related industries
Organizing receipts and similar financial documents is a multi-million dollar industry in the United States.
Consumers can use desktop and online software to organize electronic receipts; sometimes, receipts are
sent digitally from point of sale devices to consumers. The growing trend of digital receipts has led to the
launch of new businesses focused on digital receipt management.

100. b) Invoice:- An invoice or bill is a commercial document issued by a seller to the buyer, indicating the
products, quantities, and agreed prices for products or services the seller has provided the buyer. An invoice
indicates the buyer must pay the seller, according to the payment terms. The buyer has a maximum amount
of days to pay for these goods and is sometimes offered a discount if paid before the due date.
In the rental industry, an invoice must include a specific reference to the duration of the time being billed, so
in addition to quantity, price and discount the invoicing amount is also based on duration. Generally
speaking each line of a rental invoice will refer to the actual hours, days, weeks, months, etc. being billed.
From the point of view of a seller, an invoice is a sales invoice. From the point of view of a buyer, an invoice is
a purchase invoice. The document indicates the buyer and seller, but the term invoice indicates money is
owed or owing. In English, the context of the term invoice is usually used to clarify its meaning, such as "We
sent them an invoice" (they owe us money) or "We received an invoice from them" (we owe them money).

101. c) Agreement:- Agreement may refer to:
Agreement (linguistics) or concord, cross-reference between parts of a phrase
Gentlemen's agreement, not enforceable by law
Contract, enforceable in a court of law
Reliability (statistics) in the sense of, for example, inter-rater agreement
A pact, convention, or treaty between nations, sub-national entities, organizations, corporations
Consensus
Agreement (1978) – a book of poetry by Peter Seaton

102. d) Explanations :- An explanation is a set of statements constructed to describe a set of facts which clarifies
the causes, context, and consequences of those facts.
This description may establish rules or laws, and may clarify the existing ones in relation to any objects, or
phenomena examined. The components of an explanation can be implicit, and be interwoven with one
another.
An explanation is often underpinned by an understanding that is represented by different media such as
music, text, and graphics. Thus, an explanation is subjected to interpretation, and discussion.
In scientific research, explanation is one of the purposes of research, e.g., exploration and description.
Explanation is a way to uncover new knowledge, and to report relationships among different aspects of
studied phenomena. Explanations have varied explanatory power.

103. e) Reports :- A report is a textual work (usually of writing, speech, television, or film) made with the specific
intention of relaying information or recounting certain events in a widely presentable form.
Written reports are documents which present focused, salient content to a specific audience. Reports are
often used to display the result of an experiment, investigation, or inquiry. The audience may be public or
private, an individual or the public in general. Reports are used in government, business, education, science,
and other fields.
Reports such as graphics, images, voice, or specialized vocabulary in order to persuade that specific audience
to undertake an action. One of the most common formats for presenting reports is IMRAD: Introduction,
Methods, Results and Discussion. This structure is standard for the genre because it mirrors the traditional
publication of scientific research and summons the ethos and credibility of that discipline. Reports are not
required to follow this pattern, and may use alternative patterns like the problem-solution format.

104. Additional elements often used to persuade readers include: headings to indicate topics, to more complex
formats including charts, tables, figures, pictures, tables of contents, abstracts, summaries, appendices,
footnotes, hyperlinks, and references.
Some examples of reports are: scientific reports, recommendation reports, white papers, annual reports,
auditor's reports, workplace reports, census reports, trip reports, progress reports, investigative reports,
budget reports, policy reports, demographic reports, credit reports, appraisal reports, inspection reports,
military reports, bound reports, etc.

105. f) Minutes:- Minutes, also known as protocols, are the instant written record of a meeting or hearing. They
typically describe the events of the meeting, starting with a list of attendees, a statement of the issues
considered by the participants, and related responses or decisions for the issues.
Minutes may be created during the meeting by a typist or court recorder, who may use shorthand notation
and then prepare the minutes and issue them to the participants afterwards. Alternatively, the meeting can
be audiorecorded or a group's appointed or informally assigned Secretary may take notes, with minutes
prepared later.
It is usually important for the minutes to be terse and only include a summary of discussion and decisions. A
verbatim report is typically not useful. The minutes of certain groups, such as a corporate board of directors,
must be kept on file and are important legal documents.

