NOTES AUDITING B.COM PART 2 PUNJAB UNIVERSITY
AUDITING
PANEL 1
Topics Include:-
1 Difference between
Accounting & auditing.
2 Objectives of
auditing
3 Advantages of an
audit.
Q # 1: Difference
between Accounting & Auditing.
Difference between accounting and auditing work should be
clear because nature, scope and type of work are different in both fields.
Accounting:
“Accounting is an art of recording the business transaction in the books
of accounts and to prepare a financial statement”.
Auditing:
“The auditing is the examination and
checking of accounting records and financial statements”.
Process
of accounting Process of auditing 
Cash Flow Statement
Journal Reporting
Ticking
Balance sheet Ledger Verification Costing
Vouching
Calling Over
Income statement Trial
Balance
Adjusted
Trial Balance
Following points of difference is
discussed as under:
Liability:
The accountant has no liability
for preparing final accounts.
The auditor has liability after
presenting audit report.
Advice:
The accountant has a right to
give advice on accounting system.
The auditor has no right to give
advice on business matters.
History:
The history of the business and
accounting go side by side.
The history of auditing is short
as compared to accounting.
Report:
The accounting work requires no
report to any party.
The auditing work requires
separate report to shareholders, directors or owners.
Techniques:
Accounting techniques include
depreciation rate, interest rate and installment payable.
Auditing techniques include
vouching, verification and valuation.
Reward:
The reward of work done by an
accountant is called as salary.
The reward of work done by an
auditor is called as audit fee.
Rules:
Accountant is not governed by any
code of conduct laid down by any institute.
Auditing is governed by code of
conduct as laid down by institute of chartered accountants.
Necessity:
Accounting is necessity of every
business entity whether small or large.
Auditing is not necessity of
every business.
Scope:
Accounting is concern with preparing of financial
statements.
Auditing is concern with checking of financial statement.
Purpose:
The purpose of accounting is to show the performance and
financial position of a business.
The purpose of auditing is to certify the true and fair view
of financial statements.
Knowledge:
Accounting work requires that an accountant must have
accounting knowledge.
Auditing work requires that an auditor must have accounting
as well as auditing knowledge.
Nature:
Accounting is concerned with current data. It is
constructive in nature.
Auditing is concerned with past data. It is analytical in
nature.
Time:
The time period of accounting is usually one year. It takes
one year to complete record.
The time period of auditing is usually less than one year.
It may be completed within a month.
Status:
The accountant is permanent employee of the business.
The auditor is an independent person.
Start:
The work of an accountant starts when the work of book
keeper ends.
The work of an auditor starts when the work of an accountant
ends.
Qualification:
An accountant may no be a chartered accountant as per law
An auditor must be a chartered accountant for public
companies.
Extent of work:
Boundaries in which accountant has to work are clearly
described by management.
The area of work for audit is set out by international
standards and related laws.
Standards:
Accounting is a subject which works under the guidelines
given by international accounting standards and generally accepted accounting
principles. (GAAP).
Auditor has to seek help from international standards of
auditing and practices.
Frauds and errors:
Frauds, errors and mistakes created in the performance of
accounting work.
Auditing is just a check on different mistakes committed by
accountant. Auditor detects the error and frauds.
Entity:
Accountant is a person, who
is appointed by management and has no separate entity apart from business.
Auditor or audit firm has
separate entity. Audit firm can sue and be sued in its own name.
Appointment and removal:
An accountant can be appointed
or removed at any time during the flow of work by management.
Auditor can be appointed
through following ways: by shareholders, by directors, by authorities. Auditor
can removed when new auditor is appointed.
Q # 2 what is audit or auditing &
what are the objects of audit
Origin is audit?
The
word audit has been born form the Latin word “audire” which means to hear. In
old days audit were done by listening arguments of the parties, who maintained
the books of accounts.
Audit
is a procedure of checking and determining the accuracy, reliability,
correctness and completeness of financial records.
Definitions:
1 Twentieth
Century Dictionary:
“An
examination of accounts by one or more duly authorized persons. To examine and
verify by the reference to vouchers”.
2 Lawrence
“An
audit is an examination of accounting records undertaking with a view to
establishing whether they correct and complete reflect the transactions to
which they purport to relate”.
3 W. Bigg Spicer
& Pegler:
“Audit
is such an examination of business records by which auditor is satisfied to
report that the profit and loss account and balance sheet of business are
prepared according to the legal provision and they are showing true and fair
view of business”.
There are three main objectives of
audit.
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Primary Objective:
Reporting:
Auditor
is an indiscriminate third party between management and shareholders but works
in the interest of shareholders. Audit is conducted in both large and small
organizations for reporting to owner and in report auditor’s opinions
independently regarding financial position of the business.
We can conclude three points from the above discussion.
- Checking
financial statements.
- Opinion
(report) thereon.
- Opinion
(report) must be independent
Secondary
objective:
Error:
Unintentional mistakes in financial statements are called errors.
Detection and
prevention of errors:
The
purpose of auditing is to detect the errors. The auditor can use ways and means
to find out errors in accounting record.
Here we can divide errors into two parts
- clerical
errors
- principle
error
Clerical errors:
A
clerical error is such error which happened during work at office by the
employee.
(a) Error of
omission:
Every
business transaction must be recorded in the books of account. An error of
omission arises when any transaction wholly or partially unrecorded in the
books of accounts.
(b) Error of
commission:
When a
transaction is recorded incorrectly in the books of original entry or wrong
posted in ledger, it is called error of commission.
© Compensatory
Error:
A
compensatory error is one which is counter balanced by another error, and that
is not disclosed in the trial balance. These errors are most dangerous and
difficult to find.
(d) Trail Balance
Error:
The error which arises at the time
of preparing trail balance is known as trail balance error.
Location of error:
These
errors would be spotlighted during the routine checking.
Errors of
principle:
When
the rules of accounting are not followed without prior intention: that is
called errors of principles.
(a) Incorrect
Allocation:
When
account treats capital items as revenue or revenue items as capital due to lack
of professional skill.
(b) Omission of
outstanding Assets & liabilities:
Sometime accountant would not apportion accrued and expired part of
income or expense items. For example, prepayments are ignored and the amount
charged to the profit & loss A/C.
© Incorrect
valuation of assets:
Current
assets are not valued at cost or market price whichever is lower. Fixed assets
are not valued at cost less depreciation.
Location of error:
Carefully vouching of books and ledgers will highlight errors.
Detection and prevention of fraud
“Fraud means false
representation of accounts or entry made intentionally”
International
standards of auditing:
“An
international act by one or more individuals among management, employees or
third parties, which result in a misrepresentation of financial statements is
called fraud”.
Detection of fraud is considered to be one of the important
duties of an auditor. The following are the various ways in which the fraud can
be committed.
Types of fraud
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Embezzlement of
cash:
There
is a greater possibility of fraudulent transaction of money in business
organizations. By no recording, less recording or more recording of cash
received and cash paid.
·
Omitting to enter any cash which has been
received.
·
Entering fewer amounts than what has been
received.
·
Making fictitious entries on the payment side of
cash book.
·
Entering more amounts on the payment side of the
cash book.
Misappropriation
of goods:
By over
valuation, under valuation, over invoicing or under invoicing of goods
purchased, sold and stored. Misappropriation of goods is more difficult to
detect unless accurate stock records are kept.
Fraudulent
manipulation of accounts:
Such
type of fraud is also difficult to discover as it is generally committed by
directors or managers with the object of either showing more profit or less
profit than they actually are.
Some examples of frauds are :
·
Inflation of sales.
·
Inflation of purchases.
·
Over valuation or under valuation of assets and
liabilities.
·
Not providing any depreciation or providing less
or more depreciation.
Location of fraud:
The
auditor must carry out the routine checking, vouching and verification
and make searching enquiries.
Implied objective:
Moral check:
Moral
check is a psychological check. An implied object of auditing is to create a
fear in the mind of accountants and staff of client. Accountant should know
that a competent person would check books of accounts after a particular
period. By moral check accountant will take utmost care in recording day to day
transaction.
