AUDITING B.COM PART II PUNJAB UNIVERSITY LAHORE PAKISTAN
HASHMI INSTITUTE OF EDUCATION
AUDITING
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
“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
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
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 |
| Section 255(3) | 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. | Court decideds according to the nature of case. |
| Section 257 | 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. | Court decides according to the nature of breach of duty. |
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)
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
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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