Audit On Behalf Of Different Types Of Partners

The appointment of auditor is made on the basis of agreement or partnership deed in partnership firm and auditor should perform work for the shake of all partners. Following partners may make audit of partnership firm:

A) Audit On Behalf Of A Sleeping Partner

A partner who does not take any part in the business is known as sleeping partner. He invests his capital, he is entitled to profits, his liability is unlimited and so on. When this liability is unlimited and he cannot take active part in the business, naturally he would like to know as to how the business is being carried on, and that his co-partners are not handling the business in such a way that ultimately he may lose his capital. Therefore, he may appoint an auditor to examine the accounts to safeguard his interest. Of course, this is possible when there is a provision in the Partnership Agreement to that effect or all the other partners agree for such audit. The auditor so appointed should see that the interest of his client, viz, the sleeping partner, is not sacrificed and that it is safe. Auditor should pay particular attention to the following points:

1. No excessive reserve is created or over-depreciation is provided as it will reduce the amount of profit to be distributed to the partners.

2. Capital expenditure is not charged to revenue account as it will have the same effect on the divisible profit.

3. The active partners do not withdraw more money on account of profit or capital than that which is allowed by the partnership agreement.

4. The active partners do not indulge in speculative transactions which do not form part of the ordinary business.

B.) Audit On Behalf Of A Retiring Partner

An auditor is appointed by a retiring partner to see that the assets and liabilities are properly valued and that his account is correctly prepared to show the amount due to him. The auditor so appointed must pay attention to the following points:

1. Auditor should read the carefully especially the provisions relating to the retirement of a partner.

2. Auditor should see that such provisions are properly carried out.

3. Assets and liabilities are properly and correctly valued.

4. Outstanding assets specially goodwill and liabilities are brought into account and they are correctly valued so that the amount of profit or loss arrived at on the date of retirement is correct and, therefore, the amount due to the retiring partner is correct.

5. After taking into consideration the above points, the auditor should see what amount is due to the retiring partner.

6. The amount so due to a partner, sometimes, is payable at once, or by installments in subsequent years. The auditor should see that the terms of the original agreement related to the repayment of money due to a retiring partner are properly carried out. If the amount is to be paid by installments, he should see that it is transferred to the Loan Account and that the interest due to such loans is duly credited to the retiring partner's Loan Account.

C) Audit On Behalf Of The Representative Of A Deceased Partner

The line of action by the auditor in such a case will be the same as in the case of auditor appointed on behalf of a retiring partner. The deceased partner might have died during the course of the financial year and, therefore, the question of computation of the profit or loss, up to the date of death arises. Profit or loss maybe calculated on the basis of the average profit or loss of the previous year or the books of accounts may be closed on the date of the death of the partner and Profit and Loss Account may be prepared up to that date. But which course should be adopted? For this, auditor should refer to the terms of the agreement.

Again the question of computing goodwill of the firm may arise. Goodwill item may not exist in the books of account. He will have to refer to the agreement in which usually a provision is made that goodwill is to be calculated on the basis of the average profits of the previous two or three years. Auditor should see that it is computed correctly and that no capital expenditure is charged to revenue account as this step will reduce the net profit and consequently the share of deceased partner will also be reduced.

Auditor should also see that correct amounts are charged to revenue account so that the interest of the deceased partner is not sacrificed. Finally, the auditor should see that the account of the deceased partner is correctly debited and credited and thus find out what amount is due to such partner. Auditor should also find out from the Partnership Agreement as to how the amount due to the representative of the deceased partner is to be paid and advise the representative accordingly.

D) Audit On Behalf Of Quasi Partner

Sometimes an outgoing partner may leave his money to the business in the term that certain rate of interest will be charged on that amount. To know the safety of his investment, he may appoint an auditor on the basis of agreement. An auditor should conduct audit considering the interest of his client and business. He should consider the following facts while conducting audit:

1. Auditor should receive instruction from client in written form.

2. Auditor should check whether the profit and loss are properly calculated or not.

3. Depreciation on assets is properly deducted or not.

4. Amount of drawing drawn by the partners is within the limit of agreement or not.

5. Whether the capital expenditure is shown as revenue expenditure or vice-versa or not.

6. Whether the transactions of the firm are performed with personal interest or not.

Audit Of Non Governmental Organizations(NGOs)

Non governmental organization (NGO) is an organization which is established by a group of people to render service to the nation and people. NGOS should make audit of books of accounts every year. An auditor should perform following tasks while conducting audit of NGOS:

1.NGO has its own memorandum. S, an auditor should study it to know its activities.

2. NGOS may receive grant from foreign institutions. So, auditor should check whether it is received as per the provision of financial rules and regulations of the nation or not.

3. Auditor should check the use of government's grants and proper account is maintained for the recording of such grants or not.

4. If such institution has received donation from any individual or organization, an auditor should check accounting of such amount and its use.