Q # 3: what are the advantages or importance of audit?
Or
Why accounts are got audit?
Ans:
Advantages of Audit to business:
1 Detection and
Prevention of Errors & fraud:
Through
auditing detection and prevention of errors and frauds becomes possible. The
employees in charge of maintenance of accounts become regular, careful and
systematic in their work. If fraud discovers, the guilty party will be
responsible.
2 Business
Purchase Price:
If a
running business is to sold, purchase consideration can easily be determined on
the basis of audited accounts. After audit, real value of the assets and liabilities
comes before us.
3 Loan:
Business can easily obtain loan with the help of audited accounts
because audited accounts are accepted by the lenders for granting loan.
4 Tax Payments:
If
accounts are audited then these are easily accepted by the tax department for
the assessment of taxes and there is no need for further inquiry.
5 Valuable
suggestions:
Businessmen can get advice from the auditor about the weaknesses of
their business or accounts. Auditor is a professional and expert, so his
professionalism is complete guideline for management.
6 Reliability:
Suppliers customers and creditors are ready to deal only with those
companies which present the audited accounts. Accounts without auditor’s
approval are useless for decision making.
7 Goodwill:
Audit
is one of the chief elements due to which company enjoys goodwill. It is easy
to sell business at handsome price as purchaser feels minimum needs of
investigation in case of audited accounts.
8 Settlements of
Disputes:
If any
dispute arise among directors, partners or shareholders that can be solved by
auditor. Auditor is a neutral person, so his decision is acceptable for all
parties.
Advantages of audit for owners
1 Owner’s
satisfaction:
In the
presence of audit, the owners feel satisfaction about business operation and
working.
2 weak Points:
Audit
is the way of finding the weak points of internal control. In this way
efficiency of management can be increased.
3 No Exploitation
of shareholders:
Audit
is the way to avoid exploitation of shareholders. Shareholders who have no hand
in running the business can watch business through auditor. So directors can
not take undue advantage of their positions.
4 Efficiency:
Audit
determines the efficiency of employees. The efficient management is an asset
for business. We can change duties of employees according to their abilities.
5 Partner’s Trust:
If accounts
are audited then the partner easily trust on these accounts for knowing the
value of goodwill and assets at the time of retirement, death or admission of
new partner.
6 Fluctuation in
Profit:
If
accounts are audited then owners can easily know that what are the reasons for
fluctuation of profit.
7 Making of Budget:
If
accounts are audited then owners can easily know the true and fare view about
their business activities and they can make the budget for next year.
Advantage to Government
1 Easy assessment
of Taxes:
In the
presence of audited accounts the tax authorities can easily assess the income
and thus pas the assessment year.
2 Early recoveries
of Taxes:
As the
assessment orders can easily be made, it will lead towards early recovery of
taxes.
3 Economic
Progress:
The
government can check the economic progress of the various companies by going
through the audited accounts and thus can know the overall position of a particular
kind of business in the country and thus take proper action for that.
4 Leading of
Economic Progress:
The
Joint Stock Companies have played a major role in boosting up the economics
progress of a country in the modern age. The successful operations are not
possible without audit. So audit leads to economic progress.
5 Privatization of
Industries:
If
industries are running in loss then government can privatize then after going
through the audited accounts of those industries.
Advantages to General Pubic and Others
1 Public
satisfaction:
If
accounts are audited then general public easily satisfied about the business
operation.
2 Settlement of
insurance claims:
If
accounts are audited then insurance claims are easily settled because insurance
companies can easily know the actual loss through audited accounts.
3 No lender’s
Loss:
There
may be no loss to lenders because banks and others financial institutions get
the audited accounts before granting loan and with the help of audited accounts
they can check the trust worthiness of customers.
4 Better Pay:
Audited
accounts provide the true and fair view of profit, so employees can demand
higher pay.
5 Investor’s
Satisfaction:
The
investors can easily judge the position of the company and thus make the
decision to invest in one company and not others.
6 Employment
Opportunities:
As
organization and businesses are expanding; the need of audit is increasing, so
this field is providing more and more job opportunities to the thousands of
people.
AUDITING
PANEL 2
Topics includes:-
1 Continuous Audit
2 Final Audits
3 Interim Audits
Types of Audit
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Continuous Audit Final Audit Interim
Audit
Explain the Continuous Audit by its merits and demerits?
Continuous Audit:
It is also known as “running Audit”
such audit is required for large scale business. In continuous audit, audit work
carries on for the whole year with regular intervals.
Definition:
“The audits
which continue through out the financial year with regular or irregular
intervals are known as continuous audit.”
Main Points:
- Audit
which continue.
- Through
out the financial year.
- Regular
or irregular intervals.
Definition:
“Continuous audit work is conducted throughout the course of financial
year but is not taken to specific accounting period.”
Main Points:
- Conducted
throughout.
- Course
of financial year.
- Not
taken to specific accounting period.
Essentials/features/characteristics
of continuous Audit:
- Various
visits are made by auditor
- Suitable
for large businesses.
- Conducted
throughout the year.
- Thorough
checking
- Expensive
- Audit
report is not required.
Advantages/merits
of continuous Audit:
Detail checking:
The
merit of continuous audit is thorough checking. The audit remains busy
throughout the year. The work is checked on the spot.
Ready audited
information:
Shareholders are the very interested
party of the business so they want financial information for the taking
investment decisions. Continuous audit serves by giving reliable financial
information.
Early tax
return/prompt tax return:
Continuous
audit is beneficial for prompt filing of returns. The management can submit
audited accounts to the registrar.
Early meetings:
The
continuous audit is useful for early meeting of shareholders. The audited
accounts are presented for distribution of profits. The management can get the approval
of shareholders.
Early location of
errors:
In
continuous audit, errors cab be found and killed at the time when it arises.
Even work load:
The
accounting staff can feel satisfaction due to even work load. The books of
accounts are maintained as routine matter.
Accounts
completion:
The
audit induces the accounting staff to complete their work in time. At the same
time audit work completed by audit staff.
Auditor’s advices:
The
weaknesses of the business functions can be removed during the year. The
auditor can use practical experience. He can guide to remove the fault in the
way of successful working.
Moral check:
Accounting
staff work more carefully if they know that they are watched. Due to conduct of
continuous audit staff tries to keep records up dated.
Surprise visit:
Continuous audit provided chances of surprise visit to audit staff.
Surprise visits are important for eliminating the errors and frauds.
Interim dividend:
The
audited accounts can be prepared for six months. The management can declare
interim dividend to encourage the shareholders.
Time availability:
Continuous audit provides sufficient time to the audit staff. The
important and ambiguous matters may require more time to draw conclusion.
No missing
entries:
There
is no chance of missing entries in the books of accounts. The auditors can go
through each an every transaction.
Disadvantages/demerits of continuous audit:
Costly/expensive:
This
type of audit is comparatively more expensive as the auditor makes several
visits and performs detailed work involving more time being spent.
Low income:
The C.A.
keeps the staff busy for the year. They are not able to start and complete many
audits at the same time. So it is not suitable for financial point of view.
Alteration in
figures:
There
is a possibility of alteration in figures intentional or unintentional after
they have been checked by the auditor. In this way, errors or frauds can’t be
detected without further rechecking.
Interruption in
work:
In C.A.
the work of client suffers due to clash of duties. When the audit work is
started work of accounting staff suffers as books are not spare.
Mechanical work:
In this
audit work is repetitive in nature. In continuous checking auditor has to
repeat all the procedures.
Small business:
C.A is
not fit for small business concerns. Due to high cost they can not afford such
type of audit.
Precautions for continuous audit:
No erasing:
The
continuous audit requires precautions for erasing figures at later stage. The
surprise checking is essential to follow the rules of accounting so that
figures must remain the same.
No pending
questions:
There
should be no pending work on the part of auditor. The doubtful entries can be
cleared on the spot.