106. g) Prospectus:- 'Prospectus'
A formal legal document, which is required by and filed with the Securities and Exchange Commission,
that provides details about an investment offering for sale to the public. A prospectus should contain the
facts that an investor needs to make an informed investment decision.
Also known as an "offer document".

107. There are two types of prospectuses for stocks and bonds: preliminary and final. The preliminary
prospectus is the first offering document provided by a securities issuer and includes most of the details of
the business and transaction in question. Some lettering on the front cover is printed in red, which results in
the use of the nickname "red herring" for this document. The final prospectus is printed after the deal has
been made effective and can be offered for sale, and supersedes the preliminary prospectus. It
contains finalized background information including such details as the exact number of shares/certificates
issued and the precise offering price.
In the case of mutual funds, which, apart from their initial share offering, continuously offer shares for sale
to the public, the prospectus used is a final prospectus. A fund prospectus contains details on its objectives,
investment strategies, risks, performance, distribution policy, fees and expenses, and fund management.

108. In finance, a prospectus is a document that describes a financial security for potential buyers. A prospectus
commonly provides investors with material information about mutual funds, stocks, bonds and other
investments, such as a description of the company's business, financial statements, biographies of officers
and directors, detailed information about their compensation, any litigation that is taking place, a list of
material properties and any other material information. In the context of an individual securities offering,
such as an initial public offering, a prospectus is distributed by underwriters or brokerages to potential
investors.

109. Points to be Noted in Vouching
1) Auditor should check date , name of the party to whom the voucher is addressed ,
the name of the party issuing the voucher & the amounts etc.
2) All vouchers are properly filed , serially numbered & arranged in order of the entries
in the various books .
3) The voucher is inspected should be canceled by a stamp or mark so that it can not
be produced again .
4) The auditor should also note whether the revenue stamp is affixed on voucher if the
amount of the voucher exceeds Rs. 500.
5) The auditor should not take the help of any member of clients staff while vouching
receipts .

110. 6) Auditor should see that any alteration in the voucher has been duly signed &
approved by the senior officer of the organization .
7) Nature of expenditure must be related to the business concern .
8) Amount paid should be shown in words & figures it will reduce the chances of
alterations .
9) The auditor should be careful about the period for which the payment is made .
10) The auditor should see as to which account “Item” is posted . There should be a
proper distinction between capital & revenue expenditure .

111. 11) A note should be made of the transactions & items requiring further information &
explanations .
12) The auditor should properly scrutinize the duplication voucher so as to avoid
chance of fraud .
13) Received invoice should not be accepted as voucher because the chances of
double payments are there .
14) The voucher should be signed by the payee .
15) The auditor should note the signatures of the payee is taken on voucher .

112. Vouch the Cash Receipts
Cash book is very important financial book for every business concern considering the
chances of misappropriations , frauds & errors possible in connection with the receipts
& payment of cash , the auditor has to be very careful in checking the cash books . The
auditor has to ensure that all the receipts & payments of cash is the recorded in the
cash books & no factious entry is made , & also , cash is not misappropriated .
The following points should be noted while vouching cash receipts transactions .
1. Internal Check
2. Comparison of the rough cash book with the cash book
3. Control over cash receipts

113. 1. Internal Check :- As the first step the auditor should study & satisfy himself whether the internal check
system in corporation is satisfactory or not
2. Comparison of the rough cash book with the cash book :- Auditor should first examine the rough book or
diary where the entries are first made & should compare it with cash book entries .
3. Control over cash receipts :- Following points to be noted in this connection
a) All the receipts are on printed form .
b) The system is to be examined to find out whether the counter foil receipts or carbon copies are used as
evidence .
c) All the receipts & receipts books should be separately & consecutively numbered .
d) Particulars like date , amount , name , etc. on the receipts should be compared with those given in the
cash book .
e) All the receipts should be signed by a responsible officer .
f) The opening balance of cash receipts will be closing balance of the last year . So it should be verified with
last years audited balance sheet .

114. Unit – III
Verification & Valuation of Assets & Liabilities , Audit of Final Accounts .

115. Meaning of Verification
Concept Of Verification
Verification means proving the correctness. One of the main work's of auditor is verification of assets and
liabilities. Verification is the act of assuring the correctness of value of assets and liabilities, title and their
existence in the organization. An auditor should be satisfied himself about the actual existence of assets and
liabilities appearing in the balance sheet is correct. If balance sheet incorporates the incorrect assets, both
profit and loss account and balance sheet do not present true and fair views.
Thus, verification means to confirm the truth or accuracy and to substantiate. It is a process by which the
auditor satisfies himself not only about the actual existence, possession, ownership and the basis of
valuation but also ensures that the assets are free from any charge.

