f) Performance audit

III On the basis of Degree of Independence:

a) External Audit
b) Internal Audit
IV On the basis of Organizational Structure:
a) Statutory Audit
b) Voluntary Audit
c) Government Audit
V Other Methods:
a) Private Audit
b) Financial audit
c) Compliance audit
d) Payroll audit

I On the basis of the conduct of Audit:

a) Continuous Audit: a continuous audit involves the conducting of audit of accounts
throughout the year at regular intervals, fixed or otherwise, of say, one month or months.
Continuous Audit refers to an ongoing process wherein the team of the auditor is constantly
involved in checking the client’s account books throughout the year.
b) Interim Audit: Interim audit is one which is conducted in between the two annual audits
for some interim purpose, say, to enable a company to declare an interim dividend.
c) Balance Sheet Audit: Under such an audit, the auditor checks capital, reserves, assets
liabilities, etc., given in the Balance Sheet. Those items of Trading and Profits and Loss
Account are also checked which have a bearing on the Balance Sheet items.
d)Final Audit: It is an audit, where the auditor takes up his workof checking the books of
accounts at the end of the accounting periodn when the transactions for the whole year are
completely redorded and financial statements have been prepared.
e)Partial Audit: Under partial audit, an auditor is asked to check some of the records and
books for a part or whole of the period. For example, auditor may be instructed to audit
only the payment side of the cash book because he himself receives cash and cheques on
behalf of his business. Such an audit is not permitted in case of private or public limited
companies.
f) Occasional Audit: An audit which is conducted occasionally and not regularly , that is,
once a while whenever the need arises and the client desires it to be undertaken. For
instance, the audit is not compulsory in case of sole proprietorship and partnership business
but whenever the need arises, the owners can get the accounts audited.
II On the basis of objective of Audit:
a)Cash Audit: It is a type of audit which only the cash receipts and payments are audited in
detail by the auditor.
b)Cost Audit: A cost audit represents the verification of cost accounts and checking on the
adherence to cost accounting plan.
Cost audit ascertains the accuracy of cost accounting records to ensure that they are in
conformity with cost accounting principles, plans, procedures and objectives.
c)Management Audit: It is an assessment of how well an organization's management team
is applying its strategies and resources. It evaluates whether the management team is
working in the interests of shareholders, employees, and the company's reputation.
d)Tax Audit: A tax audit is the process of verification and inspection of the accounts of a
taxpayer to confirm their adherence to the provisions of the Income Tax law.
Tax audit refers to the verification of the books of accounts maintained by a taxpayer. Its
purpose is to validate the income tax computation made by the taxpayer in the income tax
return and to ensure compliance with the laws of Income Tax.
e)Special Audit: A special audit is a tightly-defined audit that only looks at a specific area
of an organization's activities. This type of audit may be initiated by a government agency,
but could be authorized by any entity, or even internally.

f)Operational Audit: An operational audit is an examination of the manner in which an

organization conducts business, with the objective of pointing out improvements that
will increase its efficiency and effectiveness.
An operational audit refers to the process of evaluating a company's operating activities –
both on a day-to-day level and a broader scale.
III On the basis of Degree of Independence:
a)External Audit: An external audit is an examination that is conducted by an
independent accountant. This type of audit is most commonly intended to result in a
certification of the financial statements of an entity.
An external audit is a financial review that is conducted by a party not associated with the
company or department that is voluntarily or involuntarily under audit. An external audit
takes place within a defined set of rules or laws.
b)Internal Audit: In short it is the examination of books of account which is conducted by
the salaried officials of a business known as internal auditors throughout the year.
An internal auditor is appointed to check the overall performance of different companies
with respect to the administrative, executive, financial, and legal standards they follow.

IV On the basis of Organisational Structure:

a)Statutory Audit: It refers to the audit of accounts of business unit compulsorily under the
provisions of a statue or law.
A statutory audit is a legally required review of the accuracy of the financial statements and
records of a company or government. A statutory audit is intended to determine if an
organisation delivers an honest and accurate representation of its financial position by
evaluating information, such as bank balances, financial transactions,
and accounting records.
b)Voluntary Audit: A voluntary audit is entirely for the benefit of your business
and provides an independent assessment of your financial statements, management and
controls.
c)Government Audit: It refers to the audit of accounts of government departments,
government offices and statutory corporation.
Government audit means the organised and independent examination of a public entity's
financial, administrative and other operations for evaluating and verifying them.
V Other Methods:
a)Private Audit: The institutions which are private in character also get their accounts
audited by some qualified auditors. As such an audit is not required by statute, it is known
as private audit.
b)Financial audit: A financial audit is one of the most common types of audit. Most types
of financial audits are external. During a financial audit, the auditor analyses the fairness
and accuracy of a business’s financial statements.
c)Compliance audit: A compliance audit examines your business’s policies and procedures
to see if they comply with internal or external standards.
d) Payroll audit: A payroll audit examines your business’s payroll processes to ensure they
are accurate. When conducting payroll audits, look at different payroll factors, such as pay
rates, wages, tax withholdings, and employee information.

Limitations of Auditing:
1. Lack of complete picture—the audit may not give complete picture. If the accounts are
prepared with the intention to defraud others, auditor may not be able to detect them.
2. Problem of Dependence—Sometimes the auditor has to depend on explanations,
clarification and information from staff and the client. He may or may not get correct or
complete information.
3. Existence of error in the audited accounts—Due to time and cost constraints, the
auditor cannot examine all the transactions. He uses sampling to check the transactions.
As a result, there may be errors & frauds in the audited accounts.
4. Exercise of judgement—the nature, timing and extent of audit procedures to be
performed are a matter of professional judgement of the auditor. The same audit work
can be done by two different auditors with difference in sincerity & personal judgement.
5. Diversified situations—Auditing is considered to be a mechanical work. Auditors may
not be in a position to frame audit programme which can be followed in all situations.
6. Lack of Expertise—In some situations, an auditor has to take opinion of experts on
certain matters on which he may not have expert's knowledge. The auditor has to depend
upon such reports which may not be always correct.
7. Limitations of internal control—The auditor can only report on the truth and fairness
of the financial statements. But other problems relating the management and control may
not be possible to be covered by the auditor.
8. Influence of management on the auditor—This is also come of the limitations of the
audit that the auditor is influenced by the doings of those in management. The reason is
that he is appointed by the shareholders and directors who pay him remuneration or fee.
UNIT: 2:INTERNAL CONTROL
INTERNAL CONTROL:
Meaning: Internal controls are the mechanisms, rules, and procedures implemented by a
company to ensure the integrity of accounting information and prevent fraud.
Definition: According to W.W.Bigg “Internal control is best regarded as indicating
the whole system of controls, financial and otherwise, established by the management
in the conduct of business, including internal check, internal audit and other forms of
control”.
Objectives of Internal Control:
1) Assets Protection: The assets are the backbone of any business. These assets are
in the custody of some specific officers of the business. The internal control
system checks the valuation and protect the assets of the business.
2) Accurate Record: The objective is to ensure that all valid transactions are accurate
with the originating transaction data and information is recorded in a timely manner.
3) Follow Policies: The purpose of internal control is to follow policies of Management.
The policies or guidelines for obtaining the business objectives all employees try their
best to follow the rules of the company.
4) Complete Records: The objective is to ensure that no valid transactions have been
omitted from the accounting records.
5) Validity: The objective is to ensure that all recorded transactions fairly represent the
economic events that actually occurred, are lawful in nature.
6) Prevention of Errors: The purpose of internal control is to prevent errors. There may
be unintentional mistake due to overwork or carelessness. There is normal load work
with every person, others check the work of one person
7) Prevention of Frauds: The purpose of internal control is to prevent fraud. It is an
intentional misrepresentation of financial information by one or more individuals
among management, employees, or their parties.
8) Best use of resources: The purpose of internal control is the best use of resources.
There is a need of optimum combination of resources for maximizing profits. Internal
control can point out weakness which can be removed.
9) Actual Comparison: The assets and other records which are recorded can be easily
compared with the actual existed information.
10) Preparation of Statement: Another object of internal control is to ensure about
the preparation of the financial statement at the proper time.