Complete checking:
The
auditor should start and complete the checking of book at one session. If it is
not possible he can go through the previous work.
Notes preparation:
The
auditor should prepare detailed notes of work done. The accounting staff can
see that facts and figures have been noted which can not be changed.
Tick marks:
The
audit staff must be careful during continuous audit. There is a need of special
tick marks to be used for audit of accounts.
No friendship:
The
auditor must inform his staff not to become familiar with accounting staff.
Secrecy is important for audit work.
Q: Discuss Final Audit with its advantages and
disadvantages?
Introduction:
Final audit is also known as “periodic
audit”. Final audit may be started after the closure of books of accounts at
the end of the year.
Definition:
“Audit
which is conducted at the end of accounting period when accounts have been
closed and financial statements are ready for relevant inferences.”
Main points:
- Conducted
at the end of accounting period.
- Accounts
have been closed.
- Financial
statements are ready.
Definition:
“Final
audit is not commenced until after the end of the financial period, and is then
carried on until completed”. (Walter w. bigg)
Main points:
- Not
commenced
- Until
after end of financial period
- Carried
on until completed
Advantages/merits of final Audit:
No change in
figures:
The
benefit of final audit is that change in figures is not possible. The audit
work starts after the completion of the accounts. The books of accounts are in
the custody of auditors, so no employees of client can access accounts and
statements.
No relationship:
In final audit, it provides no
chance to audit staff to develop friendly relations with accounting staff. The
accounting staff is not in a position to get benefit from audit staff.
Work continuity:
The
audit work goes on without any break from start till its completion. The
continuity of work is advantage for audit staff to clear their questions.
Full information:
The
final audit provides full information about business matters. So shareholders
can take decisions investment purpose.
Planned working:
The
audit work is completed under planning according to planned work the auditor
can control the audit of many business unit.
Moral check:
The
advantage of final audit is that performance of staff is improved. A fear of
staff regarding year end checking by a competent and skilled auditor.
Minimum time:
The
time required for final audit is less as compared to continuous audit. The
auditor can start and complete may audit.
Convenience for
staff:
Final
audit never disturb managerial work throughout the year, staff work without
interruption. The auditors start their work after the end of financial year.
Client
satisfaction:
In such
type of audit, the auditor is required to examine the record so such audit
provides satisfaction not only to the shareholders but also to the owners of
small firms.
Economical:
Final
audit is not a continuous burden on the shareholders because it is to be conducted
once in a year so this type of audit gives maximum benefit with minimum cost.
Legal requirement:
Such
kind of audit fulfills one of the legal requirements of joint stock company
imposed by companies ordinance 1984.
Disadvantages/demerits of final audit:
Short time:
In
final audit, audit staff has to prepare packed audit programme due to limited
time period.
Accounts delayed:
The
demerit of final audit is that delay in the preparation of accounts. Incase of large
business concerns it takes more time to complete the audit work so presentation
of accounts to the shareholders is delayed.
Late correction:
In
final audit, errors are located after the end of the year. The correction of
errors takes time so no decision can be made unless the audit staff issues its
final report.
Low moral check:
Final
audit has less moral pressure on employees of business. The audit staff comes
after one year. The employees are free to commit errors and frauds for twelve
months.
Lack of planning
for future:
The
budgets and estimates for futures may not be prepared in time as the audit work
is started after the end of accounting year it takes time to check the
accounting records.
Test checking:
In
final audit the most popular techniques of test checking is applied. Audit risk
is maximized so chance of error and fraud increase.
Non applicability:
It is
not applicable where internal controls of the company are weak or volume of
transactions is very large.
How would you discuss the merits and demerits of
interim audit?
Introduction:
Interim
refers to an audit conducted to a particular date within an accounting period.
In large scale business the performance may be checked for a particular part of
the year. For the purpose of making polices about prices, investment and
profits.
Definition:
“An
audit conducted in between the two annual audits with a view to find out
interim profits to declare interim dividend is called interim audit”.
Main points:
- Conducted
in between two annual audits.
- With
a view to find out interim profits.
- To
declare interim dividend.
Definition:
“When
an audit is conducted to a particular date within the accounting period, it is
called interim audit”. (L.R.Howard)
Essentials/characteristics/features:
- One
visits of auditor
- In
large business only
- Conducted
once in a year
- Test
checking
- Expensive
- Audit
report is required
- Conducted
to declare interim dividend.
Advantages of
interim audit:
Interim dividend:
Interim
audit is conducted to declare interim dividend. The shareholders feel
satisfaction over the business.
Planning:
Interim
audit is helpful for making plans for remaining part of a year. We can increase
the profitability of business due to better planning.
Location or errors
and frauds:
The
frauds and errors can be located due to interim audit. Errors and frauds can be
more quickly found and detected during such kind of error.
Auditor
suggestions:
The
accounting staff can follow auditor suggestion. Auditor is advices are useful
for better performance of business during the year.
No over work:
The
work is distributed over the whole year. The audit staff can complete the audit
work as per time table. All employees feel satisfaction due to even work load.
Moral check:
Like
other auditor interim audit makes accounting staff careful. If accounting staff
know that they are being watched, they will keep records up to date.
Making investment:
Interim
results are useful for investors. They can rely on audited accounts for making
investment.
Early final audit
/ final Accounts:
The interim audit is important for final audit. There is early
completion of final audit. The time spent on final audit is reduced due to
interim audit.
Disadvantages of
interim audit:
Figures
alteration:
The
disadvantage of interim audit is that figures can be changed by accounting
staff after the end of the audit.
Additional work:
The
demerit of interim audit is that there is additional work load on the part of
audit staff.
Test checking:
In
interim audit, test checking technique is followed. Audit risk is maximized
because interim financial statements will be based on sample results.
Costly/expensive:
Interim
audit increases the business expenses. Interim audit is optional for
management, so audit fee is an expense for business.
Work suffers:
Interim
audit creates troubles for accounting staff. When accounting books are
collected by audit staff, the client work suffers as books are not available
for making entries.
Conclusion:
Interim audit is conducted for a particular
part of the year. It is suitable for large industries due to additional cost.
AUDITING
PANEL 3
Topics includes:-
1 Common Points of various organization.
2 Special points for the particular business.
·
Bank
·
Insurance
·
Newspaper
·
Hotel
·
Textile & sugar company
Q # Common points of various organization or Special
points for particulars business.
- Bank
- Insurance
- Newspaper
- Hotel
- Textile
& sugar company
Special/common points for all audit :
Introduction:
Under companies ordinance 1984, it is compulsory for every public
limited company to get its account audited by a qualified chartered accountant.
The purpose is to safeguard the interest of shareholders.
It is
possible for auditor to check the audit in a limited period so the auditor
special attention to some points which are known as “common points”
Definition:
“Those key points which should keep an auditor into
consideration before the audit of special concern”
Common points in various concerns
1: Investment:
The
auditor can ask for the schedule of investment. He can see investment register.
He can see the broker note for the sale and purchase of investment. He can
calculate the dividend received on such investment.
2: Minute Book:
Auditor
should also examine the minute book and note down the resolution passed
effecting the accounting and auditing matter.
3: Payment:
The
auditor should verify the payment made to various parties. There should be
proper authority for making payments. All business expense must be for the
purpose of business activity only.
4: Outstanding expenses:
The auditor can check expenses outstanding
at the end of the year. The expenses due but not paid are to be recorded in the books of
A/c.There is a need to check the calculation.
5: Receipts:
The
auditor must check the receipts of cash from various sources. The goods sold or
service provided may be the basis of cash receipts. There is a need to check
the calculation of facts and figures.
6: Tax provision:
Auditor should see that adequate
provision has been made by the company for tax payable and shown in the balance
sheet.
7: Agreement:
The auditor can check the agreement between the parties. The terms and
conditions of such agreement should be noted. The power of management should be
examined from company article.