116. 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.
While verifying the assets, an auditor should consider the following points:
* Ensuring the existence of assets.
* Acquiring the assets for business.
* Ensuring the proper valuation of assets.
* Ensuring that the assets are free from any charge.

117. Verification of assets implies a careful checking of the value, ownership
and title of an asset. It also includes finding out its actual possession and
existence and presence of any charge on it.
Definition of Verification
According to Spicer and Pegler, “Verification of assets means an inquiry
into the value, ownership and title; existence and possession, the
presence of any charge on the assets.”

118. Objects of Verification of Assets & Liabilities
1. Valuation of assets & liabilities
2. Finding out existence of assets
3. Finding out the ownership & title of the assets
4. Detection of errors & frauds
5. Certification of the arithmetical accuracy in account books
6. Whether balance sheet exhibits a true & fair financial position of the concern
7. Finding out the existence of liabilities

119. 1. Valuation of assets & liabilities :- The auditor has to ensure that the assets
& liabilities have been shown at their correct value .
2. Finding out existence of assets :- The auditor has to satisfy that the assets
shown in the balance sheet are in existence or if audit is carried out after the balance
sheet date he should insure that assets existed at the balance sheet date .
3. Finding out the ownership & title of the assets :- Verification certifies
the ownership & the title of the assets shown in balance sheet .
4. Detection of errors & frauds :- Verification helps in detecting the frauds &
errors in the account books of the undertaking .

120. 5. Certification of the arithmetical accuracy in account books :-
Verification certifies the arithmetical accuracy of the accounts books .
6. Whether balance sheet exhibits a true & fair financial position of
the concern :- Verification helps the auditor to certify the fact whether
the balance sheet exhibits a true & fair financial position .
7. Finding out the existence of liabilities :- The auditor has to satisfy
himself that the credit balance appearing in the books are really
liabilities .

121. Difference between Verification & Vouching
A) Nature of Work :- Verification examines the assets & liabilities shown in
balance sheet , while Vouching examines the entries relating to the
transactions recorded in the account book .
B) Time :- Verification is made at the end of the financial year , while Vouching
is done for the whole years transactions .
C) Basis :- Verification is based on physical as well as documentary examination
, while Vouching is based only on documentary examination .

122. Difference between Verification & Vouching
D) Personnel :- Verification is done by auditor himself or his assistant ,
whereas Vouching is done by juniors like audit – clerk .
E) Valuation :- Verification includes the valuation while Vouching does
not mainly concern with valuation .
F) Utility :- Verification certifies the existence of the assets & liabilities
while Vouching indicates that an asset must be possessed by the
concern .

123. valuation
The process of determining the value of an asset or company. There are
many techniques for valuation, and it is often partially objective and
partially subjective.
The general definition of an audit is an evaluation of a person,
organization, system, process, enterprise, project or product. The term
most commonly refers to audits in accounting, but similar concepts also
exist in project management, quality management, water management,
and energy conservation.

124. Definition of Valuation
“The valuation of assets is therefore an attempt to ensure the equitable
distribution of the original outlay over the period of the assets
usefulness.”

125. Objects or Points to be kept in mind at the Time of Valuation
a) To know the actual financial position of the company .
b) To know about the goodwill of the concern .
c) To know the difference in the value of assets at the time of purchase
& at the date of Balance Sheet .
d) To satisfy the auditor about the accuracy of the Balance Sheet .

126. Objects of Valuation
e) To know the expected working life of the assets .
F) To know the original cost of the assets .
g) To know the mode of investment of the capital of the
company .

127. Difference between Verification & Valuation
A) Meaning
Verification proves the existence , ownership & title of the owner of the assets , while Valuation
certifies the correct value of assets & liabilities at the date of valuation of assets & liabilities
respectively .
B) Personnel
Verification is done by the auditor himself or by his assistant , while Valuation is done by the
owners or by their staff .
C) Basis
Verification is made on the basis of evidence , while Valuation does not have sufficient proofs .

