Classification of investigation

Classification of investigation has following types

1. Evaluation investigation                     4. Analysis investigation

2. Review investigation              5. Special audit

3. Survey investigation              6. Statutory investigation

1. Evaluation Investigation:

Evaluation investigation is conducted to determine the real worth of business proposed to be purchased or sold, or to determine the performance of machinery or efficiency of the personnel of an organization. In case of proposed purchase of business, the investigation relates to valuating the assets and liabilities and ascertaining the present earning potential and future prospects. In case of sale of business, net worth of business is determined. In case of evaluation of machinery and personnel, the performance of machinery and efficiency of personnel is determined.

2. Review Investigation:

Review investigation is usually conducted to determine the reliability of business data, or to ascertain the compliance with the terms of a contract. Where payment of commission, royalty, subsidy or similar items is based on output or turnover, investigation shall be conducted to determine the correctness of data provided by the party. The secured creditors may desire to know that the borrower has, in fact created a charge, as agreed, on the assets in their favour.

3. Survey Investigation:

Survey investigation is conducted to determine the accounting system, costing methods, manpower efficiency and similar matters. A survey of accounting system, may be carried out to overcome the weaknesses pointed out in audit report, to introduce a budgetary control system, or necessity of strengthening internal check or introduction of internal audit. A survey of cost system may be with a view to improve existing procedures. A survey of manpower may be undertaken to determine the real number of employees required, surplus staff, inefficient workers, etc.

4. Analysis Investigation:

Analysis investigation is conducted with a view to facilitate the decision making by top management in areas of vital importance like price fixation, cost of products or services, reasons for increase in price, ways to control them.

5. Special Purpose Audit:

Special purpose audit is in fact an investigation conducted with a  view to determine fraud, losses caused by fire, loss of production due to machinery breakdown, loss of profit as a consequence of fire.

6. Statutory Investigation:

Companies Ordinance provides for statutory investigation in section 263 to 282. Such an investigation may be made on:

a. The report of register of companies.

b. The application of members of the company.

c. In other cases like special resolution of company or under court order.

a. On report of register section 263 (1):

The Securities and Exchange Commission upon a report by the registrar of companies, under section 261 (6) appoint inspector to investigate the affairs of the company and to report thereon, (Section 163(1)).

If the company does not furnish the information required by the registrar, under section 261 (1) within the time allowed or if the information submitted disclose an unsatisfactory position or does not disclose full and fair position, the registrar shall report the position to commission whereupon the commission may order investigation.

b. On application of member section 263 (1) & 264:

Securities and Exchange Commission may appoint inspector to investigate the affairs of any company and to report thereon in such manner as Commission may direct:

Such appointment shall be made as under:

i. In case of company having share capital on the application of members holding at least one-tenth voting powers.

ii. In case of company not having share capital on the application of at least 1/10^thof members.

The application by members must be supported by such evidence as the Commission may require, supporting their claim for investigation. The applicant shall also give security for the payment of cost of investigation, section 264.

c. Investigation in other cases section 263 (1):

Securities and Exchange Commission may order investigation, according to section 265, in the following two circumstances:

a. When company passes a resolution in general meeting required investigation.

b. When investigation is ordered by the court.

• When investigation is mandatory section 265 (a)

The shareholders, by a resolution, desire the commission to appoint inspector to investigate the affairs of the company. They need not specify the circumstances in the resolution due to which they desire investigation. This right can be exercised in whosoever hand the company may be i.e. director, receiver appointed by debentures holders, administrator appointed by the court.

• When investigation is discretionary section 265 (b)

Securities and Exchange Commission may appoint inspector to investigate company’s affairs if in its opinion there are circumstances suggesting.

a. That the business is conducted with intention to defraud creditors, members or any other person.

b. Company was formed fraudulent or unlawful purpose.

c. Person involved in formation or management is guilty of fraud, misfeasance or other misconduct.

d. Members have not been given full information.

Powers of Inspector

1. Investigate affairs of any other company in the same group.

2. Require officer to produce books, etc, and to assist.

3. Require anybody corporate to give information.

4. Keep books and papers in custody.

5. Examine officers on oath.

6. Seize books and papers.

Inspectors report section 269

The inspector may make interim report, or on the conclusion of investigation shall make a final report to the Commission.

What is Investigation? Distinguish between Audit and Investigation, define the scope and objectives of investigation

Investigation involves inquiry into facts behind the books and accounts, into the technical, financial and the economic position of the business or organisation.

Investigation is an examination of books and records preliminary of financing or for any specified purpose, sometimes differing in scope from the ordinary audit.