8: Nature of
Audit:
Duties of auditor are fixed by the
ordinance. In order to avoid misunderstanding between the auditor and client, a
letter called audit engagement letter is written by auditor client clearly
defining the auditor responsibilities.
9: To study the
legal documents:
Before
commencement of audit MOA,AOA and prospectus must be checked by the auditor.
Before starting his work in order to check business uniformity.
10: copy of
resolution:
The copy of resolution of director or
shareholders can be obtained from the company secretary. The decision takes by
the management should be implemented. The decision can be check in the books of
account.
11: Contingent
liabilities:
The auditor must note the contingent liabilities
have been properly disclosed in the final accounts. The bill may be discounted
and loan guarantee may be there.
12: Maintenance of
Depreciation:
The
auditor can examine the depreciation charged on various assets. The rate of
depreciation can be checked. The principal of consistency should be applied for
depreciation matter.
13: Make sure from
report:
Auditor
should study audit report of previous year audit and if any qualification are
found in it then special attention should be given to these qualification.
14: Observe
Capital and Revenue :
The
auditor can examine that proper distinction has been made capital and revenue
expenditure. The true and fair view of financial statement is possible due to
proper allocation between capital and revenue expenditure.
15:No access to
Ledger:
The
auditor can examine the books of accounts and check that there is no access in
journal, ledger, etc because the work of auditor is to check the books of
accounts and to present true and fair view of statement.
16: Prepaid
Expenses:
The
expenses may be paid in advance such expenses must be allocated between two
periods. The coming year’s expense must be recorded as prepaid at the end of
the current year.
17: verification
of closing stock:
The
auditor can observe & verify the closing stock of the company. Stock should
be valued at lower of cost or market value. The auditor can checked it at the
end of the year.
18: Intangible
Assets:
The
auditor can examine all the intangible assets e.g. goodwill, patents, copyright
etc.
19: Nature of
Accrued income:
The
auditor can note the income earned but not received. He can check the adjusting
entries made in the books of accounts. It is essential for determining the
profit & loss for the year
20: To check the
A/C system:
Auditor
should obtain a detailed examination and understanding of a/c system of an
entity to find out about the report being generated by a/c system.
21: To verify
Assets & Liabilities:
The
auditor has a right to verify assets and liabilities. The purpose of
verification is to note the existence and ownership of assets. The liabilities
may be verified from outside sources.
Q # 2: AUDIT OF
DIFFERENT CLASSED OF BUSINESS?
Banks:-
- Balance with other banks:-
The balances in this regard to be
obtained from other bank and verified that balances from those banks where it keeps.
Either they are in accordance or not.
- Investment Fund:-
At least 30%
of total investment should be kept in government securities which is compulsory
by law of state bank.
- Loan & Advances:-
Securities of various loan and advances be securitized
and unsecured loans be shown separately and both should tally with ledger
account.
- Late Check:-
Cheque received at closing date be checked to have
been cleared within the stipulated period of time.
- Statuary Reserves:
At least 20% of deposits be kept in statuary reserves,
unless it become equal to the paid up share capital.
Insurance
(Insurance Ordinance 2000)
- Provision for unexpired Risk:
Other
than life insurance the auditor must see that the provisions are properly made
in this regard.
- Claims:
Verify
the claim paid with the cash book claim registers cancelled policies and director’s
signature about authorizing them.
- Commission Paid:
(a)
Verify that
commission payable has been accounted for.
(b)
Verify that
commission has been calculated according
to
the insurance company’s ordinance act 1938 and the relevant agreement.
- Life Insurance Fund:
Vouching
the legal provision in companies with the Insurance Act 1938.
- Agency Balances:
Examine
the balances with the balances of other agencies in order to check the
recoverability.
- Bonus Verification:
Checking
of the bonus paid in cash with the bonus register as confirmations is made by
minute book.
Hotels:
- Functions:
The
bill will be checked with the order given and the attendance verified with the
function performed.
- Excise Duty:
10% duty on all services checked
and extended to the customer.
- Entries:
Entries be checked with the daily book and receipts
issued.
- Sales:
Sales be verified with the visitors book and
subsidiary cash book.
Newspaper Company:-
- Contribution and donation:
All such contributions charities
and donation to be verified from relevant institution.
- Advertisement income:
The
advertisement day book be checked with the contracts, correspondence or any
other evidence.
- Return of Newspaper:
The system of receiving unsold newspaper from agent be
checked and their credit also be checked.
- Subscription Income:
The
company which received subscription income should be checked.
Textile Company:
- Foreign Exchange Earnings:
The amount earned and kept in the foreign currency account must be
checked that it is being utilized for the purpose of the company.
- Security against loans:-
The assets given as security for bank loan are
separately shown in the balance sheet.
- Contingent Liabilities:
If such liabilities exist it
should be seen that they have been recorded as footnote under balance sheet.
AUDITING
PANEL 4
Topics includes:-
Ø
Annual Audit Report:
1. Un-Qualified
Report
2. Qualified
Report
Ø
Statutory Report:
Q #1: Define the term
un-qualified/ qualified report. Discuss the audit work involved in submission
of audit report. Give specimen of such report?
Q # 2: As an auditor
discuss your duties regarding statutory report. Give specimen of such report?
Definition of audit report
“End product of
an audit is the auditor’s report. The auditor report summarizes results of the
work conducted by the auditor and formally communicates the auditor’s opinion”.
Audit reports
Audit reports can be divided into three categories.
1. Un-Qualified report. 2. Qualified Report. 3. Statutory
Report.
Annual Audit Report
The directors of every company are required to place in the
annual general meeting, the balance sheet, profit & loss Account and
statement of changes in financial position duly audited by the external auditor
of the company. The auditor after verification give a report that whether
financial statement are giving true and fair view of the state of the affairs
of the company such report is called Annual Audit Report.
Annual audit reports are normally of two types.
1 Un-Qualified Report.
2 Qualified Reports
Un-Qualified Report
“An Un-Qualified audit report is one in which the auditor,
after obtaining all information and necessary explanations express his complete
satisfaction that the financial statement present true and fair view”.
Such report is also called clean or positive report or this
report may define as:-
If the auditor after completion of the audit concludes that
financial statement give a true and fair view in accordance with identified
financial reporting frame work such opinion in termed as un-qualified opinion
and such report is called un-qualified report.
Qualified Report
“A qualified report is one which contains error, objection
or discrepancies from the auditor side
in respect of Co’s account during this audit.”
It means that during the course of audit of financial
statement, the auditor detects certain irregularities but effect of such
irregularities is not so significant as to render whole of the financial
statement un-reliable.
Qualification is
the Report:
Report
could be qualified because of many reasons. Auditor report that except for that
reason other information are correct e.g.
1. No Access to
books of Accounts:
If the
auditor is not provided with voucher supporting documents.
2. Stock
Valuation:
Stocks
are not valued in accordance to accounting policies or the amount appearing in
the financial statement does not agree with relevant record.
3. Less booking of
depreciation:
Depreciation expense is under booked so profit is over stated and assets
are over valued.
4.Non-compliance
with law:
Final
accounts are not prepared in accordance to relevant law.
Audit work involved in submission of
Audit report ( contents)
In accordance with companies ordinance 1984, Annual Audit
Report whether Qualified or Un-Qualified should contain the following contents.
1.Full information
and Explanation:(sec:255(3)(a).
The auditor should obtain all
necessary information and explanation from the client regarding financial
matter of the company. He should check all necessary document and has to right
access the books of account of the company.
2.Books of account
in accordance to companies ordinance (sec 255(3)(b):
The
auditor should report that books of accounts are maintained in accordance to
Co;s ordinance provisions. It means all records of
sales-purchases-assets-liabilities and detail of material labor and other items
should be properly kept by the company.
3.Financial
statement as per ordinance( sec 255(3)(c):
That
whether or not the profit & loss, balance sheet and cash flow statement are
prepared in accordance to companies ordinance requirements.
4.Financial
statement as per books of accounts(sec 255(3)(c):
Further
check that profit & loss, balance sheet agrees with books of accounts.