128. Methods of Valuation of Assets
1. Cost Price
2. Replacement Value
3. Market Value
4. Book Value
5. Realizable Value
6. Scrap Value

129. 1. Cost Price :- It is a price paid for the acquision of an asset including installation
charges & any other cost incurred to bring the asset to its working condition for its
intended use .
2. Replacement Value :- It is a price at which a particular asset can be replaced in the
market .
3. Market Value :- It is a price at which a particular asset can be sold .
4. Book Value :- Cost price less depreciation .
5. Realizable Value :- Market price less expenses incurred solely for the purpose of
selling such product such as commission , brokerage etc. given on the sales of that
assets .
6. Scrap Value :- The amount that can be realized from the sale of scrap is called as
scrap value .

130. Classification of Assets
1) Fixed Assets
2) Floating Assets
3) Fictitious Assets
4) Wasting Assets

131. 1) Fixed Assets :- The assets which are purchased for permanent use by means of
which business is carried on with object of earning revenue & not for the purpose of
sale are called fixed assets .
2) Floating Assets :- The assets which can not put to constant uses are floating or
current assets .
3) Fictitious Assets :- The assets which have income producing ability but can not be
seen or touched are known as fictitious assets or intangible assets .
4) Wasting Assets :- These assets are of fixed nature & loose a part of their value in the
process of working eg. Mines , quarries , oil wells , etc. .

132. Verification & Valuation of Assets
A) Goodwill
B) Freehold Property
C) Plant & Machinery
D) Investments
E) Patent Right
F) Trade Marks
G) Bills Receivable
H) Debtors
I) Stock in Trade
J) Cash in Hand at Bank

133. A) Goodwill :- Good will is an intangible assets , therefore it can be
verified from records only & it can not be verified physically , as per
accounting standard 10 , goodwill shall be recorded in the books only
when some consideration in money or moneys worth has been paid for
it .
The auditor should see that goodwill is shown at cost less the amount
written off . The amount of goodwill is calculated at the time of
admission , retirement & death of a partner in the partnership firm .

134. B) Freehold Property :- Auditor should examine the title deeds & he should see
that the property is mortgage in the name of client . If property is mortgage , the
auditor is obtain a certificate from the mortgage regarding the possession . If the
owner of the freehold property has created a leasehold interest therein , in which he
reserves to himself for right to receive the annual ground rent during lease period &
reversion of the property to himself at the end thereof , the auditor should examine
the title deed or land registry certificates of the property together with the counter
part of the lease which has been granted . Freehold property should appear in the
Balance Sheet at cost subject to any provision necessary in respect of depreciation on
building . It is not usual to write up or reduce the cost of this asset even if its market
value is increased or decreased respectively . Fall in the value is generally considered
at the time of realization of asset.

135. C) Plant & Machinery :- The auditor should examine the plant & machinery from plant
register . It gives full information about the description , cost , provision for
depreciation etc. If the machines are purchased in the current year , the agreement
with the vouchers should be verified . He should see that plant & machinery are shown
in Balance Sheet are cost less depreciation .
D) Investments :- He should compare the schedule of each investment & securities
with the register of investments maintained by the client . If the investment are made
& registered in the name of any other person as a nominee of the company . Auditor
should verify the deed of trust or if no such is prepared then he should obtain a letter
from such person that they are holding the investment of the company & they are free
from any charges . He should see that the investment is over valued at a higher price
than the cost .

136. E) Patent Right :- The patent rights should be verified with the certificates granting
such rights . The auditor should also examine the last renewal payment certificate .
F) Trade Marks :- A trade mark is examined with the help of assignment deed & the
auditor also see that they are registered in the name of client .
G) Bills Receivable :- The balance of the Bills Receivable Account in impersonal ledger
will represent bills in hand at the date of Balance Sheet . During verification auditor
should ensure that they are properly drawn , stamped & not overdue . It should be
seen that the sufficient provision has been made for any loss likely to be sustained .

137. H) Debtors :- The auditor should write to the debtors & get balances confirmed by them. He
should also see that sufficient provision for doubtful debts has been made or not . As the terms
of various businesses are different so it is impossible to lay down any hard & fast rule as to the
valuation of book debts or debtors .
I) Stock in Trade :- Verification of stock in trade is very important party of auditors duty . Various
difficulties are involved in the verification of stock because no entries are usually appear in the
financial books . Where stock records are kept evidence is available . This wire assist the auditor
to satisfy himself about the correctness of stock figures .
J) Cash in Hand at Bank :- The auditor should , if possible , attend on the day of closing the
accounts & verify the balances in hand by actual inspection where this is not possible then he
should check the entries in cash book up to the date of his attendance & verify the existence of
the balance in hand in hand as at that date .