INTERNAL CHECK:
Meaning: Internal Check is an arrangement of work of one person is automatically and
independently checked by the other person from the beginning to the end.
It is the arrangement of the accounting duties under which the work of one person comes
under the scrutiny(analysis) of another person, so that it is not possible to commit fraud
without collusion between two or more persons.
Definition: L.R. Dicksee defines an internal check as “such an arrangement of book-
keeping routine that errors and frauds are likely to be prevented or discovered by the
very operation of the book-keeping itself.”
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Objectives of Internal Check:
1) To eliminates the acts of fraud and error by a clerk.
2) To prevent the misappropriation of cash or goods by a clerk.
3) To detect a fraud or an error quickly and easily.
4) To exercise moral pressure over staff.
5) To have an accurate record of all business transactions.
6) To ensure that the accounting system produces reliable information.
7) To provides for proper division of work.
Fundamental Principles of Internal Check:
1. Responsibility: The work of the business should be allocated amongst various clerks in
such a manner that their duties and responsibilities are clearly divided, defined and fixed.
2. Completion: The work should be divided in such a way that no single person is
allowed to complete the work solely by himself from the beginning to the end.
3. Rotation of employees: A system of transfer or rotations of employees from one seat
of work to another must be followed by the business.
4. Automatic check: A good system of internal check must provide for an automatic
checking of the work of one clerk by the other.
5. Reliance: No clerk of the business should be relied upon too much.
6. Safeguards: Safeguards should be prescribed to keep un-used cheque books, files and
securities etc.
7. Supervision: A strict supervision should be exercised to ensure that the prescribed
internal checks and procedures are fully operative.
8. Formal sanction: No deviation should be allowed from the established procedures till
it is formally sanctioned by the top official.
9. Periodical review: The system of internal check is reviewed from time to time to
introduce improvements.
Internal Check as Regards to Cash Sales:
1)Counter Sales Book: The salesman can sell product over the counter. The sales
book can be prepared on the basis of cash memo was issued by the staff
2) No Cash Handling: The sales staff should not handle cash. All cash receipts must
be handed over to the cashier. Accountant can make entries in the books of accounts.
Another person can deposit cash.
3) Cash Register: It is maintained in large retail shop. There is a need of secrecy for
its working. The main equipment and attachments must work without any interference
from employees.
4)Checking copies: The auditor can check carbon copies of cash sales. The copies
can be used as a basis of determining total sales for a particular period.
5)Receipt of Goods: The goods are handed over to the customer along with cash
memo. The officer sales must check and sign the cash memo at the time of delivery of
goods. One copy is kept for determining total sales.
6)Sales Summary: The sales summary must the prepared and sent to sales manager.
The sales summary must tally with the cash received from customers.
7)Cash Verification: The sales officer can check the cash memo for the day the sales
summary should be examined. The cash collected must tally with the cash memo as
well as total sales summary for the day.
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8) Cash Deposits: The cashier should not deposit the cash into the bank Account. The
total cash must be handed over to the accountant who should make arrangements for
deposit of cash.
9)Sales Discount: The sales discount rate can be examined from the price list. The
discount must not be in excess of the rates stated in the list. The sales manager must
approve the discount.
Internal Check as Regards to Cash Purchases:
1) Supply of Requisition: whenever goods are needed in any department of the
company the head of the department should send the Purchase requisition to the
purchase department. He should mention the quality, quantity of the item and the
time by which the goods must be supplied.
2) Enquiry: Purchase department makes an enquiry about the terms and conditions of
purchases from different suppliers. For this purpose, tender is generally invited. But
who shall open and accept the tenders, should be clearly specified. At a rule, the lowest
tender should be accepted and accordingly a decision be taken.
3) Purchase Order: It should be given in writing. It should be given on printed and
numbered forms and it should be recorded in the purchase book.
4) Copies of Purchase Order: That should be three copies of each purchase order.
One copy should be sent to the suppliers and one copy to the store clerk and one
should remain with the purchase department.
5) Receipt of Goods (Writing Note): On receipt of goods, the purchase department
should be properly inspected them, and there after an entry in the goods inward
(Receipt) book, the same should be sent to the stores. Concerned department should be
informed about the receipt of the goods.
6) Comparisons: One copy of the received goods note will be sent to the purchase
department. Purchase department will compare the quality and quantity with the
invoice.
7) Invoice Checking: Each invoice on receipt should be checked by responsible
officer with the purchase order the price and quantity is correct.
8) Inspection: Before storing the goods, these should be inspected and quality should
be tested.
9) Purchase Returns: In case of any defect, it should be immediately reported the
purchase department and purchase department may take up the case all returns
outwards should be duly authenticated.
10) Invoice Recording: Each invoice should be consequently numbered and
properly filed.
11) Making the Payment: The Purchase Department should thoroughly check the
invoices and send the same to accounting department for payment. The accounting
department should compare the invoice with the purchase order and Incoming
Inspection Report and should also verify the calculation. The Accounts Department
should enter the invoice in the Purchase Book. Only responsible official should draw
cheque for the payment of invoice. At the time of signing, a signing authority must
verify that correct payment is made.
12) Proper Record: Proper record of purchase should be maintained in writing. All
the officials who are involved in the purchase their initials must be taken.

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Internal Check as Regards to Wage Payments:
The system of internal check for wages should be devised in a careful and planned way,
especially in manufacturing concerns, employing large number of workers, possibilities
of frauds are always there. Thus, efforts should be made to prevent such frauds with the
help of some suitable arrangements of internal check which should be revised from time
to time in the light of experience gained. System should be actively enforced and
supervised by some responsible official.
Maintenance of Wage Records:
1. Time Records: Workers are paid their wages normally on the basis of time. Thus, the
time spent by each worker should be correctly recorded in the time record book and for
this purpose the following methods are in practice.
a) The time recording clock: The time recording clock is placed at the gate under the
charge of a timekeeper. As soon as worker enters the gate, the time keeper inserts his time
into the clock which records the time. It is recorded when the worker leaves the factory.
b) Brass token: The workers are given brass token bearing their numbers. At the gate, a
time board is maintained on which each worker hangs his token as soon as he enters in
the factory. The time keeper is thus able to record the time of workers entering the
factory.
c) Attendance cards/punching machine: Each worker should punch card (identity card)
at the time of his arrival and departure. The punching or card must be supervised by the
time-keeper. Foreman of each department should also be asked to keep the time records
of his workers.
2. Piece-work records: Where the workers are paid on the basis of the piece wages
system, proper books for actual work done by workers should may be maintained. Each
worker should be provided with a job card or piece work return form bearing his name,
job number should be recorded on this card which should be countersigned by the
foreman of the department. Store-keeper to whom the goods manufactured are handed
over, should sign this card. It should be finally checked by piece work reviewer along
with quality of goods.
3. Overtime records: Ordinarily overtime work should not be encouraged. No worker
should be allowed to work overtime unless he is authorized to do so by the authorized
official of the organization. Overtime slips should be sanctioned in advance. Such slips
should bear the name of worker, number of overtime put in the job. At the weekend such
slips should be sent to the department in which he is engaged. At the weekend such slips
should be sent to the time-keeper who will forward them to the wage office.
4. Pass-out records: The workers should not be allowed to leave the factory before the
scheduled time. But if sometimes, a worker wants to go out of the factory on his personal
work during working hours he should not be allowed to go out of the factory premises
without obtaining permission from authorized official who should issue pass out slips.
Such slips are handed over to gatekeeper wage officer should also be given copy of such
slips. In case a worker leaves the factory before time on his own account, it should be
properly accounted.

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5. Preparation of wage sheets: The preparation of wage sheets should be done by a
separate department. This work should be done by five clerks to minimize the
irregularities. Information regarding attendance can be had from the attendance register,
job cards, piece work register, overtime slips, pass out slips etc,. For time workers and
piece rage workers, separate wage sheet should be used. All the essential particulars
should be entered in the wage slips which should have columns for:
a) Name
b) Number/code number allotted to him and his address
c) Total time worked
d) Details of work
e) Rate
f) Total amount of wages
g) Bonus
h) Overtime
i) Deductions
j) Net amount payable.

Internal Audit:
Meaning: Internal Audit is the ongoing critical examination of the financial and
operational activities of the concern, by an internal auditor.
Internal audits evaluate a company’s internal controls, including its corporate
governance and accounting processes.
Advantages of Internal Audit:
1] More Effective Management: The internal auditor will be able to point out any
weaknesses of the organization in the operations of the company. So, the management can
use these insights to better the chances of achieving their goals.
2] On-going Review: The process of internal audit gives the organization a unique
opportunity to conduct a review of the performances in the ongoing year itself. They do not
have to wait for the end of the year to review the company’s performance.
3] Performances of Staff Improve: The staff of the company remains alert and active.
This is because there is the fear of their mistakes being caught by the internal auditor almost
immediately.
4] Ensures Optimum Use of Resources: Internal control can be used as a tool to promote
the optimization of resources. It will help point out the areas in which resources are being
underutilized or wasted. And then these can be corrected.
5] Division of Work: Internal audit helps promote the division of labor. It is important to
keep a check on and observe the activities of all the departments and all of their employees.
Division of labor will help in achieving this.
6)To Discover Errors and Frauds: One of the main benefits of internal audit is that helps
to discover accounting errors and frauds so that they can be rectified before the final audit.
7) To Maintain Proper Accounting: It helps to maintain proper accounting system in
the organization. It ensures accuracy and authenticity of accounting records.
8) Provides Base for Final Audit: Internal audit examines and verifies entire books of
accounts and locate mistakes and frauds. So, conduction of final audit becomes easier.
9) Valuable Suggestions: It gives suggestions and instructions regarding the financial
and operational activities of the organization.
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Limitations of Internal Audit
1] Shortage of Qualified Staff: The work of an audit requires years of study and
experience. An inexperienced auditor can cause more damage than good.
2] Time Consuming: It takes a long time to perform internal auditing. It may disturb
regular office work.
3] Ignorance of Management: Unlike a statutory audit, the findings of an internal audit
are not published or made available to all. Their findings are only forwarded to the
management.
4) Not Suitable for Small Firms: Internal audit is not suitable for small business
organizations with less financial and operational activities.
5) Not Acceptable: It is conducted for internal purpose only. It is not accepted by
shareholders and other external users.
6) Chance Of Errors: There may be a chance of errors because of the poor knowledge of
the audit staff.