5.True and fair
view( sec 255(3)(d):
That
whether or not a financial statement gives true & fair view of the state of
affair of the company. It means balance sheet- profit & loss accounts-
statement of changes in financial position are giving true & fair view.
6.Expenditure
pertain to business ( sec 255(3)(e):
The auditor has to report that whether or
not the expenditure incurred is for the purpose of the company.
7.Business
conducted according to the object(sec 255(3)(f):
The
auditor has to report that whether or not the business conducted during the
year was in accordance with object clause of memorandum of association of the
company.
8.Deduction of
zakat(sec 255(3)(g):
Whether
or not zakat deducted at source under zakat at Ushr Ordinance 1980 was deducted
by the company and deposited in central zakat fund.
Before submission of Annual Report of the member it is duty
of auditor to check all the requirement.
Specimen of a qualified Audit Report:
Form 35-A
The Companies ordinance 1984
(Section 255(3) and Rule 17-A)
Auditor Report to the Members
We have audited and annexed balance sheet----- as at -----
and the related profit & loss account and statement of changes in financial
position.
We state that we have obtained all necessary information and
explanation after due verification we report that.
1. Company has not provided depreciation amounting Rs.50000.
2. The value of stock 220000 being it cost, whereas its
current replacement cost is 200000 the stock should be reduced 20000.
Expect for the above
we state that:-
(a)
In our opinion proper books of accounts have been
kept by the company as required by the companies ordinance 1984.
(b)
In our opinion:
(1)The balance sheet and profit & loss
account with the notes have been drawn in conformity with ordinance 1984.
(2)The expenditure incurred during
the year was for the purpose of the company’s business.
(3)The business conducted,
investment made the expenditure incurred during the year were in accordance
with the object of the company.
(c) In our opinion and the best of
our information and according to explanation given to us. The balance sheet, profit & loss account
and the statement of changes in finanicial position give true and fair view of
the statement.
(d) In our opinion Zakat deductible
at source under the zakat and ushr ordinance, 1980 was deducted by zakat
ordinance under section 7.
Date----------
signature(s)
Place---------
name of
auditor(s)
Q# 2: Statutory
Report
Introduction:
The companies are required to conduct the statutory meeting within (3)
three to (6) six month after getting certificate of commencement of business.
In such a meeting the director are to forward a report to every member
of the company at least 21st days before the date of the statutory
meeting this report is called statutory report.(157)(2).
It
is the duty of the auditor of the company to certify the correctness of the
information given by the statutory report regarding:
(i) shares allotted.
(ii) cash received against such allotment.
(iii) receipts & payment of the company.
Contents of statutory report
Number of shares
allotted:
Total
number of share allotted distinguishing shares allotted other than in cash, and
stating the consideration for which they have been allotted. Sec 157(3)(a).
Cash received
against shares:
Total amount
of cash received by the company in respect of all share allotted.Sec 157(3)(b)
Receipts and
payments account:
An
abstract of the receipts and payment made there upto a date within seven days of the date of the
report. Sec 157(3)(c).
Particulars of
directors etc:
Detail
of names, address, and occupation of the directors, chief executive, secretary,
auditor and legal advisor of the company.
Sec 157(3)(d).
Preliminary
expenses:
A
detail of preliminary expenses made or estimate of expense. Sec157(3)(c).
Modification of
contract:
Particulars of contract modified and details of any modification or
proposed modification. Sec (3) (e).
Underwriting
contract.
The
detail of underwriting contract and extent to which these have not been carried
out. Sec 157(3)(f).
Commission &
brokerage:
The
particulars of any commission or brokerage paid or to be paid in connection with
the issue or sale of shares to any director, chief executive, secretary etc. Sec157(3)(g).
Company’s state of
affairs:
A brief
account of the state of the company affairs and business plans including
expansion. Sec 157(4).
Auditor’s duties as
To certification of statutory report
The auditor should certify the statutory report as to
correctness of following matter.
- shares
allotted
- cash
received against shares
- receipts
& payment of company.
The auditor should under take the following steps:-
1:Certification of share allotted
(a) study of legal
document:-
The auditor should study
the legal document of the company like memorandum of association, article of
association and prospectus from these document the auditor knows the matter like
authorized capital, minimum subscription, underwriting contract etc.
(b) Minute of
director’s meeting:
The auditor
examine minute of the director meeting ascertain the allotment of share is made
according to the rules and regulation.
(c) Return of
allotment:-
Whenever a company makes any allotment of its share, the company
required t o file with the registrar a return with 30 days on such return
particulars of allots number of shares and amount of share are given.
(d) Allotment for
consideration other than cash:
If
shares are allotted for consideration other than cash contract with allotment
should be studies.
2:Certification of cash received
Against shares allotted.
It is required by the companies to deposit and keep in a
separate bank account all money required from application for share until company
obtains a certification of commencement of business.
3:Certification of receipts &
payment account:-
For the certification of abstract of receipts and payment of
the company the auditor duties include the following:
(i) Period of the
accounts:-
The
auditor should ensure that the account is made up to a date within seven days
of the date of the statutory report.
(ii) Content of
the Account:-
The abstract of the receipt &
payment includes Receipts: from
shares, debentures and other sources.
Payments: commission, preliminary expenses, purchase of property etc.
(iii) Vouching of
cash receipts & payment:
The auditor
vouches the receipts and payment by referring to supporting document and checks
the authorization of transaction.
(iv) cash &
bank balance:
The
auditor verifies cash in hand by physical counting and bank balance by obtaining
certificates from banks. These certificates are received by sending director
confirmation letter.
Specimen of statutory
Report
The directors,
ABC Ltd,
Dear Sirs,
We
being auditor of your company have examined three statements, which are required
under section 157 to be included in statutory meeting and after due vouching
and verification. We report that these statements are found correct by us.
- statement
of shares allotted by the company.
- cash
received by the company by such allotment.
- receipt
and payment account of the company.
Yours faithfully,
Chartered Accountant
Lahore, june 15th,2009
AUDITING
PANEL 5
Question for examination;
1
Discuss the legal provision governing the appointment
and removal of an auditor of a public limited company?
2
Discuss rights & duties of an auditor of Joint
Stock Company?
3
What are the qualities of an Auditor?
Q# 1 Discuss the legal provision governing the appointment
and removal of an auditor of a public limited company?
(SECTION 252)
In the light of provision of
companies ordinance appointment of the auditor is explained:
APPOINATMENT
TO
First auditor subsequent auditor fill casual vacancy
1-APPOINTMENT OF THE FIRST AUDITOR:
First auditor of the company may be
appointed.
1 By directed
2 By share holder
3 By CLA (SECP)
Auditor will hold office until the
conclusion of first annual general meeting.
i) BY directors
First auditor or
auditor of a company shall be appointed by directors with in 60 days of the
date of un corporation of the company Sec 252 (3)
ii) By share holders:
If director fail
to appoint the first auditor share holder may with in next 60 days appoint the
first auditor in SEC 252(3) general
meeting.
iii) By the corporate law authority (CLA)
The authority appoint the first auditor if within one hundred and twenty
days no appointment is made by director or share holder.
[Sec 252(6)]
The company shall within one week
of the authority power to appoint the first auditor becoming exercisable give
notice of that fact to the authority [sec 252(7)]
2_APPOINMENT OF THE SUBSEQUENT AUDITOR:
Subsequent
auditor on auditor may be appointed by share holder or CLA and auditor
appointed will hold office till next annual general meeting.
(i)BY SHARE HOLDER
In
every annual general meeting the share holder appoint the auditor of the
company by passing the resolution [sec 252(1)]
(ii)BY CLA
Where at
annual general meeting no auditor or auditor are appointed by share holder or
where auditor appointed in A.G.M is unwilling to accept the audit assignment
the authority may appoint a person in fill casual vacancy.[Sec 252(6)]
The company shall within one week of
the authority power to appoint the subsequent auditor becoming exercisable give
notice of that fact to CLA. Sec 252(7)
3- Appointment to fill casual vacancy
Where the auditor of the company
dies or firm of auditor dissolves or an account of other contingency the
auditor is unable to work as an auditor a casual vacancy arises and may be
filled by directors or CLA.