Investigation implies an examination of and record for some special purpose.

Audit and Investigation distinguished

1.         Legal binding

• Audit of annual financial statements is compulsory under the Companies Ordinance, 1984.
• Investigation is not compulsory under Companies Ordinance but voluntary depending upon necessity.

2.         Object in view

• Audit is conducted to ascertain whether the financial statements show a true and fair view.
• Investigation is conducted with a particular object in view, viz to know financial position, earning capacity, prove fraud, invest capital, etc.

3.         Period covered

• Audit is conducted on annual basis.
• Investigation may be conducted for several years at a time, say three years.

4.         Parties for whom conducted

• Audit is conducted on behalf of shareholders (or proprietor, or partners).
• Investigation is usually conducted on behalf of outsiders like prospective buyers, investors, lenders, etc.

5.         Documents

• Audit is not carried out of audited financial statements.
• Investigation may be conducted even though the accounts have been audited.

6.         Extent of work

• Audit is normally conducted on test verification basis.
• Investigation is a through examination of books of accounts.

7.         Report

• Audit report is addressed to shareholders (or proprietors or partners).
• Investigation report is addressed to the party on whose instruction investigation was conducted.

8.         Adjustment in net profit

• In case of audit net profit disclosed by audited accounts is final without further adjustments.
• In case of investigation in order to determine real earnings certain adjustments are always essential.

9.         Person performing work

• Audit is to be conducted by a chartered accountant.
• Investigation may be undertaken even by a non-chartered accountant.

Nature of Investigation

Investigation is an enquiry into the financial statements of a number of past years with a view to know the real financial position or earning capacity. It is in fact a kind of special audit with predetermined scope depending upon the purpose to be achieved. Investigation is neither accounting nor auditing. Investigation is carried out not in substitution of audit, but in addition to audit. The investigating auditor may even have to investigate the audited accounts.

Scope of investigation

No general principle can be laid down with regard to the scope of every type of investigation. Scope of investigation, in each case, would be limited to the period or area to be covered by the investigator.

An investigation on behalf of a person intending to purchase running business of a sole trader will be restricted to the determination of value of assets, liabilities, reserves, existing potential and future prospects. An investigation to settle suspected irregularities in cash or stock would normally cover a period from three to six months.

Objectives of Investigation

The real objective of conducting an investigation by an auditor on behalf of his client is to provide him the desired information in the form of a report about the matter specified. Normally the objective of investigation is to collect, analyze and evaluate facts in respect of desired field of activity with a view on some special purpose as determined by the person on whose behalf the investigation is undertaken. In short investigation is to ascertain the financial position and earning capacity of a business on behalf of a certain person.

The common objectives of investigation are listed below:

1) Proposed purchase of business.

2) Proposed sale of business.

3) Reasons for low profitability.

4) Cause of high employee turn over.

5) Reliability of business data.

6) Proposed investment in particular securities.

7) Suspected fraud.

8) Joining in existing partnership business.

9) Borrowing funds.

10) Lending funds.

11) Proposed purchase of controlling shares in a company.

12) Suspected misfeasance against directors.

13) Detection of undisclosed income for tax purposes.

14) Suspected misappropriation by trustees.

Special Audit of a Sugar Company

Sugar Manufacturing Company is a manufacturing company where raw material is converted into finished product. In addition to various other important considerations from audit point of view, some special consideration will receive attention on the part of an Auditor. They may be as under:

1-         Raw material is purchased in sufficient large quantities either from the farmers or contractors. In this behalf, various types of receipts issued to the farmers or contractors should be checked. Also the stock of goods should be physically checked in order to ensure the quality and quantity of raw material purchased.

2-         Sugar industry is a process industry and proper and strong cost accounting system is required. Necessary accounts pertaining to work-in-process, material, factory overhead and finished goods are to be properly maintained. Production record is to be properly maintained by the Factory and information in this behalf conveyed to the Head Office.

3-         Sugar industry is a seasonal industry. Necessary record is to be checked to ensure that the various expenses etc pertain to the period in which the factory was working. No worth while expenses are to be incurred during the closure of the factory.

4-         Considerable quantity of by-product is available in a sugar factory. This by-product is usually sold and considerable amount is received. So it is required that all the incomes and expenses of by-product department should be properly vouched.

5-         Considerable expenses are incurred in the transportation-in of raw material and transportation-out of finished product. Necessary record should be checked to ensure that all these expenses are properly accounted for.

6-         Necessary machinery etc might be imported and the finished goods exported. Hence necessary export and import documents in this behalf are to be thoroughly checked to ensure that all these transactions are properly and correctly recorded.