5. Auditor should examine the amount received as subscription ratifying with counterfoils of the receipts.

6. Auditor should study the decisions taken by the executives.

7. Auditor should make physical verification of assets ratifying with store ledger.

8. Auditor should check the liabilities and also that its assets and its transfer is proper or not.

Audit Of Charitable Institution

Institutions which are established to perform social works or to help the disabled are known as charitable institution like Scout, Red Cross etc. Such institutions must make audit of books of accounts every years. An auditor should perform following works while conducting the audit of charitable institutions.

1. The auditor should study the constitution, legal status, rules and regulations of the charitable institutions.

2. Auditor should go through the minutes book of the governing body to see the decisions affecting accounts.

3. Auditor should vouch all the receipts in respect to donations, subscriptions, etc., with the subscription and donation.

4. Auditor should verify that a fund is received for a particular purpose and see that it has been utilised for such purpose only.

5. In respect to legacies, auditor should verify the receipts with Legacy Register.

6. Any amount invested should be as per the rules of the institution.

7. The income from investment is properly accounted in the books.

8. Auditor should see that no income tax is deducted from the incomes of the client. The incomes of charitable institutions are usually exempt from tax.

9. Auditor should verify the assets and liabilities on the date of balance sheet.

10. It should be seen that proper distinction is made between capital and revenue expenditure.

11. The cash in hand and cash at bank should be verified.

Audit Of Educational Institutions

Audit of books of educational institutions like school, college, universities etc. or other such institutions which are engaged in the educational field is known as audit of educational institutions. Auditor should check income and expenditure account and balance sheet of such institutes in order to verify and report the true and fairness of results presented by income statements and financial position presented by the balance sheet. Generally, the methods and procedures for vouching and auditing is same even though an auditor of educational institution should perform following tasks:

1. The auditor should go through the University Act. Trust deeds and should note the rules and regulations relating to accounts. The governing body may pass resolutions from time to time in respect to accounts. A copy of minutes books should be made available to him so that he may be able to confirm whether the decision of the government body have been compiled with.

2. Auditor should obtain a copy of budget or financial statements to study of different heads of income and expenditure.

3. Auditor should thoroughly assess the strength of internal check.

4. Auditor should vouch the grant-in-aid from the government carefully.

5. Auditor should verify the receipts of monthly fees from students, from counterfoils or carbon copy of the receipts. He should also see whether cash received has been banked daily or not.

6. Other charges from the students such as examination fees, laboratory fees, fines etc. should be carefully verified.

7. Any fees received in advance should be properly adjusted.

8. The concession of fees and other charges should be duly authorised by the proper authority. Any charges becoming irrecoverable should be written off only after proper authority has recommended.

9. Any grant-in-aid or funds received for a particular purpose must be utilised for the same.

10. The donations and other subscriptions from the various authorities have been accounted for and acknowledged.

11. The income from property, investment etc., should be properly verified from the vouchers.

12. Auditor should vouch the amount of salaries paid with the Salary Register. Any increment given to an employee shall be duly sanctioned.

13. The staff provident fund should be verified and it should be seen that it is invested as per the rules.

14. The establishment expenses must be carefully vouched and it should be seen that capital expenditure has not been treated as revenue expenditure or vice versa.

15. The payment of scholarship should be verified with the receipt from students and Scholarship Register.

16. All the assets and liabilities should be properly exhibited in the balance sheet.

17. The stock of equipment, stationary, furniture should be carefully verified.

18. While making payment of staff salaries, income tax should be deducted at source and shall be duly deposited with the Income Tax Department.

Contents Of Audit Report

Auditor should check the books of accounts and balance sheet and need to prepare the audit report addressing to the shareholders and present it to the concerned department and to the company. Copy of such report should be sent to all the shareholders. Audit report should contain the following things.

1. Answer, clarification and explanation of furnished questions are given by the concerned authority satisfactory or not.

2. Income statement and balance sheet is prepared by the company in prescribed structure or not.

3. Accounts are maintained as per the provision of laid down rules and regulations or not.

4. Balance sheet of the company presents true and fair view of financial position or not.

5. High ranking official, representatives and staffs of the company have performed work as per the provision of rules and regulations or not; they have committed fraud or not.

6. Transactions of the company are satisfactory or not.

7. Auditor should provide suggestion if necessary.

In addition to above facts, an auditor should include other facts using his own discretion. Other facts which are to be incorporate in the report are given below:

1. An auditor should include all the facts demanded by the Company Act.

2. Auditor should include the true and fairness of books of accounts as well as facts where he is not able to satisfy himself.

3. Auditor should include all the important facts which directly affect the financial position of the company.

4. Some abnormal transactions which are found during the course of audit but they are necessary for the company should be incorporated in the audit report.

5. If financial statements like income statement and balance sheet are not maintain properly, an auditor should clearly state in the audit report.

6. An auditor should include in the report that the audit of books of account is made in detail or applying test check.

7. If there is special situation, an auditor should include it in the audit report.

8. If auditor detects any frauds and errors during the course of audit, he must include in audit report clearly stating their effect in financial statements. Like regarding valuation of stock, depreciation system demarcation of capital and revenue etc.