(i)
By
Director:
The casual
vacancy in the office of the auditor is filled by the director within 30days of
occurrence of the vacancy.
(ii)By
CLA:
If director failed to fill
vacancy within the prescribed time limit, the authority may appoint a person to
fill the vacancy. (Sec 252(6)
The company shall inform authority
within one week after the expiry of time limit of 30days.
Remuneration
of auditors
Whoever appoints the auditor also
fixes his remuneration relevant provision of companies ordinance 1984 is
presented below:-
Remuneration shall be fixed by:
(i) Director or Authority, if any of
them appointed auditor
(ii) In all other cases by the
company in general meeting.
Schedule IV, Part III, Section (D)
of the company’s ordinance 1984 requires that.
Ø Auditors
remuneration should be separately shown in profit & loss account.
Ø Types
of services rendered by the auditor should be disclosed in profit & loss
account.
Removal
of the Auditor
Following are the provisions of the
companies ordinance 1984 regarding removal of an auditor of the company.
(a) Removal of the first Auditor:
Shareholder in a general meeting
may remove the first auditor and appoint another auditor nominated by any
shareholder. Notice of such nomination must be given to shareholder at least 14
days before meeting. [Sec 252(3)]
(b) Removal of the Subsequent Auditor:
An auditor appointed after the
first one cannot be removed before the end of next annual general meeting.
In the annual general meeting a member
of the company may propose to appoint another person to act as the auditor
instead of reappointing the retiring auditor.
In that case the following
procedure as prescribed in section 253 if companies ordinance 1984 shall be
followed.
(1) Notice of the proposal:
The member who proposes
appointment of another auditor instead of the retiring one must give a notice
of the proposal of the company at least 14 days before the meeting.
(2) Communication of the Notice:
The company communicates the
notice to.
i.
The retiring auditor
ii.
And the member of the company at least 7 days
before the A.G.M.
(3) Publication in newspaper:
The listed companies are also
required to publish this notice in one English and one urdu newspaper having
circulation in the province in which the stock exchange on which the company is
listed is situated.
(4) Representation by retiring Auditor:
On receipt of such notice, the
retiring auditor may make a written representation and may require his
communication to the member of the company.
The company shall send a copy of
the representation to every member unless the representation is received too
late to do so.
(5) Representation to be read out:
If the representation cannot be
sent the auditor may require that it shall be readout in the meeting.
(6) Abuse of Representation:
If in the application of the
company the registrar of joint stock companies is satisfied that the right of
representation given to the retiring auditor.
Under section 253 is intended to
be abused he may allow the company not to read or send such representation to
member.
(7) Intimation to registrar:
Every company shall
within 14 days from the date of retirement or removal of an auditor send
intimation to the registrar.
Q # 2:
Explain the rights and duties of an auditor of a company?
Ans: Rights of an auditor (sec 255)
Right of Access
the books.(255(1).
Every auditor of the company
shall have a right to access at all times to the books,papers,accounts and
vouchers of the company.
Right to require
information.(255(1).
The
auditor has the right to require from the directors and officers of the
company.
Right of access to
branch office.(255(2).
An
auditor has a power to look into records of branches other than the head office
to results of business. He can visit the branch office to confirm records and
statements rendered by the branch to head office.
Right to attend
annual meeting(255(6)
The
auditor shall be entitled to attend any general meeting of the company and to
receive all notices of, and any communications.
Right to receive
remuneration.(255(8)
An
auditor of a company has a right to get his remuneration on the completion of
the agreed work.
Right to seek
opinion.(256).
Auditor
has a right to speak in meeting, the true financial position of the company and
other matters. He is not bound to answer every question.
Right to receive
notice.(255(6)
Auditor
has a right to receive all notices and any communications relating to any
general meeting.
Duties of an Auditor
Duties of an auditor are as under.
Certification of
statutory report.(157(3).
According to section 157(3) of company’s ordinance 1984, it is the
statutory report in respect of following:
- The
shares allotted by company.
- The
cash received in respect of such shares.
- The
Receipts and Payments of the company.
Reports on annual
accounts.(255(3).
Auditors shall make a report of the members of the company regarding the
accounts examined by him and every balance sheet and profit and loss account,
including notes, statements or schedule.
Certification of
solvency report.(362(2).
Where
it is proposed to wind up a company voluntarily the auditor of the company will
report on the company’s affairs in support of director’s declaration of the
company’s solvency. It means that the company is in a position to pay back its
liabilities.
Duty to sign
annual report.(257).
It is
also the duty of the auditor to sign the report which is to be submitted to the
shareholders at annual general meeting.
Assistance to
advocate general:
A past
or present auditor of the company has a duty to provide assistance to the
company prosecutor. Auditor is legally bound to provide help the public
prosecutor.
Help inspectors:
Sometime government appoints the
inspector for obtaining the necessary information about the company. So it is
the duty of the auditor to provide true information to inspector.
Agreement:
It is
the duty of the auditor to perform his all jobs according to agreement with
company. The legal duty of the auditor can’t change but he can performed extra
duties.
Follow ethics:
It is the
professional duty of an auditor to follow the professional code of ethics as
described by professional body.
Accuracy of accounts:
It is
the duty of the auditor to check that all the books of accounts are properly
maintained. He should provide true and fair view of financial statements, there
should be no mistakes in preparing profit & loss account and Balance Sheet.
Secrecy:
It is
the duty of the auditor to keep the fact and figures of the company himself
.there should be no leakage of secrecy.
Q # 3: Qualities of an auditor:
There are following
qualities of an auditor describes as under:
Ability to plan:
An auditor should be good planner. He should decide that
which task is to complete in what time? Auditor prepares the audit program for
the better performance of his work.
Behavior:
Attitude, behavior and skill of auditor must be positive. He
must work to solve problems rather creating. Positive behavior creates
environment of co-operation and team spirit.
Creative:
Auditor should introduce new ways and techniques of
checking. Accountants usually become familiar with auditor so every time
changing methods of checking will not allow accountant to error.
Detection of error
and frauds:
An auditor should be very expert in detecting errors and
frauds. He must use different ways to detect the errors and frauds.
Experienced:
Old wise says that nothing is better than experience. With
more experience auditor can increase the efficiency of working.
Foresight:
Auditor should work by keeping eyes on future. Audit plan
made by an auditor for one industry is helpful in future while conducting the
audit of similar industries.
Goodwill maker:
Auditor makes the repute of company where he conduct audit.
On the basis of audited accounts that company can easily takes loans, can deal
with insurance companies, suppliers, creditors.
Honesty:
An auditor must be honest in performing his duties. He must
take reasonable care and skill while audit work.
Independent:
An auditor should be independent to work without the fear of
management. He is responsible to prove the truth of statements, so he must not
work under the influence of management or third party.
Judgment:
Auditor must have the quality of good judgment because he
has to take many decisions during process of audit.
Knowledge of
business:
Auditor should have sufficient knowledge of the business
whose financial position is to be certified. He should know about internal
control system of organization, manual or computer based techniques used by
management.
Leadership:
Many junior and senior clerks work under the entire control
of principal auditor. He should supervise them with the full spirit of
leadership. An auditor should co-operate and co-ordinate with his staff.
Neutral
personality:
An auditor is suspected to have an impartial or neutral
personality. One single favored statement may cause endless breakdown of
business.
Professional
competency:
Professional competency in auditor assures the perfection in
work. An auditor should have complete knowledge of tax laws, banking laws,
insurance laws and business laws.
Qualification:
According to company’s ordinance 1984, an auditor must be a
chartered accountant, within the meaning of chartered accountancy act 1961.
Reliability:
Auditor should rely on the statements given by accountant,
he should not suspicious unless and until circumstances make him suspicious.