Special Audit of a Textile Mill

Textile Mill is a manufacturing concern where raw-material is purchased and finished product in the form of yarn and cloth etc is obtained. From Auditor’s point view so many important aspects will require special consideration. These may be as under:

1-         System of internal check / internal control should be studied in order to ensure that it is satisfactory and is serving the best interest of the organization.

2-         Considerable amount is spent on the procuring raw cotton which is purchased either directly from farmers or contractors. Proper record in this behalf must be maintained. Quantity and quality of stock is to be checked and the rates etc, verified.

3-         Although an auditor is not supposed to be an expert to check the quality of raw material, but he is supposed to be pay special visits to the Mill to the quality of stock physically maintained and as shown in the books.

4-         Proper accounting system must be followed by the Mill Factory Accountant will be responsible for properly maintaining the work in process, material, factory overhead and finished goods etc. Other accounts are to be maintained by the Head Office Accountant.

5-         Waste of cotton may be a by-product and its proper accounting is required. So income from such items are to be properly ascertained and ensured that these incomes have been accounted for correctly.

6-         Considerable amount of stock of raw material and other spare parts etc, is to be carried by a manufacturing concern. Physical stock-taking is necessarily required in order toe ensure that figures of physical stock taking tally with the figures as shown by the books.

7-         Considerable expenses are incurred on the transportation of raw material and the finished goods. Such carriage expenses may be paid on the purchase of raw material and the dispatch of finished goods. CIF and other terms should be checked to make clear the expenses of insurance, freight etc.

8-         Considerable quantity of manufactured good may be exported. Hence it is required to check the various important documents with regard to export and import. Letter of credit and other sale and purchase agreements will be inspected in order to ascertain exact quantity sold, rate per unit and number of shipments to purchaser.

Special Audit of a Hotel

While auditing the accounts of a big hotel, auditor will pay his special attention to the following points:

1-         Examination of the system of internal check in operation in the business will be the first and the most important duty of the auditor.

He will thoroughly enquire into the system of internal check with regard to cash receipts and the preparation of customer’s bills.

2-         Auditor will carry out complete checking of Cash Book and Pass Book. He may prepare Bank Reconciliation Statement to reconcile the amount of cash at bank as shown by both the books.

3-         Auditor will vouch all payments made from the Cash Book and Petty Cash Book. He will check the posting of cash transactions to their respective ledger accounts.

4-         Auditor will see that room rent receipts and bar receipts are recorded in separate accounts and are properly accounted for. He will vouch visitor’s ledger and the income there from. Auditor will be careful to examine that items paid out on account of visitors are properly recorded, charged and collected.

5-         Auditor will carry out a detailed checking of the periodical posting from the window ledge into impersonal accounts in the general ledger.

6-         Auditor will carry out a detailed voucher of wages, purchases and stock books. He will see that wages and salaries are properly paid, certified and receipted. He will verify the balances of creditors and debtors with the statements and confirmation letters received.

7-         Auditor will see that adequate provision for depreciation of beddings, crockery, cutlery, utensils, furniture etc, has been made out of the profits of the business on a fair and consistent basis.

8-         Auditor will carefully vouch capital expenditure. He will check that the rents realized from the rooms are properly accounted for.

9-         Auditor will examine the terms and conditions of employment of those employees, who are entitled to free boarding and lodging.

Amount spent for the proprietors of the hotel shall be ascertained and treated by an auditor as their personal drawings.

10-       In cases where there are several petty cash payments, auditor shall verify the balances of all of them simultaneously n order to prevent manipulations.

11-       Auditor will see that the firm has made adequate reserve for redecoration expenditure in addition to provision for depreciation of the existing items.

12-       In those cases where the firm has obtained furniture on hire purchase basis, auditor will see that revenue is duly charged with the internet on the hire portion of the instalment paid.

Special Audit of a Cinema

While auditing the accounts of a Cinema, the following points will receive special consideration on the part of an Auditor:

1-         Auditor will examine the working of the system of internal check in operation in the business particularly in relation to cash receipts and payments ad un-issued tickets. He will see that un-issued tickets are kept under proper control and the issued tickets are duly signed by a responsible officer of the business.

2-         Auditor will check the daily returns for the tickets sold for different shows. He will see that the collections are daily deposited into the bank. He can vouch receipts from tickets sold with the amount of entertainment tax paid.

3-         Auditor will check other sundry receipts from contracts to supply refreshments, receipts from advertisements, hire charges of opera glasses, space allotted for display of goods etc, with the necessary documentary evidence available.