Meaning Of Audit Report And Points To Be Considered While Preparing Audit Report

Audit Report

The preparation of audit report is the last work of audit. An auditor presents weakness, strength and details of an organization by preparing audit report. Audit report accumulates all the facts of audit. So, it is the proof of conducting audit properly.

Audit is related with the examination of books of accounts on the basis of regularity, rationality, economy and efficiency. An auditor checks the books of accounts on the basis of evidential documents. So, a financial statement is prepared by the auditor on the basis of information collected from the examination of evidential documents and records. An auditor should prepare report incorporating the facts found during the course of audit which is known as audit report.

Audit report is an important document in which the auditor sets forth the scope and nature of the audit and also gives his impartial opinion regarding the client's financial statement. It is the last outcome of every audit. We can find vast difference in the reports which were prepared previously and the reports prepared nowadays because the responsibility of an auditor is increased highly. So, an auditor should prepare report considering the following facts:

1. Address should be made to the authority that has appointed him.

2. Auditor should express his opinion in connection to financial statements.

3. Auditor should prepare report based on the facts found after the examination of all the books of accounts.

4. Date must be written in report which shows the duration of audit.

5. Audit report may clean, qualified and adverse.

6. All the facts incorporated in report should be concise, clear and correct.

Differences Between Verification And Vouching

Verification is made on the basis of vouching. So, verification is a part of vouching. Even though they have some differences which are as follows:

1. Meaning

Verification is the act of checking title, possession and valuation of assets but vouching is the act of checking the records with the help of evidential documents.

2. Nature

Verification is specially related to the assets and liabilities but vouching is related to all the accounting documents.

3. Person

Generally, assistant staff or auditor performs the work of vouching but auditor himself performs the work of verification.

4. Time

Vouching is made at the beginning of auditing but verification is made at the end of auditing or at the time of checking balance sheet.

Differences Between Valuation And Verification Of Assets

Valuation and verification of assets are complementary to each other. Until and unless the valuation of assets is made, verification is impossible even though they have some differences which are as follows:

1. Verification is a final work but valuation is needed to the verification.

2. Verification is the work of auditor but valuation is the work of concerned authority or board.

3. Valuation checks the amount shown in accounts but verification checks the items shown in the balance sheet.

4. Valuation is made throughout the year but verification is made at the end of the year.

5. Valuation is based on evidence but verification is based on individual check.

Methods Of Valuation Of Assets

Valuation of various assets can be made by using different methods. Valuation of fixed assets can be made in different ways. Some of the major methods are as follows:

1. Cost Method

In this method, valuation of assets is made on the basis of purchase price of the assets. It is very simple method of valuation of assets. Sometimes, existence of one assets depends on the existence of another. Then it is difficult to use this method.

2. Market Value Method

Valuation of assets can be made on the basis of market price of such assets. But if same nature of assets is not available in the market, it is very difficult to determine the value of such assets. So, there are two methods related to it. They are:

i. Replacement Value Method

If same asset is to be purchased then on the basis of same value, valuation of assets can be done.

ii. Net Realizable Value

It refers to the price in which such asset can be sold in the market. But expenditure incurred at the sale of such asset should be deducted.

3. Base Stock Method

Under this method of valuation, company should maintain certain level of stock and valuation of stock is made on the basis of valuation of base stock.

4. Standard Cost Method

Some of the business organizations fix the standard cost on the basis of their past experience. On the basis of standard cost, they make valuation of assets and present in the balance sheet.

5. Average Cost Method

It is a simple method for the valuation of such assets which cannot be distinguished. Like petrol, petrol is kept in the tank but e cannot separate its stock on the basis of lot. So, valuation of stock is made adding to all the cost and dividing by the quantity.

Importance Of Verification And Valuation Of Assets And Liabilities

Assets and liabilities are very important aspects of business. Balance sheet is prepared on the basis of them and an auditor should prove the true and fairness of information provided by balance sheet. So it is very important for an auditor. Its importance can be highlighted as follows:

1. To Show The Actual Financial Position

Balance sheet is prepared to show the actual financial position of a business. If proper valuation is not made, such balance sheet does not provide true and fair information. So, to provide information about the real financial position, verification and valuation of assets are essential.

2. To Know The Real Position Of Profit And Loss

Depreciation and other expenses on assets will be incorrect if proper valuation of assets is not made. So, to calculate the actual amount of profit and loss, proper valuation of assets and liabilities is necessary.

3. To Increase Goodwill

Proper valuation gives fair information about profitability and financial position of a business.So, people can get information which creates positive attitude towards company. Positive attitude of public increases goodwill.

4. To Assure Shareholders

Valuation and verification provide actual information about assets and liabilities to the shareholders which assure the safety of their investment.

5 Easy For Sale

At the time of sale of the company, it can be sold at the price which is enlisted in the balance sheet, but the assets whose valuation is not made need valuation before selling the company.

6. Easy To Get Loan

Company discloses the balance sheet proved by auditor for public knowledge which increases the trust of the company. Financial institutes provide loan easily to such companies.

7. Easy To Get Compensation

Whenever the loss occurs due to any incident, insurance company provides compensation on the basis of valuation of assets. So, the company can easily get compensation.