Differences between Internal Check and Internal Audit:

Sl Basis Internal Check Internal Audit
No.
1 Meaning It is an arrangement of work in It is an independent appraisal
such a way that another person of the operations of the
automatically checks the work company.
of one person.
2 Involved Accounting and clerical Effectiveness of management
evaluation of accuracy control
3 Performed by Existing staff A specially dedicated team of
auditors
4 Cost Economical Comparatively Expensive
Involvement
5 Objective Prevention of errors and frauds Detection of errors and frauds

6 Tool for It is considered as a devise for It is a devise for checking the

doing the work work
7 Time of Checking is performed Examination of the work
Checking simultaneously when the work takes place after the work is
is performed. completed.
8 Scope Limited Broad
9 Appointment of No separate staff appointed Separate salaried staff of
staff internal auditor appointed

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UNIT 3: VOUCHING
Meaning:
The act of examining documentary evidence in order to ascertain the accuracy of entries in
the account books is called "Vouching".
Vouching means a careful examination of all original evidence i.e. invoices, statements,
receipts, correspondence, minutes and contracts etc. with a view to ascertain the accuracy
of the entries in the books of accounts.
Definition:
According to R. B. Bose, "By vouching is meant the verification of the authority and
authenticity of transactions as recorded in the books of account".
Voucher:
A voucher is documentary evidence in support of a transaction in the books of account.
A voucher is a written paper or document in support of an entry in the books of account.
Types of Vouchers:
1. Primary Voucher: When written evidence in original is available in support of a
transaction it is known as a primary voucher. For example, invoice for a purchase, cash
memo etc.
2. Collateral or Subsidiary Voucher: When the original voucher is not available, copies
of such evidences are made available for the purpose of audit. Such copies of evidences are
called a collateral voucher or secondary voucher. For examples photo copies of dd, carbon
copies of sales invoice etc.
3.Receipt Voucher: It is also called a credit voucher. A receipt voucher is used to keep a
record of cash or bank receipt.
4.Payment Voucher: It is also called a debit voucher. A payment voucher is used to keep
a record of payments made in cash or through the bank.
5.Non-Cash Voucher: These vouchers are used for non-cash transactions; they are
basically used as documentary evidence. e.g., Goods sold on credit. In such cases, the cash
or the bank account of the assessee is unaffected.
6. Supporting Vouchers: The vouchers that act as evidence of any kind of business
transactions such as cheque, sale invoice, cash Memo, etc, are called as supporting
vouchers. These vouchers are made both for money and non-money exchanges.
Objectives or Importance of Vouching:
1. To Detect Errors and Frauds: All transactions are to be supported by evidence. Each
document should be proved by authorized authority. With the help of vouching, we can
detect errors and frauds by verifying each transaction.
2. To Know the Truth of Account: Each and every transaction is checked and ratified on
the basis of support document. So, we can easily know the truth of account.
3. To Find the Unrecorded Transactions Vouching helps to find out the unrecorded or
missing transactions. If any voucher is found unrecorded, auditor can suggest to record
such transactions.
4. To Know That All the Transactions Are Authorized: If transactions are not
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authorized, such transactions can be fictitious transactions. So, such fictitious transactions
can be found with the help of vouching.
5. To Know That Only the Business Transactions Are Recorded: Sometimes,
transactions are performed for individual purpose but payment is made out of business.
Such transactions should not be recorded in account of business. If such transactions are
recorded, we can find it with the help of vouching.
7.Proper Evidence: One of the main benefits of the vouching is that all the documentary
evidence which substantiate transactions are thoroughly examined, which helps in
identifying the genuineness of the transaction.
8.Assurance: Vouching is the crux of auditing, wherein the auditor confirms that
transactions that actually occurred are properly recorded, in the appropriate account, with
exact amount and in the relevant accounting period.
9.Verification of Assets and Liabilities: Once vouching of the transactions recorded is
over, verification of assets and liabilities is done. Therefore, vouching acts as a basis for
verifying the assets and liabilities.
10. Right Period: The purpose of vouching is to check that date of the vouchers relates to
accounting period. The adjustments in books are made on the basis of current year record of
transactions.
11. Correct Amount: The purpose of vouching is to check that correct amounts have been
recorded in the entry. The vouching is useful to record only correct amounts in the books
of accounts.
12. Arithmetical Accuracy: The purpose of vouching is to see the arithmetical accuracy of
books of accounts. The auditor to confirm that books are accurate can check the total
subtotals, casting and posting.
13. Reporting: The purpose of vouching is to form an opinion for the purpose of reporting.
In case of true and fair view there is good report. In the absence of such result there may
be qualified report.
14. Vouching is the backbone of auditing: Main aim of auditing is to detect errors and
frauds for proving the true and fairness of results presented by income statement and
balance sheet. Vouching is only the way of detecting all sorts of errors and planned frauds.
PRINCIPLES OR TECHNIQUES OF VOUCHING:
At the time of vouching auditor should keep in view the following principles in his mind:
1. Arranged Vouchers: Auditor should check all the vouchers provided by the client are
properly arranged. These are in the same order as the entries are made in the books.
2. Checking of Date: The auditor should compare the date of the voucher with the date
recorded in the cash book.
3. Compare the Words and Figures: The auditor should satisfy himself amount written
numbered consecutively. All the vouchers should be properly filed. On the vouchers, its
figures and words are same or not.
4. Checking of Authority: The auditor should examine that all the vouchers are passed by
the authorized officer. If the voucher is passed by unauthorized person, it will not be correct.
5. Cutting or Change: If there is any cutting or change on the receipts and vouchers figures
it should be signed by the authorized officer.
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6. Transaction Must Relate to Business: The auditor should carefully examine that the
entries must relate to the business.
7. Case of Personal Vouchers: The auditor should not accept the voucher in personal
name. There is a chance that an officer of the company has purchased any item in his
personal capacity.
8. Checking of Account Head: Auditor must be satisfied about the head of account on
which cash is deposited and drawn. He should examine the documentary evidence in this
regard.
9. Revenue Stamp: The auditor should also check that voucher bears a required revenue
stamp or not?
10. Case of Cancelled Voucher: The auditor should not accept the cancelled voucher.
Because it has already served the purpose of payment. There will be a danger of double
payment if it is accepted.
11. Important Notes: The auditor should take some important notes about those items
which need further evidence or explanation.
12. Payment: The auditor should check that whether payment is described partially or for
complete transaction of sale.
13. Agreements: These provide the basic information to the auditor. He should check the
agreements, correspondence and other relevant papers.
14. Printer Vouchers: Printer vouchers are considered true and these are legally
acceptable. If these are not printed then these are useless.
15. List of Missing Vouchers: Auditor should prepare the list of missing vouchers. This
list will be helpful in detecting the fraud and errors.
Routine Checking:
The auditors check the arithmetic accuracy of journals and ledgers. It is called routine
checking. The purpose is to detect the errors and frauds.
It refers to the checking of the casting and posting of subsidiary books and ledger accounts
by the auditor.
Essentials of Routine Checking:
1. Sub-Cast: Sub-Cast is a part of routine checking. Sub-total is possible in accounts
matters. The sub-cast must be correct.
2. Casts: Cast is part of routing checking. Total in journal and ledger accounts should be
examined for accurate results.
3. Carry Forward: Carry forward is a part of routing checking. The balance of one page
can be transferred to the next page.
4. Posting: Posting is a part of routing checking. The entries are posted in to the ledger
accounts. Posting must be properly examined.
5. Balancing: Balancing is a part of routing checking. Taking the difference of debit and
credit in the accounts is called balancing.
6. Carry Down: The amounts in an account can be transferred to next page. The carry
down is a part of routing checking.
7. Transfer: Transfer is part of routing checking. The amount is one accounts can be
transferred to another account.