4-         Auditor will carefully examine the film hire contracts. He will ascertain the terms and will see that the films purchased but not shown are properly valued and recorded. He will distinguish film hire from film purchases.

5-         Auditor will carry out a thorough vouching of the operating expenses paid. He will see that they have been properly allocated between capital and revenue.

6-         Auditor will see that all outstanding liabilities have duly been provided for and that adequate provision has been made for depreciation of buildings, furniture, machines and other assets.

7-         Auditor will thoroughly vouch Cash Book, Pass-Book, Petty Cash Book, Employees Register and Wages Records.

He will ascertain the terms of charity performances, if any.

Special Audit of a Newspaper

The primary object of such an audit is to give an idea to the advertisers about the effectiveness of their advertisements. In order to eliminate the effect of temporary factors contributing to sudden increase or decrease in circulation of a newspaper, it is always better to select short durations, say a month or a quarter of the year, for the purposes of investigation in the accounts of a newspaper. Auditor must remain on guard throughout his work against attempts made to show a false increase in the circulation of a newspaper by including the names of dummy subscribers. Leading advertisers in the country have set up an Audit Bureau, which has developed the procedure to be followed by auditors while conducting such audit.

The audit programme for verifying the circulation of a newspaper will be on the following lines:

1-         Auditor will verify the number of copies printed from the printers voucher and the entry for the issue of newsprint to the press out of the stock held by the company.

2-         Auditor will pay greater attention to the verification of the record of the issue of the copies of the newspaper. He shall examine the subscribers list for the copies issued to subscribers, dispatch notes sent to the news agents to verify copies issued to them.

3-         Auditor will examine the copies of bills issued and the record of copies of newspaper issued to the subscribers, news agents, hawkers etc, in order to verify the accuracy of debit entries passed into their ledger accounts.

4-         Auditor will then proceed to vouch cash collections, the duplicates of the receipts issued and the credit entries passed therefore into the accounts of various types of the customers.

5-         All additions and deletions to the subscribes list should be examined carefully in order to confirm that the list contains only the names of genuine subscribers to whom the newspaper had been issued.

6-         Total of the copies issued daily should be compiled from the financial records of sales and distribution and should be compared and reconciled with the total number of copies printed. Causes for wide discrepancy in two figures should be enquired into.

Average daily issues will constitute the total circulation of the newspaper. On deduction of free circulation copies, auditor will get the total of the net paid circulation.

What steps are involved in audit of accounts of hotels and commercial banks, enumerate

In the course of audit examination, the auditor will have to keep in mind the different situations existing in different types of organizations. There may be some very important steps to be taken by an auditor in a certain type of audit examination which may not be so important in other organizations. Audit examination of manufacturing organizations such as Textile and Sugar Companies will require different emphasis to be laid by the auditor which may be totally different in case of a trading concern or a banking company. However some general points may be discussed which may be applicable in every type of business. These general points may be summarized as under:

1-         To check the efficiency or otherwise of Internal Control System in the organization;

2-      In order to ensure the liquid position of the organization to verify the cash in hand;

3-      Verification of bank balance is also a must almost in all the organizations;

4-      Various types of legal documents are to be prepared by every organization, these are to be thoroughly checked;

5-         To compare the current balance sheet with the previous years;

6-         Capital and Revenue distinctions are to properly ensured;

7-         Inspection of Payroll of employees;

8-         Schedules of Accounts Receivable and Payable are to be thoroughly checked;

9-         Adequate supporting documents are to be obtained and inspected.

Special Audit of a Bank

Auditor will begin his work by carrying out a thorough verification of the assets and liabilities of the banking company. Points to which he must pay his special attention in the performance of this work with regard to each individual asset and liability are discussed below:

1-         Cash in hand / with other banks – Auditor will attend on the last date of the period under audit and will verify cash in hand or bullion by actual counting or weighing. He will compare and tally the balance with the Cash Book, the Day Book. Balances with the State Bank or other banks shall be verified.

2-         Investments – Auditor shall obtain a list of the investments of the bank. He shall verify these investments at the close of the year by carrying out an actual inspection of the scripts or other documentary evidence available with the bank. He must take utmost care to see that the same investments are not shown to him twice.

3-         Advances, Overdrafts, Loans and Cash Credits – Auditor shall obtain a schedule of all loans, advances, cash credits and overdrafts etc from the bank and will then proceed to verify them with the balances of respective leaders. The totals will be compared and checked up with the respective total accounts maintained in the general ledger.