Concept And Meaning Of Verification And Valuation Of Assets And liabilities

Concept And Meaning Of Verification 

Verification means proving the correctness. One of the main work's of auditor is verification of assets and liabilities. Verification is the act of assuring the correctness of value of assets and liabilities, title and their existence in the organization. An auditor should be satisfied himself about the actual existence of assets and liabilities appearing in the balance sheet is correct. If balance sheet incorporates the incorrect assets, both profit and loss account and balance sheet do not present true and fair views.

Thus, verification means to confirm the truth or accuracy and to substantiate. It is a process by which the auditor satisfies himself not only about the actual existence, possession, ownership and the basis of valuation but also ensures that the assets are free from any charge. While verifying the assets, an auditor should consider the following points:

* Ensuring the existence of assets.

* Acquiring the assets for business.

* Ensuring the proper valuation of assets.

* Ensuring that the assets are free from any charge.

Concept And Meaning Of Valuation

Valuation is the act of determining the value of assets and critical examination of these values on the basis of normally accepted accounting standard. Valuation of assets is to be made by the authorized officer and the duty of auditor is to see whether they have been properly valued or not. For ensuring the proper valuation, auditor should obtain the certificates of professionals, approved values and other competent persons. Auditor can rely upon the valuation of concerned officer but it must be clearly stated in the report because an auditor is not a technical person.

An auditor should consider the following points regarding the assets while making valuation off assets:

* Original cost

* Expected working life

* Wear and tear

* Scrap value

Auditor's Duty Regarding Capital Expenditure And Revenue Expenditure

Demarcation of capital expenditure and revenue expenditure is an important function of an accountant because such expenses directly affect the income statement and balance sheet. Thus, an auditor should check whether correct demarcation is made or not.

Following are the duties of an auditor regarding capital and revenue expenditure:

1. An auditor should ask with concerned officer regarding doubtful items.

2. An auditor should understand the nature of work and procedures of an organization. S/he should know the rules and regulations of the business so that s/he can easily identify the expenditure as revenue and capital expenditure.

3. An auditor should check whether demarcation made as per the generally accepted principles of accounting or not. For, painting in existing building is revenue expenditure and new building is capital expenditure.

4. An auditor should consider the situation of making payment because situation also make same expenditure as capital expenditure and sometimes revenue expenditure.

Concept And Works To Be Performed For The Audit Of Impersonal Ledger

Concept Of Audit Of Impersonal Ledger

Impersonal accounts refer to real accounts and nominal accounts which are related to trading account, profit and loss account and balance sheet. So, if there are any errors in such accounts, they will affect adversely to the report and financial statements which are to be signed by the auditor. Checking of such accounts is known as audit of impersonal ledger. It does not only assure the correctness and reliability of nominal accounts but also helps to detect the errors which which remain in personal accounts. Such audit is conducted with the help of cash book, journal and subsidiary books.

Following works are to be performed for the audit of impersonal ledger:

1. Cash transactions are to be checked on the basis of cash book or journal.

2. Other impersonal transactions are to be recorded on the basis of sufficient evidences. An auditor has to check whether it is recorded on the basis of evidence or not.

3. Special attention should be given while checking transfer entries because it effects the final accounts.

4. Totals and balances of impersonal ledger should be ratified with the balance shown in trial balance.

5. Opening balance of impersonal ledger should be verified with the audited account of previous year.

6. Auditor should thoroughly check the totals of the various other books of original entry and also the postings of their totals of the impersonal ledger.

Points To Be Considered While Vouching Of Cash Transactions

Vouching of cash transaction is the most important job of an auditor. Before setting the program of vouching, an auditor should inquire carefully into whole system of internal control. An auditor should examine and understand the system and should pay attention in the following points.

1. Responsible officer for cash received and authority to sign check should not be given to the cashier and a copy of counterfoil should be kept for record of office. The receipts should be numbered serially.

2. All the receipt of cash should be recorded in the cash book.

3. Amount of cash received should be deposited into bank daily.

4. The cashier should not have any control over ledgers.

5. Drawer of check should present it to responsible officer to sign.

6. All unused receipt books and check books must be kept under lock.

7. System for recording cash sales and miscellaneous income should be different.

8. All the payments except petty cash expenses must be made by check.

Factors To Be Considered While Vouching

Vouching helps to prove the truth and fairness of account by detecting errors and frauds. So, while conducting the test of vouchers, following factors are to be taken into consideration:

1. An auditor should check the records whether they are supported by evidential documents or not.

2. All the documents related to income and expenditures are to be separated and separate files should be maintained. If not, auditor should ask to do so.

3. An auditor should use special sign in tested vouchers so that they cannot be used again.

4. While vouching, an auditor should check whether the general principles of accounting have been followed or not and clear cut demarcation of capital and revenue is made or not.

5. Whether the documents presented for testing are related to the current year or not.

6. All the documents which are presented for auditing must be authorized by the concerned authority. An auditor should check whether it is done or not.