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Routine Checking vs Vouching:
Sl No. Basis Routine Checking Vouching
1 Objective Ensure arithmetical accuracy Examine the accounting
of entries made in the books transactions recorded in the
of original entry as well as books of accounts by using
Ledger documentary proof
2 Concerned with Concerned with castings, Accuracy, authenticity, and
posting, and balancing completeness of transactions
3 Frauds and errors It can help to detect only Vouching can detect well-
minor cases of fraud. planned frauds and errors
4 Scope Narrow scope A wider scope; includes
routine checking
5 Performed by Junior staff in an organization Performed by the auditor and
his staff
6 Depth Mechanical in nature and A thorough and detailed
monotonous process
7 Compensating Does not reveal Reveals
errors and errors of
principle

I VOUCHING OF RECEIPTS or DEBIT SIDE OF THE CASH BOOK:

It is rather very difficult to vouch the receipt of cash than to vouch payments as some entries
might have been omitted altogether and therefore only indirect evidence like counterfoils
of receipts issued, carbon copies of receipts, contracts and letter from debtors etc. are
available.
He should check a few items at random and if he finds them to be in order, he may assume
that the others will be correct but he must not forget to compare the rough cash book or the
diary with the cash book. If he fails to do so and later on a fraud is detected, he might be
held responsible.
Some of the important items which usually appear on the debit side of the cash book and
the duty of an auditor in that connection are given below:
A. Opening balance: This can be vouched by comparing it with the balance shown in the
duly audited balance sheet of the previous year. By doing this, it is verified that the actual
balance has been brought down.
B. CASH SALES: (Voucher – carbon copies of cash memos, salesman dairy etc.)
Cash Sales are sales of goods and services where cash is collected at the time goods or
service is supplied. Cash sales include cash and GST collected for such things. Cash Sales
units need to comply with the Cash Sales Procedure and Banking procedures.
Payment for Cash Sales can be in the form of currency (bank notes and coin), cheques,
bank drafts, money orders, credit and debit cards, or Electronic Funds Transfer (EFT).
Under this head, the chances of fraud are comparatively greater, for example the salesman
may sell goods but may not record the same in the cash book thus misappropriating the
money. Assuming an effective internal check and internal control system in operation, the
auditor should take the following steps to verify the correctness of the amount of cash sales.
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Vouching of Cash Sales
Cash sales can be vouched by the auditor in the following way:
1. Internal Check: Auditor should evaluate the internal check and if it is proper system
then he should rely on it.
2. Checking of Cash Sales Memos: Auditor should check the cash sales memos and
compare it with the daily summaries of salesman and cashier.
3. Entry in Cash Book: Auditor should also check the figures of the salesman and
cashier summaries entry in the cash book.
4. Checking of Cash Register: If cash register is used, auditor should check the total
daily rolls with the entries in the cash book.
5. Checking of Cash Book: Auditor should compare the cashbook with the general ledger.
6. Checking of Price Lists: Auditor should obtain and verify it price lists and other
instructions by the authorize persons regarding the cash sales.
7. Guidance to Client: If internal check system is not effectivethen auditor should inform
the client about the dangers of frauds. He should also suggest some measures.
8.Verification of Date: The date of cash memo and the date of cash receipts which are
recorded in the cash book must be the same. If there is a difference in date , it has to be
enquired.
9. Check the counterfoils of the cash sales books with the salesman's summaries.
10. Check the details of cash received with the cash sales counterfoils.
11. Examine the classification of cash sales to ensure that correct account heads have been
credited.
12.The total in the rough cash book, if any should be checked with the main cash book.
C. CASH RECEIVED FROM DEBTORS:
The cash received from customers to whom good have been sold on credit in the past can
be vouched with the help of the counterfoils of the receipts issued to them. The auditor
should take the following steps in vouching receipts from debtors:
1. System of internal check: he should enquire into the system of internal check
in operation in regard to the receipt from debtors and satisfy himself about the
efficiency of it.
2. Debtor‘s account: Persons maintaining the debtor‘s account should not be allowed to
collect money from the customers.
3. Remittances: the customers should be asked to remit cash or cheque through post,
and not to hand over the samedirectly to the cashier.
4. Total cash received: he should check the total cash received from the debtors by
verifying the rough cash book with the counterfoils of the receipts issued to the
customers.
5. Cash book and rough cash book: the auditor should checkthe cash book with the
rough cash book and the counterfoils ofthe bank paying in slips.
6. Method of granting discounts: he should enquire into themethod of granting discounts
and find out the general rate of discount, and see that discount allowed does not exceed
thegeneral rate.
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7. Bad debts written off: he should enquire whether bad debts are written off a
competent authority, and also refer torelevant correspondence in this regard.
8. Balance due: He should verify the balance due as per the schedule of debtors with
letter of confirmation received. With the permission of his client, the auditor should
send statementsof accounts to the customers for confirmation.
9. Teeming and lading or lapping: he should be alert to thepossibility of teeming and
lading or lapping.
10. Persons handling remittances: he should see that the persons who handle
remittances received do not take part inthe preparation and sending of statements of
accounts to debtors.
D. SALE OF INVESTMENTS: (Vouchers – Brokers note, bank advise etc.)
Investments are the securities, shares, bonds etc. in which the firm has invested. It is an
additional fund deployment along with the fund employment in usual operating activities.
In vouching the receipts from sale of investment an auditorhas to follow the
following procedure:
1) Broker‘s sold note and commission paid: As investments are usually sold through
brokers, so the broker's sold note should be examined to note the date of sale, the amount
received and the commission changed.
2) Investment sold cum dividend: If the investment has been sold cum dividend, the
auditor should see that the sale proceeds there of are properly apportioned between
capital receipt and revenue receipt.
3) Investment sold with ex-dividend: If the investment hasbeen sold with ex-
dividend, the auditor should see that the dividend is received and recorded
subsequently.
4) Ear- marked funds: If the investments pertain to some ear- marked funds, the
auditor should see that the profit or loss on the sale of investments is transferred to the
ear-marked fund account. (vouchers – broker sold note, bank advice).
5) In case the sale has been made through the bank, the bank advice should be
examined.

II VOUCHING OF PAYMENTS or CREDIT SIDE OF THE CASH BOOK:

Cash payments are general in normal course of business, thesereduces the cash balance in
the firm. At the same time frauds, errors and mistakes are common in handling cash
payments in cash division.While vouching the cash payments, an auditor should consider
the following events considerably:
(a) To the proper and right party,
(b) Payments relate to the business only,
(c) For the accounting period under audit,
(d) After proper authorization,
(e) Against a proper voucher, and
(f) Correctly recorded in the books of account.
(g) No payment should be left unrecorded
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(h) Amount paid should be correct
(i) Particulars should be tally with the books
(j)The legality of payment should be verified

Some of the important items on the credit side of the cash book and the duty of an auditor
in that connection are given below:
A) CASH PURCHASES: (Voucher – Cash memos, goods inward book etc)
In vouching payment for cash purchases, the auditor should take the following steps :
1) Genuineness of transactions: in regard to cash purchases, the auditor should
examine the entries in the cash book with the help of cash memos receipted
invoices issued by the suppliers and also the inward book.
2) Trade discounts: special attention should be given to trade discounts which
should be deducted from the purchases. See that only net amounts, that is, purchases
minus trade discount, has been carried to the books of account.
3) Missing vouchers: if any voucher is missing, he should insist upon getting
a duplicate copy of it. He should vouch such an item also with any other
possible documentary evidence.
4) Authorization of purchase: he should see that the purchases are duly
authorized.
5) Exact payments: To ascertain whether the paymentmade for the purchases
relates to the business, the auditor should examine the original voucher to find
out whether the goods were purchased for business or for the personal use of the
officers.
6) Rough cash book Vs. Cash book: he should enquire whether a rough cash book or daily
cash diary is maintained. If a rough cash book or daily cash diary isavailable, he should
compare the entries of all the payments.
7) Amount in words and figures: he should see that the amount appears in the voucher
both in words and figures,and it agrees with the amount in the cash book.
8) List of untouched entries: a list of untouched items should be submitted to the
management for submission of duplicates or other documentary evidences.
B) PAYMENTS TO CREDITORS: (Voucher – Statement of A/cs, receipts etc)
Creditors are the suppliers who supply the goods and serviceson credit basis and ask to
make the payment in future on specific date.
While vouching payments to creditors, an auditor has to followthe following points:
1) Receipts issued by the creditors: payments to creditors may be vouched with the
receipts issued by the creditors.
2) Purchase before the close of the year: in the case of purchases made before the
close of the year, the auditor must see that the goods not actually received are kept outof the
closing stock of the year.
3) Amounts due: he should check the amounts due to the creditors with the accounts of the
creditors, and the goodsreceived with the invoices.
4) Goods inwards book: entries in the goods inwards book orstock ledger should also be
verified to see whether the goods have actually been received.