The responsibilities of the auditor with regard to the verification of loans and advances etc are very heavy. He will have to pay special attention with regard to the different kinds of advances such as:

a) Advances against government securities;

b) Advances against stock in trade;

c) Advances against properties;

d) Advances against Life policies;

e) Advances against fixed deposits;

f) Advances against bullion.

4-         Bills Discounted and Purchased – Auditor will verify bills discounted and purchased as recorded in the books with those which are in the actual possession of the bank. He shall see that the limits fixed by the Board of Directors have not been exceeded and that the total of the Bills Discounted Ledger agrees with the balance of the control account in the General Ledger. He will examine the date of maturity of each bill in order to verify the amount of overdue bills.

5-         Contra Accounts – Usually they relate to the following types of accounts (a) Bills for collection (b) acceptances, guarantees, letters of credit etc, opened on behalf of the customers. These items appear on both sides of the balance sheet as they constitute both the assets and liabilities of the bank.

6-         Branch adjustments – This item discloses the combined effect of the difference sin the inter-branch balances. Auditor shall verify this item from the certificates of balances received from branches preparing reconciliation statements.

7-         Other Assets – Other assets of the bank shall include premises, furniture and fixtures, stock of stationary, interest accrued on investments etc. Auditor shall examine the title deeds or any other type of documentary evidence in order to ascertain that the assets of the bank, on the date of the Balance Sheet, do exist in the name of the bank and that they have been properly valued.

8-         Liabilities – Important items which usually appear on the liabilities side of the Balance Sheet of a bank are the customer’s deposits, borrowings from other banks or agents etc, bills payable, branch adjustments, liabilities for outstanding expenses and contingent liabilities etc. Auditor will try to check up the understatement or overstatement of liabilities.

relationship between the two parts of Faust. In what ways do they differ? In what ways to they serve a similar and interconnected purpose

Goethe himself once described the differences between the two sections of his poem by saying:

The first part is almost entirely subjective; it proceeded entirely from a perplexed, impassioned individual, and his semi-darkness is probably highly pleasing to mankind. But, in the second part, there is scarcely anything of the subjective; here is seen a higher, broader, clearer, more passionless world, and he who has not looked about him and had some experience, will not know what to make of it.

The two parts of the poem are essential elements of a single whole, but their relationship is an indirect and metaphorical one. They present alternative views of the human yearning for truth and fulfilment by exploring different aspects of this same problem. Part One is concerned mainly with highly personal experience, while Part Two treats society as a whole, and Faust develops from a single individual into a symbolic figure who represents the striving spirit of man in the modern world. This distinction between the two parts of the poem has been compared by some critics to the medieval philosophical conception of the microcosm and macrocosm; Part One is said to portray the “small world” or inner experience and Part Two the “great world” of social institutions, ideological systems and intellectual institutions. Thus, both sections mirror different aspects of the same philosophical theme.

The second part of Faust is less fragmentary than the first in structure, and adheres to the conventional dramatic organization of acts and scenes, but in fact it is far more disorganized and difficult to follow. It has often been pointed out, also, that the general tone of Part One is Gothic and Romantic, while of Part Two is Classic and staid. Part One is often read as an individual and self-contained work, but this approach overemphasizes Gretchen’s tragedy and hinders the reader from grasping the poem’s full meaning. Only by studying the two sections of Faust in conjunction is it possible to fully appreciate what Goethe intended and to understand the philosophical message he was communicating.

Do Goethe’s doctrines about sin, salvation, and the nature of the universe as presented in Faust conform to orthodox Christian theology? What use does Goethe make of Christian symbolism in Faust

Although there are many elements of Catholic religious symbolism in this scene, they were adopted by Goethe only because he saw in them a means to give tangible expression to his beliefs, and do not demonstrate his adherence to orthodox Christianity.

Faust has been saved as a result of the heightened knowledge and insight gained through great experience. The presence of all these figures in the place to which Faust’s soul is brought, indicates that striving for union with the ultimate is part of the essential character of all life, and is the basis from which immortality arises.

The angles who bring in Faust’s soul reveal that he has not yet attained Salvation. Now that he has been liberated from sin, however, he will commence his purification and will free himself from the remaining traces of his earthly existence. He will be reborn, in a sense, like the spirits of the innocent children, and with them will rise to the higher levels of Salvation. This indicates the Salvation is most surely gained by altruistic concern for others, which is also the message of Faust’s great project in behalf of humanity. The striving which characterized Faust’s life will be continued, but in another sphere and another form.