7. An auditor should ask duplicate copies of missing vouchers, but if important vouchers have been missed and auditor is not satisfied with the reasons presented, s/he should write in report to this fact.

8. If an auditor finds the correction in the evidential document, then such figures should be verified with documents and to be noted down in audit note book for consideration while preparing report.

9. All the documents are to be reviewed before closing the work of audit which helps to check again those facts where special sign is given.

Importance Of Vouching

Vouching is the act of checking evidential documents to find out errors and frauds and to know the authenticity, accuracy and reliability of books of accounts. Thus, it is important for an auditor due to the following reasons:

1. 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. So, it is the backbone of auditing.

2. Vouching Is The Essence Of Auditing

Auditing not only checks the accuracy of books of accounts but also checks whether the transactions are related to business or not. All the transactions are performed after the prior approval of concerned authority or not, transactions are real or not because an accountant may include fictitious transactions to commit frauds. All these facts can be found with the help of vouching. So, vouching is essential for auditing.

3. Vouching Is Important To See Whether Evidences Are Correct Or Not

An auditor checks the books of accounts to detect errors and frauds. Frauds may be committed presenting duplicate vouchers. All the small and big amounts of frauds can be detected with the help of vouching. So, all the evidential documents and records are to be checked carefully and in detail by an auditor which is the scope of vouching.

Therefore, it can be said that vouching is the heart of auditing because without the work of vouching, the work of auditing cannot be performed.

Meaning And Objectives Of Vouching

Meaning Of Vouching

Voucher is known as the evident for the support of a transaction in the books of account. It may be bill, receipts, requisition form, agreement, decision, bank paying slip etc.

The act of examining documentary evidence in order to ascertain the accuracy of entries in the account books is called "Vouching". Vouching is a technical term which refers to the inspection by the auditor of documentary evidence supporting and substantiating a transaction. Simply stated, 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 and also to find out, as far as possible, that no entries have been omitted in the books of accounts. Therefore, vouching is the act of testing the truth of entries appearing in the primary books of accounts. It is initial for auditing.

Objectives Of Vouching

Main objective of vouching is to find out the regularity or irregularity of transactions, frauds and errors. Regularity means maintaining record and performing the work compliance with the rules, regulation and law. But irregularity means doing the work crossing to the line of rules, regulation and laws. Some of the major objectives of vouching are given below:

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. Planned fraud can be detected through vouching.

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

Each and every transaction is checked and ratified on the basis of document. 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 the transactions are made on the consent of concerned authority, such transactions are known as authorized transactions. If transactions are not authorized, such transactions can be fictitious transactions. So, such fictitious transactions ca 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. To know the real profit or loss of business, such transactions are to be separated.

Differences Between Internal Audit And Statutory Audit

An internal audit is conducted by the permanent staff of the same office to detect weakness in system, procedures and for the improvement. But statutory audit is the act of checking books of accounts as per the provision of company act. Both of them check books of account, detect errors and frauds even though they have certain differences which are as follows:

1. Appointment

An internal auditor is generally appointed by the management but statutory auditor is appointed by the shareholders or Annual General Meeting.

2. Legal Requirement

Internal audit is the need of management but it is not legal obligation but statutory audit is the legal requirement.

3. Qualification

An internal auditor does not required specific qualification as per the provision of law but qualification of statutory auditor is specified.

4. Conducting Of Audit

Internal audit is of regular nature but final audit is conducted after the preparation of final account.

5. Status

An internal auditor is a staff who is appointed by the management but statutory auditor is an independent [person appointed by the shareholders.

6. Scope Of Work

Internal audit is related to the examination of books of accounts and other activities of an organization but statutory audit checks the books of accounts and related evidential documents. So, scope of internal audit is vague but scope of statutory audit is limited.

7. Removal

Internal auditor can be removed by the management but statutory auditor can be removed by the annual general meeting only.

8. Remuneration

Internal auditor is appointed by the management; so remuneration is fixed by the management but remuneration of statutory auditor is fixed by the shareholders.

9.Report

Internal auditor needs to give suggestions to improve weakness but no need to present report but statutory auditor requires to prepare report after the completion of work on the basis of facts found during the course of audit and present such report to the appointing authority.

Concept Of Routine Checking, Its Advantages And Disadvantages

Routine Checking

Regular checking of all the daily transactions is known as Routine Checking. Routine checking incorporates the following tasks:

* Checking of record in primary books, costing, transfer etc.

* Checking transfer of transactions from original books of accounts to ledger account.

* Checking debit and credit side of various accounts.

* Checking transfer of balances of various accounts to other pages or accounts or statements.

Various signs are used while conducting routine check. Such signs provides the proof of routine checking of transactions.

Signs which are used in audit should be small and clear. Generally red or pink color is used while conducting routine check. But green color is used while conducting final audit.

Advantages Of Routine Checking

Following benefits can be obtained from the routine checking:

1. All the original entries will be checked; so all the errors and frauds can be detected easily.

2. All the entries and posting will be tested.

3. Routine checking helps to conduct final audit because all the balancing and totals have already been checked.

4. Separate and specific staffs are not needed because it is a regular process.

Disadvantages Of Routine Checking

Followings are the limitations of routine checking:

1. Routine checking is a mechanical test, so the staff who performs this work does not have inspiration. So, there are chances of leaving errors and frauds.