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5) Suppliers‘ account: auditor should compare the suppliers‘ accounts with the statements
of account submitted by them. He should also check the periodicalstatements submitted
by the creditors with the creditors‘ accounts.
6) Payments relate to business: to ascertain whether the payments made to the suppliers
relate to business, the auditor should examine the original invoices to find out.
7) Payment in excess of the bill: where the payments are in excess of the bill or where the
same bill is paid twice, thefact should be enquired into.
8) Creditors‘ periodical statements: he should ensure whether creditors‘ periodical
statements are sent by the creditors, and if so, the same should be verified to find
discrepancies.
9) Invoice in duplicate: when invoices are received in duplicate, care should be taken to
ensure that there is nodouble payment against the same supply.
C) PURCHASE OF INVESTMENTS:
Investments should be vouched in the following manner:
(i) In case, these have been purchased through a stock-broker, payments should be vouched
with reference to the brokers sold note.
(ii) In case of a new issue for which application has been made and if the share certificates
have not yet been received, the allotment letter and banker's receipts for the instalments
paid should be inspected. But if share certificates or debentures have been received, they
should be examined.
(iii) The actual investments should be examined.
(iv) In case of cum-dividend purchase, he should see that the expenditure has been properly
apportioned between capital and revenue.
(v) He should see that the investments have been made in accordance with the provisions
of the Companies Act and Investments are registered in the name of the company required
under section 49 of the Companies Act.

D) PURCHASE OF LAND & BUILDING: (Vouchers – invoice, agreements, letter of

contract, receipts etc.)
The auditor should take the following steps to vouch purchases of Land and Building:
(i) The documents of title of the property purchased should be examined.
(ii) The auditor should find out as to whether land or buildings purchased are on freehold
or leasehold basis.
(iii) If the properties are purchased through an auctioneer, the account submitted by the
auctioneer should be checked.
(iv) In case the property has been purchased through the broker, the broker's note should
be examined.
(v) Where the property is got erected through a contractor, he should examine the receipts
issued by the contractor, for payments made.
(vi) If the buildings have been constructed by engaging labour, he should vouch the
expenditure on building materials purchased, cartage paid, wages paid to the workers etc.
(vii) The expenses incurred, for example, auctioneer's commission, brokerage, architect's
fee, registration fee etc. can be vouched with the help of the receipts obtained.
(viii)He should make a physical inspection of the property acquired.
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E) INCOME RECEIVED IN ADVANCE:
1) In the ordinary course of a business, it may receive some incomes in advance in spite of not
rendering the services. Such incomes are incomes received in advance
2)Rent received in advance, commission received in advance are the examples of unearned
income.
3)These are not pertaining to the current accounting year.
4) The Income Received in Advance A/c appears on the liabilities side of the Balance Sheet.
5) Each unearned income has to be deducted from the concerned income on the
credit side of P/L account.
6) Examine demand notes, vouchers, etc. to ascertain whether the outstanding
liabilities are brought into account or not.
7) Compare the outstanding liabilities of current year with those of previous year
&enquire into the material difference, if any.
F) DEFERRED REVENUE EXPENDITURE:
Deferred revenue expenditure is a revenue expenditure which is not completely written
off in the year in which it is incurred, but is spread over the year during which its benefit
is available.
1. Expenditure incurred in launching.
2. Research expenditure
3. Discount allowed on the issue of shares or debenture
4. Heavy promotional expenses.
5. Preliminary expenses
6. Alterations and Heavy Repairs to plant etc.,
While vouching deferred revenue expenditure, an auditor has to consider the following
provisions:
1) Nature of the business: he should acquaint himself withthe nature of the business
so that he can take the right decision regarding the treatment of revenue expenditure.
2) Circumstances of revenue expenditure: he should thoroughly examine the
circumstances of revenue expenditure in which the revenue expenditure are incurredso
that he can take the right decisions regarding their treatment.
3) Amortization: he should discuss with the client and understand clearly the policies
of the client in respect ofthe amortization of the deferred revenue expenditure.
4) Number of years: he should see that the estimate of the number of years over which
the deferred revenue expenditure is required to be written off has been correctlymade.
5) Calculation of expenditure: he should check the calculation of deferred revenue
expenditures and the deferred revenue expenditures amortized with relativevouchers.
6) Treatment of expenditure: he should see that the deferred revenue expenditure
treatment in the books. Written off portion should be debited to profit and loss account
and the same portion should be deducted in total amount.
7) Exceptional losses: he should see that a proper distinction has been made between
exceptional losses due to fire, floods, earthquakes etc. And deferred revenue

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G) PRELIMINARY EXPENDITURE:
Preliminary expenses are expenses which the promoters of a company incur at the time of
incorporating the company.
Preliminary expenses which incurred for before commencement of business or for setting
up of any undertaking or business. In other words, the expenses which are incurred before
the business starts functioning.
Vouching steps for preliminary expenses:
1)Check the board resolution approving the expenses.
2)Examine supporting papers and voucher, contracts, agreements. To support the
promoters’ claims.
3)Checks bills and receipts issued by the printer of the MOA, AOA and share certificate.
4)Check receipts for the registration fee paid for registration of the company.
5)Verify rates of stamps required to be affixed on the MOA and AOA.
6)Check that no expenses other than those that constitute preliminary expenses are booked
under this heading.
7)Ascertain boards minute book for the decision to write off the preliminary expenses over
a period.

H) TRAVELLING EXPENDITURE: (Vouchers-Receipts, Bills)

(i) Examination of the existing rules in respect of reimbursements including the advances,
or the past practice followed;
(ii) Checking the systems of internal controls and internal checks in force;
(iii) Vouching the bills with regard to sanction, payment authorisation, supporting of
evidence, advance, adjustments, receipts, etc.;
(iv) Test checking the calculations or expenditure details with approved journeys and
rates, and extraordinary expenses whether sanctioned by a senior official.
(v) Examination of the Articles of Association permitting such payment.
(vi) Checking the board’s resolutions fixing the rates and amounts and approving the
journeys including foreign travel.
(vii) Verifying the travelling agent’s bills, receipts, payments authorisation and vouchers, etc.
(viii) Traveller signature: Traveller must sign the Travel Expense Voucher in the space
provided.
(ix)Authorizing signature. Travel voucher must be approved by the authorizing signature
assigned to a particular cost centre number.
(x)The staff of the company is paid travelling expenses according to the rules.
(xi)The voucher and receipt of travelling expenses will serve as an evidence for vouching
these expenses.
(xii)If the allowance is fixed as per rules, auditor can verify the amount from the rules.
(xiii)If actual expenses are reimbursed, the calculation of travelling expenses should be
verified.
(xiv)The Bill of travelling expenses should be sanctioned by a responsible officer.

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b. Liabilities for calls on partly paid shares: the amount called on shares held and paid should be
verified from the cash book and the liability for the amount uncalled should be ascertained.
c. Liability under a guarantee: the auditor should ascertain the liability for a guarantee given by the
client for a loan or overdraft to his friend or partner. In case of non-payment of such loan, the
possible liability should be ascertained.
d. Liability for cases against the company not acknowledged as debt: it is a liability in a disputed
case where damages may have to be paid. A contingent liability should be Ascertained and a note
should be made at the foot of the balance sheet.
e. Liability in respect of the arrears of dividend on cumulative preference shares: the auditor should
examine the AOA which should laydown rules in this regard and due provision should be made for
such a liability.
UNIT 5: AUDIT OF LIMITED COMPANIES AND OTHERS
Introduction:
The companies Act, 2013 requires the compulsory audit of every Joint Stock Company and
therefore, an auditor is to be appointed to do the job and submit his report to the
shareholders of the Company.
APPOINTMENT OF COMPANY AUDITOR:
Under section 224 of the Companies Act detailed provisions regarding appointment of
statutory auditors have been laid down. This section is applicable to all kinds of
companies. The Act has vested the power to appoint auditors with directors, shareholders,
the Central Government and the Comptroller and Auditor General of India.
1) Appointment by directors:
a) First Auditors:
(i) The board of directors shall appoint the first auditor of a company within one month
of the date of registration of the company by a valid resolution.
(ii) The auditor so appointed shall hold office till the conclusion of first annual general meeting.
(iii) The directors are also empowered to fill any casual vacancy of an auditor if it is not
caused by resignation.
Casual Vacancy - The directors have been empowered to fill any casual vacancy in the
office of the auditor, except one, which is caused by prior resignation of an auditor. Any
auditor appointed in a casual vacancy shall hold office until the conclusion of next annual
general meeting.
2) Appointment by shareholders: (Annual General Meeting)
a) First Auditors: In case the directors fail to appoint first auditor, the shareholders shall
appoint the auditor at a general meeting by passing a resolution.
b) Subsequent Auditors:
(i) By ordinary resolution: As per provisions of section 224 (1), subsequent auditors are
to be appointed at each annual general meeting by the shareholders by passing a
resolution. The auditor so appointed shall hold the office from the conclusion of that
meeting until the conclusion of the next annual general meeting.

(ii) By special resolution: The Companies Amendment Act 1974, by its Section 224-A,
requires passing of a special resolution for the appointment or re-appointment of an
auditor(s) at each annual general meeting, in case of companies where less than 25%
of the subscribed capital is held whether singly or in any combination by.
In case of appointment of subsequent auditors, the company must inform the auditor
within seven days of appointment; The auditor within 30 days of receipt of information
from the company, must inform the Registrar in writing whether he has accepted or
rejected it.
* Casual Vacancy—If a casual vacancy in the office of auditor arises by his resignation,
such vacancy should only be filled by the company in a general meeting. In case a casual
vacancy arises because of any other reason except resignation, the shareholders can appoint
the auditor only if directors fail to fill the vacancy.
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In every annual general meeting, the appointment of the company's auditor is made by
the simple majority of votes by the members present.