Is the “Walpurgis Night’s Dream” episode related to the rest of the drama? What, if anything, is its function? Why is the scene that follows it written in prose

The scene is particularly praised by critics for its poignant portrayal of Gretchen’s madness. Gretchen’s restoration to sanity when she sees Faust illustrates the regenerative power of love. He refusal to escape is based on her acknowledgment of responsibility for her acts and her acceptance of God’s law. She has a simple and clear-cut conception of right and wrong which is incomprehensible to the still inwardly doubling Faust.

Gretchen is granted salvation by God’s grace (the voice from Heaven) because her crimes were the result of inexperience and her motives were never sinful or impure. Gretchen was led into sin by following her instincts, but in Goethe’s thought it is part of being human to err. One is redeemed in the end if his conscience learns to know the difference between good and evil, rejects sinfulness, and repents. Gretchen’s final words, “Heinrich! I shudder to look at you,” express her horror at the ungodly, negativistic life Faust has chosen by maintaining his association with Mephisto, rather than any change in her feelings for him.

This is the end of the first part of the tragedy, a portion of a larger work but at the same time complete in itself. So far Mephisto has lost his wager with the Lord and failed to secure Faust’s soul. God’s faith in man has been upheld by Faust’s moral renewal on the Walpurgis Night and his final though misguided effort to do a good deed. Despite his filtration with sensuality and evil, Faust’s love for Gretchen had developed into something more than lust.

Faust, however, has still not found happiness or fulfilment in life, and is not sufficiently purged of sinfulness to terminate his alliance with the devil. Thus, the resolution of Faust’s struggle with his soul is in doubt, but a passionate and moving love story has come to a tragic end. At its close Faust seems at last to be on the right path.

Gretchen’s salvation and her loving concern for him right up to the moment of her death are lessons, which will make a permanent impression on him. Faust knows now that he cannot find himself through uninhibited sensuality, but he must taste all the world has to otter before he learns that only in God lies human fulfilment.

At the end of Part One Gretchen’s refusal to leave the prison prevented Faust from becoming absolutely dependent on Mephisto’s power, and thus made his ultimate salvation possible. At the end of Part Two her sacrifice is rewarded by the joy of guiding Faust to the highest level of Paradise and, with the aid of his Love, herself rising to the highest sphere.

Discuss the characterization and function of Gretchen. Why is she a tragic figure? What responsibility does she have for her own downfall? Why is she received into Heaven at the end of Part One?

Gretchen:

Gretchen is a simple, innocent, and pious maiden who develops into a figure of genuine tragic stature. She is essentially pure and innocent, but becomes a willing victim of Faust’s seduction due to loneliness, inexperience, resentment of her mother’s strictness, and an idealistic naivete that leads her to assume that Faust’s love will be as permanent and unselfish as her own. In a sense her crimes are the result of her innocence, although this does not negate her own responsibility for her downfall. Gretchen has an innate religious sense, and one critic has called her the only the Christian in the poem. 

This is why she is able to accept her punishment at the end of Part One, and also explains her intuitive aversion to Mephisto and her insight that Faust’s plan for escape would be morally unbearable. Gretchen is admitted to Heaven at the close of Part One because, despite her acts, she was never motivated by evil intentions and had acted according to her natural instincts. Although in Goethe’s view, positive action is better than negative action, nonetheless humans are basically creative and good, and action is better than non-action, so this entitled Gretchen to an opportunity to find salvation.

While Faust’s earthly adventures have continued, she has purged herself of sin and has progressed toward the attainment of ultimate Salvation. Her final entrance to Paradise is dependent on the aid of Love, which for Gretchen is represented by Faust. She welcomes him into Heaven because the highest and purest fulfilment of both of them can only be achieved together.

symbolic meaning of “Walpurgis Night” scene? What change in Faust’s outlook becomes evident in this scene

It has been nearly a year since Valentine’s death and Faust has again abandoned Gretchen. Now it is Walpurgis Night (April 30^th), the time of the annual gathering of witches and spirits at the top of the Brocken in the Harz Mountains (located in central Germany) to celebrate a satanic orgy. The mountaintop is covered with swarms of demons dancing and singing. While coupled in an erotic dance with a young female witch, Faust suddenly notices a mouse coming out of his partner’s mouth. The shock of this causes him to remember Gretchen. He has a vision of her in chains, becomes distressed, and starts to wander away.

This episode can be interpreted symbolically as the descent into Hell promised in the “Prelude in the Theatre.” The witches and demons whom Faust encounters are incarnations of all the many facets of evil. Faust is made to face the awful reality of his degeneration, but at the last moment his moral sensibility makes a final effort to assert itself. He remembers Gretchen and the love for her, which was his first real participation in life.