2. Routine checking can only detect small errors and frauds but not the planned frauds.

3. Routine checking is not needed where self balancing system is applied.

4. Routine checking cannot detect principle and compensating errors.

Concept Of Test Check, Its Advantages And Disadvantages

Test Check

Big business houses have a lot of transactions. So, it is very difficult to check all the transactions in detail. An auditor needs to prepare and present report in short period of time. So, an auditor checks the sample transactions and prepares and presents report to the concern authority which is known as 'Test Check'. An auditor checks the books of accounts of a particular time or area if there is no any doubt, s/he proves the account as true and fair, otherwise auditor checks in detail where s/he has doubts.

But if any errors or frauds are left out due to random sampling, auditor will be responsible for such losses. So, an auditor applies test check if internal check is effective in the organization.

Following points are to be taken into consideration while applying test check:

1. Sample should be selected from the various books of account and of different times.

2. Transactions related to beginning and ending period of particular year should be checked in detail.

3. Transaction related to cash and stock should be checked in detail.

4. Sample selection is to be made in random basis, not in planned way.

5. Detail check of Bank Reconciliation Statement is necessary.

Advantages Of Test Check

Following advantages can be obtained while applying test check:

1. Test check helps an auditor to complete work in less time because test of few transactions can be made.

2. An auditor can complete the work of audit of various organizations within stipulated time.

3. Test check saves labor, time and cost of man auditor. So, an auditor can check in detail the specific items rather than checking similar items.

4. Test check give assurance of accuracy and reliability of transactions to some extent.

5. Accounting staffs remain alert and careful because auditor checks the transactions of various times in random basis.

Disadvantages Of Test Check

1. There are chances of living errors and frauds because transactions with frauds may be left out from audit.

2. Result presented by income statement may be incorrect and report presented to the management may not be true due to the use of test check.

3. Test check increases the responsibility of auditor because an auditor should be responsible for the undetected errors and frauds due to application of test check.

4. Test check is not suitable method for the audit of small organizations.

Concept Of Internal Control And Its Advantages

Internal Control

Internal control is the plan of organization and all of the coordinated methods and procedures adopted within a business to safeguard its assets, check the accuracy and reliability of its accounting data, promote operational efficiency and encourage adherence to the prescribed managerial policies. We can say that internal control is a broad term with a wide coverage. Its scope extends beyond those matters which related directly to the functions of accounting and financial departments.

Previously internal check and control was taken as the same term but nowadays owners and managers are separate and different. So, it is taken as a separate term. Internal control incorporates inspection, internal audit and other factors of control. Nowadays, it is essential for the smooth operation of accounting, cash and other transactions of business.

Advantages Of Internal Control

Application of internal control provides the following benefits to the various parties:

1. Internal control helps to protect the assets of the business from misuse, theft, accident etc.

2. Internal control helps to implement management policies to attain corporate goals.

3. Internal control helps the auditor in his/her work detecting all the errors and frauds which are committed in the books of accounts.

4. Internal control helps to increase the accuracy and reliability of financial statement and books of accounts.

5. Internal control helps to regulate the work of staffs through division of work among the staffs in a scientific manner which helps to make the daily works of staffs effective.

6. Internal control helps the management to prepare and implement effective plans by providing correct and fact information.

7. Internal control helps to put moral pressure on staffs.

Disadvantages Of Internal Check System

Internal check system is useful to every stakeholder of the business even though it has some disadvantages which are as follows:

1. Under internal check system, every staff wants to complete her/his work in time. So, s/he performs work in hurry which leads errors.

2. Under internal check system, once work is checked by the another staff, the latter detects errors and frauds. So, there are chances of conflict between or among the staffs.

3. Staffs may form a group for personal benefits which leads to delay in work and increases errors and frauds.

4. Small organizations cannot use internal check system because it needs more staffs which increases the cost.

Advantages Of Internal Check System

Internal check system is useful to number of parties which are as follows:

1. Advantages To An Auditor

If internal check system is effective, an auditor can apply test check rather than checking the books of accounts in details. So, auditor can save his time and labor which simultaneously saves the cost.

2. Advantages To Businessman

Following advantages can be achieved by the businessperson from internal check system:

* Internal check detects errors and frauds which increase the morale of honest staffs. It helps to increase the production and reduce the cost. So, it helps to increase sales and profitability.

* Staffs know the real position of the business. So, it helps to maintain good relation between staffs and managers.

* Internal check system assures the owners in the accuracy and reliability of books of accounts.

3. Advantages To Business

Internal check system is beneficial to the business also. So, the advantages which can be achieved by the business are as follows:

* Right, responsibility and duties of staffs are clearly defined under the internal check system. So, they perform work whole heartedly which reduces the chances of errors and frauds and increases profit.

* Internal check system is based on the principle of division of labor. So, the work of business can be completed easily at minimum cost.