3) Appointment by the Central Government:

According to section 224(3), if the auditor has not been appointed in the annual general
meeting, the company has to inform within 7 days to the regional director to whom the
central government’s power to appoint an auditor.

4) Appointment by the Comptroller and Auditor General:

In case of Government companies, the Comptroller and Auditor General appoints or re-
appoints the auditor(s).
Remuneration of an Auditor:
The appointing authority fixes the remuneration of an auditor. Thus, it is clear that
where the auditor is appointed by the Board, it is to fix the remuneration;
If he is appointed by the Share Holders in the General Meeting, the remuneration is to
be fixed in the Annual General Meeting;
If he is appointed by the Central Government, the remuneration is to be fixed by it. The
General Meeting can also lay down the manner of fixing the remuneration.
The retiring auditor, when reappointed in the General Meeting, shall get the
remuneration, which he was already getting, in the absence of any resolution passed for
refixing his remuneration.
When an auditor is required to do some extra work, he is entitled to claim extra-
remuneration for such work. Such extra-remuneration payable to him is to be shown in
the Profit and Loss Account of the Company also. (Schedule VI Part II Clause B).
Any sum paid by the Company in respect of the auditor(s) expenses shall be deemed
to be included in his remuneration.
Audit procedure:
1. The understanding of organization under audit.
2. Preparation of audit programme.
3. Vouching of basic books.
4. Valuation and verification of assets and liabilities.
5. Certification for final statements.
6. Preparation of audit report.
REMOVAL OF COMPANY AUDITOR: Section 224 (7) and Section 225
The removal of an auditor can be discussed under the following heads:
1. Removal before the expiry of the term—section 224 (7) of the Act includes
provisions relating to removal of an auditor of a company before the expiry of term. These
are :
(a) Removal of first auditor: The company (and not the board of directors) in a general
meeting can remove the first auditor appointed by the directors before the expiry of the
term. In this case the prior approval of the central Government is not needed for removal
of first auditor.

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(b) Removal of subsequent auditor: Any subsequent auditor can be removed from
office before the expiry of his term, by the shareholders at a general meeting only after
obtaining the prior approval of the central government.
The only purpose of obtaining the prior approval of shareholders through general meeting
and the central government is to prevent directors of the company to remove an auditor
without adequate and justified reasons.
2. Removal after the Expiry of the term
The auditor can be removed after the expiry of his term of office, as per the procedures
laid down in section 225. According to the section, for removal of a retiring or appointing
another auditor in his place, the following procedures mut be observed.
1. Special notice: A special notice of intention to move such resolution
must be given to the company by shareholders, who wish to nominate some other
person for appointment, at least fourteen (14) days before the annual general meeting.
2. Notice to be sent to retiring auditor: On receipt of such a notice, the company
must sent a copy there of to the retiring auditor.
3. Right of retiring auditor to make a representation: The retiring auditor has a
right to make a written representation to the company and the shareholders of the
company.
4. Right to attend meeting: The auditor to be removed has right to attend the general
meeting where his removal is to be discussed. He has also a right to speak at such meeting.
5. Passing of resolution: The general meeting may, by passing a resolution remove the
auditor.
QUALIFICATION OF COMPANY AUDITOR (STATUTORY):
1) A person who is a chartered accountant within the meaning of the chartered
accountant’s Act 1949.
2) The partners who are Chartered Accountants in practice shall be authorized by the firm.
3) Thus, to be a qualified, auditor should have passed the examination of the ICAI and be
a member of the Institute of the Chartered Accountants.
4) He should hold a certificate of practice under the Restricted Auditors Certificate
(Part B States) Rules 2013. Such persons are also known as certified auditors.
5) The Central Government has powers to make rules providing for the grant, renewal,
suspension or cancellation of such certificates to persons.
6) Central Govt has got powers to prescribe conditions and restrictions for such purposes.
But is has to notify to this effect in the official gazette (Section 216(2) (b).
QUALITIES OF COMPANY AUDITOR:
An efficient auditor must possess certain general qualities besides statutory qualification, so
that he can carry out his work efficiently and smoothly. The qualities are
I Professional Qualities:
1) He should have knowledge of principles and practice of general accounting, cost
accounting and management accounting.
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2) He should have knowledge of provisions relating to income tax, sales tax, GST etc.
3) He must not disclose the confidential information about the business to others.
4) The auditor must be familiar with the computer accounting and other automatic machine
devices used in the office.
5) An auditor should have a good knowledge in business organization and financial
administration, and industrial management.
6) He should have a knowledge of Economics, Business law, Mathematics, Statistics,
Business Management, Financial Management etc.
7) He should have a thorough knowledge in various legislation regulating business such as
Companies Act, the Indian Partnership Act, Banking and Insurance Act etc.
8) The auditor should have a thorough knowledge of the techniques of auditing. He should
be fully aware of new changes and developments in auditing.
II Personal Qualities:
1. Honesty: An auditor must be honest in his work if he has to carry out his duties
successfully. He has to maintain a good moral standard.
2. Tactful: The auditor should be tactful in dealing with the client’s staff.
3. Ability to Work Hard: The auditor must have a positive attitude and willingness to
work hard.
4. Impartial: The auditor should not be influenced by any bias in discharging his duties.
5. Cautious and Vigilant: An auditor must be vigilant in his work. He should always
proceed with his eyes open and be alert.
6. Methodical: He must perform his duties methodically, and should be thorough, and
complete in his work.
7. Ability to Trace out Facts and Figures: Auditor should possess a realistic attitude
towards his work. He should be able to trace out facts and figures.
8. Always Inquisitive: The auditor should not be suspicious. He should always be
inquisitive. He should not adopt an attitude of suspicion.
9. Courage: The auditor should be bold enough to discharge his duties. He should not
certify which he doubts to be genuine.
10. Ability to Communicate: An auditor must have the ability to prepare audit report
correctly and forcefully, precisely, concisely, and clearly.
DISQUALIFICATION OF COMPANY AUDITOR:
1) A body corporate, except LLP;
2) An officer or employee of the company;
3) Any partner/employee of officer or employee of company;
4) A person whether directly or indirectly, has “business relationship” with the company, or its
subsidiary, or its holding company;
5) A person who is full time employment elsewhere;
6) Person who is auditor for more than 20 companies;
7) A person who is convicted by a court of an offence involving fraud and a period of ten
years has to not elapsed from the date of such conviction.
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Tenure or Reappointment of Company Auditor:
Auditor appointed for
i. One term of 5 years in case of individual and
ii. Two terms of 5 years in case of auditing firm, shall not continued or reappointed for
a period of 5 years.
This means that there should be a cooling period or gap of 5 years between two appoints
in both the cases (individual auditor or auditing firm).

RIGHTS AND POWERS OF COMPANY AUDITOR:

According to section 227 (7) of the Companies Act, a company auditor has the following
rights
1. Right to inspect books of accounts (S, 227(1)): The auditor has a right to see the books
and the vouchers of the Company, at all times, The books here mean the account books as
well as the Statutory, statistical and costing books, Vouchers mean documentary evidence
of any nature concerning the books.
2. Right to ask for information and clarifications. (S. 227 (1) ): The auditor has a right to
call information and explanations from the directors and officers of the Company. This
information and explanation should be necessary for discharging his duties as an auditor
while auditing the books of account of the Company.
3. Right to get notice of the general meeting and attend it. (S. 231): The auditor has a
right to receive notice of the general meeting and attend it. It is not necessary that the
accounts of the Company are to be discussed in these meetings. He can attend every meeting
of the shareholders.
4. Right to make a statement in the meeting: The auditor has a right to make statement
in the shareholder's meeting relating to the accountsof the company only. But he is not
bound to make any statement, unless the Chairman of the meeting asks him to do so.
5. Right to be indemnified. (Section 633): The auditor has a right to be indemnified out of
the assets of the company for all legitimate expenses incurred by him in defending a law
suit filed against him for any Civil or Criminal proceedings.
6. Right to visit the Branches: The auditor has a right to visit each and every branch of the
company, in connection with the audit of these branches or of the Company, provided these
branches do not have a separate auditor and further.
7. Right to take legal and technical advice: The auditor has a right to take legal, expert or
technical advice in connection with the performance of his work. But he should give his
own opinion in the audit report and not that of the experts.
8. Right to ask for remuneration: The auditor has a right to ask for the remuneration, after
completing the audit work of the company. In case of his dismissal after his appointment
too, he is entitled to his fees.
9. Right to sign the audit report (S. 229): The auditor has a right to sign the audit report.
But where the auditor is a firm, a partner of such firm has a right to sign the audit report,
provided he is a practicing Chartered Accountant in India.
10. Right to correction of wrong statements: The auditor has a right to correct any
wrong statement made by the directors in the generalmeeting. But this statement must
relate to the accounts of the company which he has audited.
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11. Loans and Advances made by the company: Auditor should verify that the security
held against the loans and advances made by the companyare legally enforceable.
12. Right to refuse the audit unless the books are balanced: The Auditor has a right to
refuse the audit unless the books are balanced by the management.
13. Right to comment on inadequacy of accounting system in his report: The auditor
has the right to inform the directors to change the system of accounting provided it is
inadequate to the business, if the directors are not carried out his advice, the fact has to be
mentioned in his report.