Difficulties in Obtaining Evidence

Following difficulties are faced by an auditor in obtaining audit evidence.

1. Inadequate records maintained.

2. Existence of mass of data.

3. Client’s assistance facility not available.

4. International concealment and falsification

5. Accounting procedures problems

1.         Inadequate records maintained: An audit or expresses his opinion on the financial statement prepared by the client from the books and records maintained by it. The opinion is to be the truth and fairness of financial statements.

When a client has not maintained proper and systematic financial records of his business activities, adequate and acceptable audit evidence will not be available to the auditor. He would, therefore, find it difficult to form an opinion with regard to the financial statements prepared from such record. Resultantly, it would be very difficult for him to collect necessary evidence to ensure himself about the accuracy of the financial statement.

2.         Existence of mass of data: In big organization financial records comprise of huge volume of documents. Even if such record is proper and systematic, the auditor may find it difficult to obtain audit evidence in respect of each and every item out of mass of information due to a number of limitations e.g. time, cost, and planning, supervision, assistance from client’s office etc. The auditor may decide not to go in greater details to acquire audit evidence.

3.         Client’s assistance facility: Certain situations arise during the course of an audit where a client hesitates, avoids or is reluctant to provide the information desired by an auditor. Under such circumstances, it becomes difficult for the auditor to form an opinion about the position reflected in the financial statements and to certify a true and fair view of the state of affairs of things.

4.         International concealment and falsification: A serious difficulty may arise for an auditor where a client has adopted a planned technique for concealing material facts and to falsify the accounting records with a view to present a very bright, sound, and progressive financial position through the financial statement. The existence of such concealment and falsification cannot come to the knowledge of auditor by routine planning. His planning and verification techniques should be such to expose falsification and concealment.

5.         Accounting procedures problems: In case of organizations having multiple business locations not at all visited by the auditor a problem may arise for him in respect of the verification of certain items like closing inventory, cash, work-in-process, etc.

International Standard Auditing and Audit Evidence

ISA8 describe audit evidence as:

“Audit evidence means the information obtained by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence comprises source documents and accounting records rendering the financial statements and corroborating informations from other sources.”

ISA8 requires that an auditor should obtain sufficient appropriate audit evidence through the compliance procedures and substantive procedures to enable him to draw reasonable conclusions therefore to form the basis of his opinion on the financial statements.

ISA8 contains three important standards relating to nature and sources of audit evidences:

(a) ISA8.2: The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.

(b) ISA8.10: When obtaining audit evidence from tests of control, the auditor should consider the sufficiency and appropriateness of the audit evidence to support the assessed level of control risks.

(c) ISA8.12: When obtaining audit evidence from substantive procedures, the auditor should consider the extent to which the evidence supports the relevant financial statement assertions.

Sufficient Appropriate Audit Evidence

Sufficient and appropriateness are interrelated and apply to both tests of controls and substantive procedures:

a. Sufficiency is the measure of the quantity of audit evidence.

b. Appropriateness is the measure of the quality or reliability of the audit evidence.

The auditing standard points out that the quantity of audit evidence required cannot be prescribed but is a matter of professional judgement. Factors influencing the decision include:

1. Auditor’s assessment of the nature and level of inherent risks at both the financial statement level and the account balance or class of transactions level.

2. Nature of the accounting and internal control system and the assessment of control risk.

3. Materiality of the item being examined.

4. Experience gained during previous audit.

5. Result of auditing procedures.

6. Source and reliability of information available.

If the auditor is unable to obtain sufficient appropriate audit-evidence, the auditor should consider the need to qualify his audit report.

Test of Control

Test of control means tests performed by the auditor to obtain audit evidence about the suitability of design and effective operation of the accounting and internal control system:

(a) Design: The accounting and internal control system are suitably designed to prevent or detecting and correcting material misstatements.

(b) Operation: The systems exist and have operated effectively throughout the relevant period.

Substantive Procedures: Substantive procedures mean tests performed to obtain audit evidence to detect material misstatement in the financial statement.

Procedures for Obtaining Audit Evidence

An auditor obtains audit evidence by conducting one or more for the following procedures.

1. Inspection

2. Observation

3. Inquiry

4. Confirmation

5. Computation

6. Analytic procedures

1. Inspection:

Consists of examination of client’s records, documents or tangible assets. The reliability of audit evidence obtained by inspection of records and documents varies according to the nature or source and effectiveness of internal control over their processing. Three major categories of documentary audit evidence exist, given here in descending degree of reliability as audit evidence.

a. Created and provided to auditor by third parties.

b. Created by third parties and held by entity.

c. Created and held by entity.