* Work of every staff is checked automatically. So, the staffs remain honest which increases the profitability of business.

* Every book of accounts remains correct, so final account can be prepared in less time, cost and labor.

Essential Characteristics Of Internal Check System

Certain qualities are needed to make an internal check system more effective and efficient. Such qualities are known as features of internal check system which are as follows:

1. Division Of Work

Before applying test check it is necessary to divide the entire tasks among the staffs in such a way so that work can be checked automatically by the another staff. Like, when staff takes the responsibility of purchase, then another staff should make its payment.

2. Provision Of Check

An organization should set up such provision, so that work can be checked by the another staff. An officer can check the work of one staff by transferring to the staffs and again.

3. Use Of Devices

In this modern world, various devices can be used to do various function like use of time record machine, wage determination machine etc. An organization should use such machines which help to make work of internal check easier.

4. Self-balancing System

An organization can use self-balancing ledger accounts which helps to make the work of internal check easier. Its effectiveness depends on its management.

5. Change In Work

An organization needs to transfer the staffs from one place to another place so that the work of previous staffs can be checked by the later staff which helps to make the internal check system effective.

6. Specialization

Every staff may not have such specialized knowledge to maintain accounts properly. So, an organization should give training to increase their skill so that internal check can be made more effective.

7. Control

There is more chance of frauds where there is direct contact of consumer or public. So, a manager can keep eyes in those works so that internal check system can be made more effectively.

Concept And Objectives Of Internal Check

Concept Of Internal Check

An internal check is a part of internal control. Internal check is the process of arrangement of duties of various staffs of a business in such way that work is automatically checked by the next staff while performing their duties. Frauds which are committed by a staff are automatically detected and corrected by the another staff. So, it helps a lot in the work of final audit. For example, a staff records the expenditure in a book and another staff posts them into ledger, another staff checks and verifies the ledger and payment is made by another staff. So, the work of one staff is checked by the another staff while performing their works so that errors and frauds committed by one staff are detected and prevented by the another staff.

Objectives Of Internal Check

Following are the objectives of internal check system:

1. To eliminate the frauds and errors which may be committed by the staffs.

2. To prevent misappropriation of cash or stock.

3. To ensure the reliability of information produced by the accounting system.

4. To detect errors and frauds promptly which helps to minimize their effects in long term.

5. To exercise moral pressure over the staffs.

Concept, Objectives And Advantages Of Internal Audit

Concept Of Internal Audit

Internal audit is a review of operations and records undertaken within a business by specially assigned staff. It is a post-transaction review to evaluate the correctness of records and the effectiveness of operations on a continuous basis in an organization by the paying staffs. The term 'internal audit' has been defined as the independent appraisal of activity within an organization for the review of accounting, financial and other business practices as a protective and constructive arm of management. It is a type of control which functions by measuring and evaluating the effectiveness of other types of controls. Internal audit deals primarily with accounting and financial matters, but it may also properly deal with matters of an operating nature.

The work of internal auditor is more or less the same as that of external or professional auditor. Being the employee of the organization, s/he has to see that there is no waste and inefficiency in the organization. An auditor has to ensure that the organization incurs liabilities in respect of its valid and legitimate activities. S/he has to make efforts to find out the weakness of the internal control and internal check system followed in the organization and suggest necessary improvements.

Many large organizations have a system of internal audit within the organization as a integral part of internal control. Internal auditing is a staff function rather than a line function and the internal auditor does not exercise direct authority over other persons in the organization.

Objectives Of Internal Audit

The objectives of the internal audit can be summarized as follows:

1. To verify the correctness, accuracy and authenticity of the financial accounting and statistical records presented to the management.

2. To confirm that the liabilities have been incurred by the organization in respect of its valid and legitimate activities.

3. To comment on the effectiveness of the internal control system and the internal check system in force and to suggest ways and means to improve these systems.

4. To facilitate the early detection and prevention of frauds.

5. To examine the protection afforded to company's assets and use of them for business purpose.

6. To identify the authorities responsible for purchasing assets and other items as well as disposal of assets.

7. To ensure that the standard accounting practices which have to be followed by the organization are strictly followed.

8. To undertake special investigation for the management.

9. To assist management in achieving the most efficient administration of the operation by establishing procedures by complying with company's operating policies.

Advantages Of Internal Audit

The advantages of internal audit are as follows:

1. Staffs remain alert because their work shall be checked by the internal auditor. So, accounting remains correct.

2. Internal audit helps to detect errors and frauds and provides suggestions to improve them which helps the management to take corrective action.

3. Internal audit detects the misuse of resources in time which helps to reduce unnecessary expenses.

4. Internal audit checks the efficiency of staffs which helps to increase the efficiency of them.

5. Internal audit checks the books of accounts, detects errors and frauds and helps in its correction which makes the act of final auditor easier.

6. Internal audit increases the morale of honest staff because evaluation of performance of any staffs will be made at any time.

Advantages And Disadvantages Of Management Audit

Advantages Of Management Audit

1. Management audit provides information about strong and weak points of the management after reviewing policies and programs. So, it helps to the smooth operation of an organization.