DUTIES OF AUDITOR (u/s 143, Companies Act 2013):

The auditor of a company has several duties and responsibilities to perform, which are
categorized in to four groups as under.
I. Statutory duties
II. Contractual duties
III. Duties imposed by certain laws and judgments
IV. Duties arising out of professional etiquette (customs)
I. STATUTORY DUTIES: The duties imposed by the company Act, and which can’t be
altered either by the Articles of association, any resolutions or by the directors of the
company are the statutory duties. They are –
1. Duty to make certain enquiry: Under sec. 227(IA) of the co’s Act 2013 the auditor
should have enquiry into-
➢ The loans and advances are made according to the interest of the company.
➢ The treatment of personal expenses in the books of accounts.
➢ When the co’s shares are sold for cash, is it properly stated in the books
2. Duty to report: It is the duty of the auditor to give the report on the examination of
financial statements such as – profit and loss account and balance sheet.
3. Duty to comply with certain directives of Govt’s.: Under sec. 227(4A) of the co’s Act
2013. the central govt. is empowered to give certain directives to the auditor, in such a
case it is his duty to comply with such directives.
4. Duty to sign his audit report: Under sec. 229 of the co’s Act, 2013 the duty of the
auditor is to sign his audit report, in case if the audit is conducted by the firm of auditors,
it may be signed by any of the member of that firm.
5. Duty to give a statement in prospectus: Under sec. 56(1) of the co’s Act, 2013 an
existing co. shall give the statement of its auditor in its prospectus. That statement shall
contain the facts of – profits and losses of the co., assets and liabilities of the co. and the
rates of dividends declared by the co.
6. Duty to certify the statutory report: Under sec. 165(5) of the co’s Act, 2013, the
statutory report shall be certified by the auditor. That statutory report is in relation to –
the allotment of shares, cash received from issue of shares etc.
7. Duty to certify the declaration of solvency of the co.: Under sec. 488 (2) , when the
co, goes into voluntary liquidation it is required to submit the declaration of solvency to
its liquidator, it is the duty of the auditor to certify that declaration.
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8. Duty to assist investigators or inspectors: Under sec. 240 of the co’s Act, 2013, it is the
duty of the auditor to preserve and produce all books and papers of the co. to the
investigators or inspectors of the co.
9. Duty to assist the central govt. in connection with prosecution: Under sec. 242(1) of
the co’s Act, 2013, it is the duty of the auditor to give reasonable assistance in connection
with the prosecution of co’s directors, or other officers of the co. when it is needed.
10.Duty to report on public deposits: Under sec. 58A of the co’s Act, 2013 and Reserve
Bank of India Act, the co. shall furnish the information of its public deposits, and it is
the duty of the auditor to report the matter to the RBI and state the fact in his report.
II. Contractual duties or duties arising out of common law: The auditor is appointed
under an agreement; hence he needs perform all those duties which arise under the
common law or law of contract, in respect of this, his duties are –
1. Verification of his appointment to see it is in order
2. Performance of special duties of effectively
3. Performance of his duties, in due care and diligence in order to avoid his liability.
III. Duties imposed by certain laws and judgments: there are many duties imposed
on the co. auditor by the courts or legal decisions, they are –
1. He verifies the balance sheet arithmetically and also accurately
2. He has to see the method of valuation of assets and liabilities
3. Verification of stock, and examination of debenture deed
4. Correspondence with the previous auditor to know about the co.
IV. Duties arising out of professional etiquette: The main duties arising from
professional etiquette are –
1. He should carry on his duties with due care and with the interest of the public
2. He should comply with the rules of the institute of chartered accountants.
3. He must be independent, skill, technical and sincere
4. He must disclose full information of working and financial position of the co.

LIABILITIES OF A COMPANY AUDITOR:

The auditor of a company is appointed as per the provisions of the co’s Act, 2013,
particularly to safe guard the interest of the shareholders. Therefore, the liabilities of an
auditor are also prescribed by the co’s Act, 2013. They are
I Civil liabilities:
II Criminal liabilities:
III Auditors liability to third parties:
I CIVIL LIABILITIES:
The liability of an auditor to pay damages are known as civil liability. It includes
1)Liability for negligence: Under the law of Agency the auditor is liable for negligence and
in such a case he has to pay damages to the aggrieved party. If the company suffers a loss
on account of the acts of the auditor, he has to make good this loss. The auditor shall not
be held liable for negligence, if the company does not suffer any loss. He shall also not be
held liable for the loss suffered by the company without his negligence.
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Liablity for Negligence' includes the following acts—
a) Not to see the Articles of Association and not to object payment of dividends out of
capital.
b) Not to get statements of accounts from the creditors and find out the errors and frauds.
c) Not to verify Cash and Petty Cash.
d) Not to report to the client about the insufficient provision for bad and doubtful debts.

2)Liability for misfeasance (illegal performance): The financial loss raised to the co. due
to the wrongful act of the auditor and for which he is liable, is called misfeasance. The
misfeasance of an auditor is identified by the law under these following cases
1) Under sec. 227 (2) of the co’s Act. 2013. Which are deals with the statements made by
an in his report to the shareholders, states that, if he is misfeasance in his act, he is held
liable for a fine of ₹ 1,000
2) Under sec.227and 229 of the co’s Act, 2013, if sign his report of authenticity of any
document will fully, he is liable for a fine of ₹ 1,000
3) Under sec. 543 of the co’s Act, 2013, if an auditor misapplies any money at the time of
winding up of the co. he is liable for the damages to the co.
4) Any wrongful authorization made in the prospectus of the co. he is liable for a sum of ₹
5000 with an imprisonment.
Every auditor in the performance of his job is expected to exercise reasonable care and
skill as per the circumstances, the shareholders of the company appoint the auditor as
their agent, he must exercise reasonable degree of skill and care in performance of his
duties. If not, the auditor will have to face the consequences. This is clearly expressed
in some case decisions below.
a) Hudson Vs. Official Liquidator, Dehradoon Mussoorie Electric Tramwar
Company Limited (1929)
In this case, the management of the company had committed robberies and payments
were made illegally. The auditor did not exercise reasonable skill and care in performing
his duties to the company. He passed dubious transactions and illegal payments without
any enquiry. It was proved that the auditor did not demand any explanation for any
transaction and the documents of the company were also not examined carefully. It was
held that the auditor was guilty of misfeasance as he was reckless in the performance of
his duties.
b) Leeds Estate Building and Investment Society Vs. Sheperd (1897) In this case the
auditor was found guilty of misfeasance for:
• Non-compliance with the Articles of Association of the company
• Paying dividends out of capital.

II CRIMINAL LIABILITIES:
The liability of an auditor for a crime is called criminal liability. The criminal activities of
an auditor may be - Misrepresentation of facts, falsification of facts, issue of false
certificate, making of false statement, destruction of any voucher or doing of any act with
an intention to deceive others.