Secrecy:
Auditor is not allowed to leak out the secrets of business
that’s why working papers collected from client’s staff are to be kept in safe
custody.
Technical standards:
All the international
auditing standards should be well on tips of auditor, multinational
organizations enforces audit personnel to follow ISA.
AUDITING
PANEL 6
Q # 1: Liability for negligence
Q # 2: Liability for misfeasance
Q # 3: Liability for libel
Q # 4: Liability to third party
Q # 5: Criminal Liability
Liability for Negligence
Introduction:
An auditor to a limited company is an agent of shareholders. He is
required to exercise reasonable care and skill in the performance of work
entitled to him. If auditor falls to do his work honestly then he may be held
liable for the negligence.
Negligence (meaning):
Negligence means carelessness or breach of duty. It is an act of
commission or omission on the part of an auditor. He may perform his work
without reasonable care.
Negligence in Law:
In law negligence means, “breach of duty”.
Therefore, there is negligence on the part of an auditor who
does not perform his job with reasonable care & skills.
Legal rules:-
Legal provisions regarding auditors liability for negligence are as
under:-
- Where
the auditor is proved to be negligent but no loss is sustained by his
client due to his negligence, he is not liable.
- An
auditor cannot restrict his liability by entering into an agreement as his
duties are defined & laid down in Co.Ord. 1984. Any such agreement
would be against the law and will be void.
- No
clause in AOA of company can relieve the auditor of his liability
according to sec 194 of Co.Ord.1984.
- If
auditor is proved negligent in the performance of his duties then he is
liable to make god any loss caused by his negligence to others.
- Action
against the auditor for negligence can be taken any time during the life
time of the company.
Legal cases:-
1.
Kingston cotton mills Co. Ltd (1896)
Auditor
of the company was sued for negligence because the facts of case relied upon
the stock sheets which was prepared by the company staff and signed by manager.
Auditor
defended himself by saying that he is relied upon stock sheet and fact was
stated while signing the Balance sheet and remarks were as per “manager’s
certificate”.
The court relieved the auditor by saying that he was right while
accepting the certificate of the company.
2.
London oil storage Co Vs Seear hasluck &
Co.(1904):
Facts of case: actual petty cash in
hand was only £ 30 and the petty cash balance was shown in the books at £ 796
and the difference of £ 766 was misappropriated by petty cashier.
Defendant Plea:
the auditor said that there was negligence on the part of the directors who
kept a large sum of money with petty cashier and hence misappropriation occurs.
Court Decision:
the court gave the judgment that main party to negligence was directors not
auditors. So main loss is to be compensated by the directors and auditors were
relieved with the nominal damages only.
Liability for misfeasance
Meaning:
The
term ‘misfeasance’ means breach of
duty involving the company in a loss. Under section 412, when a company is in
liquidation, its past and present auditors are liable to make good all losses
sustained by the company on account of negligence of duty or breach of trust if
misfeasance proceedings are initiated against him within the prescribed time.
Action taken:
For
this purpose the action must be taken by anyone of the following during the prescribed
time:
- The liquidator
- A Creditor
- A contributory of the
company(shareholders).
|
In the
light of companies ordinance 1984
|
Breach of
duty
|
Punishment
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Section 255(3)
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Duty to obtain information:
Whether or not they have obtained all the information and explanations
which to the best of their knowledge and belief were necessary for the
purpose of the audit.
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Court decideds according to the nature of case.
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Section 257
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Duty to sign audit
report presented in meeting for discussion
If auditor has not recognized his duty, he may be charged
with some fine on the breach of duty imposed by civil law.
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Court decides according to the nature of breach of duty.
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Time period for
proceedings:
Misfeasance application may be submitted to the court within 5 years
from the date of the order of winding up or appointment of liquidator.
Legal cases:
(1) London
Facts of case: the bank had advanced loans which were not
recovered but were treated as good loan.
The auditor knew all this and gave the certificates that the
amount of assets shown in the balance sheet depends on realization. The court
held the auditor liable for misfeasance. The auditor was imposed a penalty of £14400
along with directions to pay back amount of two dividends which was paid out of
capital during 1890 & 1891.
Facts of case:
As a matter of fact two defaults were
committed by auditor, first was the overstatement of work in progress in
balance sheet and second understatement of credit purchases and automatically
profit inflated to £ 3458 where actual profit were £ 297.due to these
arrangement dividend was paid out of capital.
Plaintiff’s plea:
It was
pointed by the shareholders that auditor left many invoices unchecked which were
of concerned period. On this ground auditor was held guilty of breach of duty.
Court decision: Auditor was held
responsible and directed to return to company the amount of dividend wrongly
paid plus interest for the period.
LIABILITY FOR LIBEL
Meaning:
Auditor’s liability for libel arises when his report containing
criticism and defamation of officers and other staff of company.
Explanation:
It is
the duty of auditor to report on actual financial position of company but he
must not have blaming & defaming attitude during audit or in reporting.
Professional code of conduct requires audit from auditor to act as neutral
charge between two parties.
- Management
- Shareholders.
Defamation grounds:
Auditor
may be held liable on the grounds of defamation if the reputation or goodwill
of any person is injured due to auditor’s report. For this purpose the report
must contain the following facts:
- It
does mis –state the facts.
- It is
actuate by malice.
- It
goes beyond relevance to the subject.
- It is
not bonafide.
Case Law Reference
Weld Blundel Vs. Stephens (1920):
Mr.
Weld Blundel was interested in the accounts and he wrote a letter to the
auditor which contained defamatory remarks relating to the two employees
connected with the management. The contents of the letter came to the knowledge
of the two individuals concerned.
A libel action was brought by the individuals named in the
letter against Mr.Weld Blundel. The jury gave a verdict in favour of Mr. Weld
Blundel and the auditor was held liable for £ 650 damages and cost.
Lawless Vs. Anglo – Egyptian Cotton and Oil Co.(1943):
Facts of the case;
There
was a head office of company in Manchester and branch
in Egypt .
Branch Manager in Egypt
rendered accounts of branch to head office in which there was a deficiency of
stock amounting £ 1306. Branch manager said that it is not deficiency but a
depreciation of stock.
Auditor’s Comments:
Auditor
of the company was not satisfied with the explanation and report contained the
following comments: We certify that the accounts as above stated are correct.
Shareholders will observe that there is a charge of £ 1306.For deficiency of
stock, which the manager is responsible for. His accounts have been badly kept
and have been rendered to us very irregularly.”
Manager blamed a director that’s why they circulated such
statement of defamation to shareholders.
Court decision:
Judgment of the case was that now here directors were liable for libel
because it was their responsibility to circulate report of auditor and
consequently absence of evidence regarding defamation turned the verdict in
favor of company.
Liability to third party
Meaning:
Liability to third party arises when decision making parties suffer loss
by relying on the financial statements certified by auditor.
Examples of third parties:
Bankers
Tax authorities
Insurance company
Supplier
Investors
Customers
Govt.
Explanation:
Auditor
is liable to compensate 3rd party against negligence and fraud 3rd
parties can go to the court of law for compensation of loss. If any party
sustains a loss due to reliance on auditor’s report then he may go to the court
of law for compensation.
Conditions:
Auditor
is liable to pay damages in following cases:-
1. If
auditor knows that others will rely upon his work
2. If
party has put reliance on auditor report
3. If
auditor was negligent
4. If
party has suffer loss.
Legal Cases:
Condler Vs Crane Christmas & Co. (1951):
It was
decided that auditor owed no duty of care to any body but client. He cannot be
held responsible for any loss suffer by third parties through reliance on
accounts which have been audited by him even though negligence may be proved.
It was
held that if a 3rd party wanted to hold auditor liable for damages
he should prove the following:-
- That
statement or B/S signed by auditor was materially untrue.
- That
auditor knew that statements etc were untrue.
- That
statements etc were made with an intent that a 3rd party should
act on it.