2. Management audit provides suggestions to the management which helps to maintain effective management.

3. Management audit helps the management providing suggestions to attain goal of an organization.

Disadvantages Of Management Audit

1. Management auditor cannot understand the practical problems. So, the suggestions provided by them is theoretical but not practical.

2. Scope of management audit is vague. So, it does not help to achieve specific goal.

3. Generally management gives more emphasis on maintaining books of accounts rather than concentrating on other factors. So, it consumes time of farsighted management.

Concept, Functions And Objectives Of Management Audit

Concept Of Management Audit

Management audit is an emerging concept of auditing. It has been originated from America. Management audit is an act of evaluation of all the activities of all the departments with a view to provide appropriate suggestions to the management to help their work. In other words, management auditing is a future oriented task which evaluates timely in all the levels of management like production management, sales management etc. The main objective of management audit is to improve the profit earning capacity, work of management, objectives of program, social objectives and human resource development so that organizational goal can be easily attained. It refers to the existence of control system, compliance of rules and regulations, process of managerial decisions etc.

Functions Of Management Audit

Management audit is a difficult and complex task. It performs the following functions:

1. Management audit identifies the objectives of an organization if such objectives are not set up.

2. Management audit allocates the overall objectives of an organization in small parts.

3. Management audit reviews the structure of organization and asset of the organization and decides whether goals can be obtained or not.

4. Management audit examines all the scope of work and liability centers.

5. Management audit provides valuable suggestions to the management after the evaluation of all above facts.

Objectives Of Management Audit

Main objectives of management audit are as follows:

1. To formulate the goal of an organization.

2. To ensure the fulfillment of goals.

3. To help management to improve the activities and procedures.

4. To help all the members of management to make effective discharge of their duties.

5. To help in the improvement of profits.

Advantages Of Cost Audit

The important advantages of cost audit are briefly discussed as follows:

A. Advantages Of Cost Audit To The Management

1. Cost audit provides reliable cost data for managerial decisions.

2. Cost audit helps management to regulate production.

3. Cost audit acts as an effective managerial tool for the detection of errors, frauds and irregularities so that reliable and smooth functioning of the system is continued.

4. Cost audit reduces the cost of production through plugging loopholes relating to wastage of material, labor and overheads.

5. Cost audit can fix the responsibility of an individual wherever irregularities or wastage are found.

6. Cost audit improves efficiency of the organization as a whole and costing system in particular by constant review, revision and checking or routine procedures and methods.

7. Cost audit helps in comparing actual results with budgeted results and points out the areas where management action is more needed.

8. Cost audit also enables comparison among different units of the factory in order to find out the profitability of the different units.

9. Cost audit exercises moral influence on employees which keeps them efficient and alert.

10. Cost audit ensures that the cost accounts have been maintained in accordance with the principles of costing employed in the industry concerned.

B. Advantages Of Cost Audit To The Shareholders

1. Cost audit ensures that proper records are maintained as to purchases, utilization of materials and expenses incurred on various items i.e wages and overheads etc. It also makes sure that the industrial unit has been working efficiently and economically.

2. The cost audit enables shareholders to determine whether or not they are getting a fair return on their investments. It reflects managerial efficiency or inefficiency.

3. Cost audit ensures a true picture of company's state of affairs. It reveals whether the resources like plant and machinery are being properly utilized or not.

C Advantages Of Cost Audit To The Society

1. Cost audit tells the true cost of production. From this the consumer may know whether the market price of the article is fair or not. The consumer is saved from the exploitation.

2. Cost audit improves the efficiency of industrial units and thereby assists in economic progress of the nation.

3. Since price increase by the industry is not allowed without justification as to increase in cost of production, consumers can maintain their standard of living.

D. Advantages Of Cost Audit To The Government

1. Cost audit assists the 'Tariff Board' in deciding whether tariff protection should be extended to a particular industry or not.

2. Cost audit helps to ascertain whether any particular industry should be given any subsidy in order to develop that industry.

3. Cost audit provides reliable data to the government for fixing up the setting prices of the various commodities.

4. Cost audit helps the government to take necessary measures to improve the efficiency of sick industrial units.

5. Cost audit can reveal the fraudulent intentions of the management.

6. Cost statements may be helpful to authorities in imposing tax or duty at the cost of finished products.

7. Cost audit facilitates settlement of trade disputes of the companies.

Objectives Of Cost Audit

The following are some of the objectives for which cost audit is under taken:

1. To establish the accuracy of costing data. This is done by verifying the arithmetical accuracy of cost accounting entries in the books of accounts.

2. To ensure that cost accounting principles are governed by the management objectives and these are strictly adhered in preparing cost accounts.

3. To ensure that cost accounts are correct and also to detect errors, frauds and wrong practice in the existing system.

4. To check up the general working of the costing department of the organization and to make suggestions for improvement.

5. To help the management in taking correct decisions on certain important matters i.e to determine the actual cost of production when the goods are ready.

6. To reduce the amount of detailed checking by the external auditor if effective internal cost audit system is in operation.