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The criminal offence of an auditor during the course of an audit, he is liable for fine and
also imprisonment. Criminal liability of the auditor arises under the following Acts:
1) Under companies Act 2013:
A. For misstatement in prospectus (u/s 63)
B. For fraudulently inducing persons to invest money (u/s 68)
C. For making a fraudulent report required (u/s 227)
D. For failure to assist investigation (u/s 240)
E. For failure to return property, books, of papers (u/s 477)
F. For falsification of books (u/s 539)
G. For prosecution for guilty in winding up (u/s 545)
H. Penalty for false evidence (u/s 629)

2) Under the Indian penal code:

when an issue or sign any certificate, knowing or believing that such certificate is false in
any material point, he becomes punishable under sec, 197 of Indian penal code.
3) Under the income tax Act:
The auditor is criminally liable for encouraging or abetting his client to make a false
statement or declaration regarding his taxable income. The liability for such offence is
imprisonment up to 6 month or fine or both. (Section 278).
4) Under the Chartered accountants Act:
The auditor is liable for misconduct, which is defined under section 122 of the Act.
Cases of professional misconduct are dealt in the various schedules of the Act.
5) Under the Banking Companies Act:
The auditor is criminally liable, if he makes a false statement knowingly relating to a
return, report, balance sheet or any other document or conceals a fact. The punishment is
imprisonment up to a period of three years. (Section 46).
6) Under the Life Insurance Corporation Act:
The auditor is criminally liable for making a false statement willfully on a material point
relating to the return, report, balance sheet or any document. The punishment is
imprisonment and fine. (Section 104).
III Auditors liability to third parties:
There are several parties who rely on the certified accounts of the auditor, like creditors,
investors, govt. trade association’s banks, shareholders etc. the question is that whether the
auditor is liable to these outsiders, for negligence or breach of contract. It includes
1) Liability for negligence: In the modern the auditor is liable to third parties for his
negligence.
2) Liability for fraud:
The auditor is held liable to 3rd parties for his fraudulent acts in the following
circumstances.
a. The statement or balance sheet signed by him is materially wrong
b. When he knows the statements signed by him are false
c. When the statements are intentionally made for defraud
d. When an auditor gives his consent for inclusion of such facts in the balance sheet.
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PROFESSIONAL ETHICS OF AN AUDITOR:
Meaning:
Professional ethics refers to the professionally accepted standards of personal and business
behaviour, values, and guiding principles.
It refers to the behaviour of a member of professional body toward the other members of
his profession and toward the member of the public.
The code of conduct is essentially a set of professional ethical standards regulating the
relationship of Chartered Accountants with their clients, employers, employees, fellow
members of the group and the public generally.
IFAC Code of Ethics for Professional Auditors
1. Integrity: A professional accountant should be straightforward and honest in all
professional and business relationships.
2. Objectivity: A professional accountant should not allow bias, conflict of interest or
undue influence of others to override professional or business judgments.
3. Professional Competence and Due Care: Professional accountants should act
diligently and by applicable technical and professional standards when providing
professional services.
4. Confidentiality: A professional accountant should respect the confidentiality of
information acquired as a result of professional and business relationships and should
not disclose any such information to third parties.
5. Professional Behavior: A professional accountant should comply with relevant laws
and regulations and should avoid any action that discredits the profession.
6. Disclose Material Fact: Practicing member should disclose a material fact known to
him which is not disclosed in a financial statement.
7. Communicate with previous auditor: Auditor should accepting a position only
after communicating with the previous auditor.
8. Receive only fee: Practicing member prohibited from charging or offering to charge
any professional employment fees which are based on a percentage of profits.
9. Practicing member prohibited from allowing a person not being a member of the
institute to sign on his behalf or on behalf of his firm, any balance sheet, P&L A/c.
AUDIT OF EDUCATIONAL INSTITUTIONS:
Audit of books of educational institution include schools, colleges, universities or other
institution which are engaged in the educational field.
The audit of educational institution should be conducted as follows:
I General Aspects:
1. The auditor should go through the University Act, Trust deeds and should note the
rules and regulations relating to accounts.
2. The governing body may pass resolutions from time to time in respect of accounts.
3. Auditor should obtain a copy of budget or financial statements to study the different
heads off income and expenditure.
4. Auditor should thoroughly assess the strength of internal check and internal control
system.
5. The auditor should also check whether his letter of appointment is in order specially
mentioning the scope of his examination.
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II Audit of Incomes:
1. Auditor should verify the receipts of monthly fees from students, from counterfoils or
carbon copies of the receipts.
2. He should also see whether cash received has been banked daily or not.
3. Other charges from the students such as examination fees, lab fees etc. should be
carefully verified.
4. Any fees received in advance should be properly adjusted.
5. The concession of fees and other charges should be duly authorized by the proper
authority.
6. Any grant in aid or funds received for a particular purpose must be utilized for the same.
7. The donations and other subscriptions from the various authorities have been accounted
for and acknowledged.
8. The income from property, investment etc. should be properly verified from the
vouchers.
9. As regards the amount of fees collected, the auditor should check entries in the cash book
and the fee register.
10. The auditor should check late payments of fees along with fines if any with the entries
in the fees register.
11. Grants from the government should be checked and verified.
12. Income from investment (Interest or Dividend) should be properly checked and verified
with vouchers.
III Audit of Expenditure:
1. Auditor should vouch the amount of salaries paid with the salary register.
2. The staff provident fund should be verified and it should be seen that it is invested as
per the rules.
3. The establishment expenses must be carefully vouched.
4. The payment of scholarship should be verified it the receipt from students and
scholarship register.
5. All the assets and liabilities should be properly exhibited in the balance sheet.
6. The stock of equipment, lab equipment, furniture’s should be physically verified.

7. While making payment to staff salaried, income tax should be deducted at source and
shall be duly deposited with the IT dept.
8. All purchases and issue of material should be properly authorised by a responsible
official.
9. Auditor should check the contribution to the PF both by the management and staff.
10. Library stock should be checked with register.
11. Check whether Loans to the staff should be sanctioned by the managing committee.
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AUDIT OF INSURANCE COMPANIES:
Introduction:
The Insurance companies are basically governed by the Insurance Act 1938. Life insurance
business was nationalized in 1956 by passing Life Insurance Corporation Act. The General
Insurance Business was nationalized by passing the General Insurance business Act 1972.
According to sec 12 of the Insurance Act of 1938, The B/S, revenue account, P/L account,
P/L appropriation account of every insurance company are to be audited annually by an
auditor under the provisions of the Companies Act 2013.
The auditor should note the following points to audit of accounts of Insurance
Companies:
1. The auditor should first examine the internal check system in company.
2. He should ascertain the types of insurance business carried on by the company.
3. He should ensure that all the statutory registers as required u/s 14 of the Insurance Act
1938 are being maintained.
4. He should check the receipts and payment of cash and cheque, calculation of premium,
making loans, buying and selling of investments etc.
5. He should inspect the records of the company in respect of claims, premiums, and
commissions.
6. He should inspect the certificates in respect of securities deposit with RBI.
7. He should ensure that separate accounts and proper registers have been maintained and
the annual accounts are prepared in accordance with the Insurance Act.
8. He should verify the premium receipts with the policy registers and the premium registers
and check the accounts for such receipt.
9. He should verify the investments and investment income.
10. He should vouch the claims paid by reference to claims register and other documentary
evidences. Claims not paid shall be shown as liabilities.
11. He should verify commission, allowance and bonus paid.
12. Auditor should also check all the payments of annuities.
13. He should check re-insurance account verify assets and liabilities and provisions made
for unexpired risk.
14. He should check premiums and outstanding premiums on policies.
15. He should vouch the bonus paid.
16. He should check commission and outstanding commission.
17. He should check the contingent liabilities.

AUDIT OF CO-OPERATIVE SOCIETIES:

The Co-operative Societies are established under the Co-operative Societies Act of 1912.
The accounts are generally audited by the staff of the co-operative department. However in
some cases a practicing CA may also conduct audit.

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The following points should be kept in mind in connection with the Audit of co-
operative society:
1. Qualification of auditors: Apart from a chartered accountant within the meaning of
Chartered Accountants Act 1949, some of the State co-operative Acts have permitted
persons holding a government diploma in co-operative accounts.
2. Appointment of auditor: An auditor of a co-operative society is appointed by the
Registrar of Co-operative Societies and the auditor so appointed conducts the audit on
behalf of the Registrar and submits his report to him and the society.
3. Books, Accounts and other records of co-operative societies: Under section 43(h)
of the Cooperative societies Act, a State govt can frame rules prescribing the books
and accounts to be kept by the cooperative society.
4. Restrictions on loans: A registered society shall not make a loan to any person other
than a member. With the special sanction of the Registrar a registered society can make
a loan to another registered society (sec 9)
5. Restrictions on borrowings: A registered society may accept loans and deposits from
its members and others subject to the restrictions and limits of the bye laws of the
society
6. Appropriation of profits: Section 33 of the Central Act states that 25% of the profits
should be transferred to reserve fund, before the distribution as dividends or bonus to
members. However, depending on the financial position the registrar may reduce the
percentage of the transfer, but it shall not reduce less than 10%.
7. Contribution to Charitable purpose: According to section 34, a registered society
may with the sanction of the registrar contribute an amount not exceeding 10% of the
net profits remaining after the compulsory transfer to the reserve fund
8. Contribution to education fund: Some of the State Acts provide that every society
shall contribute annually towards the education fund of the state federal society
9. Examination of overdue debts: Overdue debts for a period from 6 months to 5 years
and more than 5 years will have to be classified and shall have to be reported by an
auditor. Overdue debts affect the working capital position.
10. Adherence to cooperative principles: The auditor will have to ascertain in general
how far the objects for which the co-operative organisation is set up.
Auditor not Rendering Certain Services:(Prohibited Services)
Sec 144 is introduced in Co. Act 2013 to permit auditor to do other services as approved by
the board of audit committee. This section further provides the services, which the auditor
cannot perform directly or indirectly to the company they are
1)Accounting and bookkeeping services.
2)Internal Audit.
3)Design and implementation of any financial information system.
4)Investment advisory services.
5)Investment banking services.
6)Rendering of outsources financial services.
7)Management services.
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