- That
3rd party did act upon such statement etc & consequently
suffered loss.
Q # : Define
Vouching? Explain the objects of vouching:
Introduction:
“Vouching is the essence of auditing”. The auditor can inspect the
documents which support and prove a transaction. Vouching means to prove an
entry in the accounting record with any documentary evidence such as invoices,
receipts and statement etc.
Definitions:
“Vouching consists of comparing entries in the books of accounts with
documentary evidence in support thereof”. (L.R.Dicksee)
“Vouching refers to the inspection by the auditor of documentary
evidence supporting and substantiating a transaction”. (Ronald A.Irish)
“The auditor should obtain sufficient appropriate audit evidence to be
able to draw reasonable conclusions on which to base the audit opinion”. (ISA).
Final Result:
Vouching
Comparing
Entries in books
of accounts
Documentary Evidence
Draw conclusion
Objects of Vouching:
Correct Amount:
The purpose of
vouching is to check that correct amount has been recorded in the entry. The
vouching is useful to record only correct amount in the books of accounts.
Capital and
revenue:
The purpose of vouching is to examine the
analysis of transaction into capital and revenue. The expenses relating to one
year is treated as revenue otherwise it is called capital.
Casting:
Another purpose of vouching is to check casting or totals.
The auditor can calculate all total by himself.
Cash at bank:
Auditors can vouch all receipts and payments. The result is that he can
check whether cash book is correct or not.
Cash in hand:
The cash can be counted.
He can compare it with cash book
No errors:
The
purpose of vouching is to check that there are no errors in the books of
accounts. Audit staff is not over loaded so they can locate errors.
No fraud:
The
purpose of vouching is to examine that no fraudulent payments are made. The
auditor can vouch the entries to disclose such frauds.
Time period :(
right date)
Vouching is helpful to check the dates of vouchers related
to accounting period.
Accuracy:
Vouching is helpful to see the arithmetic accuracy of books of accounts. The
totals, subtotals, casting and posting can be checked.
Q: DEFINE VERIFICATION? EXPLAIN THE
TECHNIQUES OF VERIFACTION:
ANS:
Introduction:
Verification
is an enquiry by an expert to determine the value, ownership, possession and
any charge on the assets of business. Verification is required to see the true
and fair view of financial statements.
Definition:
(1) Arther
w.Holmas
“Verification
is the proof of accuracy of extension, footings, postings, existence and
ownership of assets”.
Main points:
- Proof
of accuracy.
- Extension,
footings, posting.
- Existence,
ownership of assets.
(2) Spicer and
Pegler:
“Verification
of assets implies an enquiry into the value, ownership and title, existence and
possession; the presence of any charge in the accounts.”
“Techniques of Verification”
(1)Physical
existence:
The
technique of verification is checking the existence of assets. Satisfaction
regarding the physical existence of assets and liabilities at the data of the
balance sheet.
(2) Proper
valuation:
All the
assets must show in balance sheet at proper values. Auditor must verify that it
is properly valued and correctly stated in the balance sheet.
(3) Ownership:
Auditor
must check the ownership of the assets on the date of the balance sheet shown
in the books actually owned by the business.
(4) Proper
disclosure:
Auditor
must check that each item of asset and liability is being properly disclosed as
legally required.
(5) Free from
charge:
The
auditor must verify that the company is free from any charge on mortgage.
(6) Purchased for
business:
Auditor has to satisfy himself that the
assets were purchased for business.
(7) Proper
authorization:
The
auditor should see that the purchase of a particular asset was properly
authorized.
Define internal Control? What are its objectives?
Discuss in detail?
Introduction:
Internal control system is a complete system of controls use by the
management in the conduct of the business. It includes internal check, internal
audit and other forms of controls. Efficient working of internal control is
helpful for management and also for external auditor.
Definition:
“Internal
control system is a complete system of control organized by management
financial or otherwise for the smooth conduct of the business”. (General
Concept)
Definition:
“Internal control consists of all measured taken to provide management
with assurance that everything functioning as it should”. ( Meigs & Meigs)
Final Result
System of controls Establish
by Management for
smooth working of business- Internal
check called
- Internal
Audit Internal Audit
- Other
Measures
Objects of internal control
Protection of errors and frauds:
The
purpose of internal control is to prevent errors and frauds. There is normal
load work with every person. The work of one person is checked by others.
Assets protection:
The
purpose of internal control is to protect the assets of business entity. Assets
are in the custody of responsible officers, so cant be misused.
Best use of resources:
Internal control can print out the weaknesses which can be removed. The
purpose of internal control is the best use of resources. There is a need best
combination of resources for maximum profits.
Follow policies:
The purpose of internal control is to
follow polices of management. The policies are broad guideline for obtaining
the business objectives.
Reliable record:
With the help of internal control reliable record can be maintained. The
equal distribution of work among the employees provides complete and reliable
records.
Reduces work load:
The
effective internal control can be useful for auditors. They can check few items
and remaining items checked by the auditor.
What is an audit program? What are its advantages and
disadvantages?
Audit program:
Audit program is a written scheme or list of work to be done
by an auditor and his staff. All the work which is assigned to each member of
the audit team is written in the audit program.
Definition:
Howard F. Stettler:
“Audit program is an outline of all procedures to be
followed in order to arrive at an opinion concerning a client’s financial
statements”
Meigs:
Audit program is a detailed plan of audit work to be
performed, specifying the procedure to be followed in verification of each item
in the financial statements and giving the estimated time required”.
ADVANTAGES
Training:
Audit program is very useful for training of staff. Staff
can get the guideline from audit program.
Supervision:
With the help of audit program, the auditor can check the
progress of auditing. He can know that how much work they have been completed
or how much work to be completed.
Distribution:
Audit program is very helpful for distributing the work
among the members of audit team according to their abilities.
Transfer of work:
If any member of audit team goes on leave, the new comer can
easily know the nature of work due to audit program.
Uniformity of
work:
With the help of audit program uniformity of work can be
achieved.
Legal proof:
Audit program is a legal proof of work done by every member
of audit team. If any time any suit is brought in court of law against the
auditor for his negligence then audit program can be presented in the court.
Control of several
audits:
With the help of audit program, the auditor can control the
audit of various companies simultaneously.
Responsibility of
negligence:
If any fraud or error remains undetected, the responsibility
of negligence will fall on particular member who has performed that job.
Final review:
Before signing the report, final audit review is made and
for this purpose audit is very useful.
Missing of any
step:
If audit program is prepared then there are very less
chances of missing of any important step in audit.
Useful for future:
Another benefit of audit program is that it is very useful
for future.
Audit staff is needed:
Audit staff also helps to determine the number of employees
needed to do work.
Sequence in audit:
Another advantage of audit program is that it draws a
sequential flow of work and sequence is necessary as the audit itself is.
Progress of audit
work:
Audit program is also useful to check the progress of work.
Auditor can check that how much work has been completed.
Time table:
With the help of audit program, the work is completed within
the stated time period.
Guidance of
assistants:
Audit program serves as guideline to audit assistants. There
is no need to repeat the instructions to junior staff.
DISADVANTAGES
Mechanical:
The audit work may be too mechanical and particular parts
may be finished without proper attention of clerks.
Rigid:
Each business may have separate problem of its own, so a
rigid program can not be suitable for each type of business.
Inflexible:
Another draw back of the audit program is that it can not be
altered. So due to inflexibility better result may not be produce.
No initiative:
Another drawback of the audit program is that it is not
initiative for the audit staff. If they put the suggestion for better performance,
the audit program fails to accept any useful proposal.
Not suitable for
small business:
Audit program is not suitable for small audit. A small
business may have few books of accounts due to this there is no need of
preparing audit program.
No comprehensive:
Audit program can not cover every thing that might come up
during the course of audit even if it is well drawn.
Revision:
There is a need of revision in audit program according to
the latest business changes. But it is not possible in busy schedule of
auditor. Auditor gives preference to prepare a new plan instead of revision.
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