138. Verification & Valuation of Liabilities
i) Capital
ii) Debentures
iii) Loans
a) Secured & Unsecured
b) Loans on Mortgage of Property
iv) Creditors
v) Bills Payable
vi) Contingent Liabilities

139. i) Capital :- The auditor should verify the memorandum of association , articles of association ,
cash books , pass book & directors minutes book to find out the amount received from
shareholders .
ii) Debentures :- The auditor should see the debenture trust deed & if necessary can obtain a
certificate from the debenture holders .
iii) Loans :-
a) Secured & Unsecured :- The auditor should refer to loan agreement & satisfy that the
conditions on which loan has been obtained have been dully complied with it possible he should
obtain the balance confirmation betters from the parties . The auditor should examine the right
of borrowing authority to confirm that the loan has been raised in the proper exercise of the
authority . It loan is obtained by a charge on the assets of the company then document of
charge should be inspected . It should be conformed that sufficient disclosure of the charge
have been made in Balance Sheet . In case of company one auditor should ensure that the
provision of Sec. I (A) have been complied with .

140. b) Loans on Mortgage of Property :- Mortgage is a charge on immovable property to
secure a debt . The auditor , where loan is obtained by mortgaging the property ,
should examine the mortgage deed to verify the amount of loan raised , rate of
interest , terms of payments & rights created in the property by the mortgage deed .
Auditor should ensure the proper disclosure of mortgage on an asset is properly
disclosed in Balance Sheet .
iv) Creditors :- The auditor should obtain a schedule of creditors from the client &
check the purchase ledger , credit notes etc. Certificate should obtained from the
responsible official that all the liabilities accrued at the end of the year , have been
accounted for .

141. v) Bills Payable :- The auditor should vouch the bills with the entries in
the cash book . He should reconcile the total of the schedule of bolls
payable outstanding with the balance in the Bills Payable Account .
vi) Contingent Liabilities :- A contingent liability is possible liability of a
presently determinable or undeterminable which has arisen from past
dealings that may not become a legal obligation in the future . An
obligation may be a contingent liability when the very basis of the
obligation is contested .

142. Audit of Final Accounts and Capital & Revenue Expenditure
Final accounts includes Trading and Profit & Loss Account and Balance Sheet .
Duties of Auditor Regarding the Audit of Final Accounts :
1. Auditor has to ascertain that items shown in final accounts are classified properly .
2. Auditor has to see that final accounts show actual financial position of the company .
3. In case of companies , auditor has to see that Balance Sheet is prepared as per the standard format
given in part I of schedule VI and Trading and Profit & Loss Account discloses all the information as per the
requirement of part II of schedule VI .
4. In case of companies , which are governed by special acts such as Banking Companies , Insurance
Companies , Auditor should see that final accounts are prepared as per the requirement by the special
acts .

143. Audit of Trading and Profit & Loss Account
Items on Debit Side of Trading Account
1. Opening Stock
2. Purchases
3. Rent & Carriage-Inwards
4. Productive Wages
5. Import & Excise Duty
6. Royalty
Items on Credit Side shown in Trading Account
1. Sales
Closing Stock

144. 1. Opening Stock :- The closing stock of previous year is the opening
stock of the current year . There is no opening stock in the first year of
the new business concern . This is the first item shown in this account .
2. Purchases :- The auditor should see that actual purchases are shown
after deducting the purchases returns & it includes cash as well as credit
purchases .
3. Rent & Carriage-Inwards :- He should see that rent & carriage
expenses relating to purchases of raw materials are shown on the debit
side of trading account .

145. 4. Productive Wages :- he should ensure that manufacturing wages are
shown in trading account and salaries & wages are shown in profit &
loss account .
5. Import & Excise Duty :- He should see that import duty paid by
importer or exporter and excise duty paid by producer are shown in this
account .
6. Royalty :- Royalty which is paid for production should be shown in
this account .

146. Items on Credit Side shown in Trading Account
1. Sales :- The auditor should ensure that the amount of sales return is
deducted from total credit as well as cash sales .
2. Closing Stock :- He should see that the stock is valued on the basis of
cost or market value which ever is less .