Inspection of tangible assets provides reliable audit evidence about their existence but not necessary as to their ownership or value.

2. Observation:

Observation involves looking at a procedure while it is being performed by others. The standard examples of observation are attendance at the wages payments, stocktaking, general security measures including high risk areas like computer centre, directorate’s office. Observation tests are generally compliance assurance because the client’s staff may be on their best when auditor is watching and less conscientious at other times.

3. Enquiry:

Enquiry involves seeking information from client’s staff or external sources. Enquiries may range from formal written ones to third parties to oral ones to persons inside the entity. Responses may provide the auditor with:

(a) information not previously possessed; or

(b) corroborator audit evidence

4. Confirmation:

Confirmation aims to verify what is shown in client’s accounting records. Examples of confirmation include direct confirmation by debtors, banks, creditors, lawyers, etc. The strength of the evidence depends on the knowledge and integrity of the source. Internal anguishes may be part of either compliance testing of substantive testing approaches but most external request for confirmations are example of substantively based exquisites.

5. Computation:

Computation includes checking the arithmetical accuracy of source documents, depreciation calculations, payroll deductions, reconciliation’s inventory valuation, control accounts etc. So the auditor carries out computational audit test during both the compliance and substantive phase of the audit.

6. Analytic procedures:

Analytical procedures consist of analysis of significant ratios and trends including resulting investigation of fluctuation and relationship that are inconstant with other relevant information or deviate from predicted amounts.

Common Law Evidence in Auditing

Common law evidence rules determine what facts are relevant to a particular issue before a court, which party is required to prove, what material can be tendered to and accepted by a court as evidence. The burden of providing evidence rests upon a party to proceedings to issue. Failure by such a party to adduce sufficient evidence on an issue would result in the case being lost. Such a party, however is not required to produce absolute evidence. Any single piece of cogent evidence can be sufficient to satisfy the burden of proof cast upon him. Evidence will be considered by a court only if it is both.

(a) Relevant to the issue before the court and

(b) Is capable of being admissible as evidence.

The evidence which is admissible can be oral, documentary or real.

Concludingly, common law evidences requirements are:

a. Evidence should be reasonably admissible

b. Evidence should be relevant

c. Evidence should be provided by the party claiming existence of certain facts.

d. Evidence may be oral or documentary

e. Failure to adduce evidence results in loosing the case

The main principles or rules of common law evidence are equally applicable in auditing on account of similarity of action. In common law, the judge is to decide the acceptance or otherwise of evidence which must be sufficient and admissible. Same is the situation with auditing. The auditor has to decide the sufficiency and acceptability of evidence and the client is required to produce evidence. Which may be oral or documentary.

In auditing a client must prove by sufficient evidence the facts that have been recorded in his books of accounts and must prove their correctness, authentically genuineness and relevancy to the business of the undertaking. If he so succeeds and the evidence is admissible the auditor shall accept such evidence, otherwise the same will be liable to be rejected. Thus common law rules and principles of evidence are equally applicable in auditing.

Source of Audit Evidence

Audit evidence may be obtained from various sources, but the basic factor is that, irrespective of the source, the evidence must be acceptable, relevant and reliable so that the auditor can fulfil his statutory duty and form an opinion.

Audit evidences collected by an auditor may be divided into the following categories:

a. Observations

b. Testimony from independent third parties

c. Authoritative outside documents

d. Authoritative inside documents

f. Satisfactory internal control

g. Subsequent events

h. Relationship evidence

i. Computation and comparison

j. Calculations and analysis by auditor

k. External events.

Observations:

Auditor’s own observation of the existence of an item, asserted the existence of the item which is the strongest audit evidence. The Observation comprises of the following aspects.

a. Physical examination

b. Witnessing internal control and book keeping procedures.

c. Presence of record to ensure that procedures have been carried out.

Physical examination of cash, inventory, investments, assets provides satisfactory evidences of their existence. However, such observation is evidence of existence only and not of ownership or qualitative assertion.

Testimony from independent third parties:

The second strongest audit evidence available is written or oral statement by an independent third party e.g. confirmation from debtors, bills receivable, deposits, banks and employees.

Authoritative documents:

Documentary evidence prepared outside or inside the entity can be relied upon as audit evidence e.g. (outside) title deed, share certificates, loan documents, insurance policies, leases, contracts, invoices, (inside) minutes, copy of invoice, goods received notes, petty cash vouchers and payrolls.

Statement by directors and officers:

The auditor asks a number of questions from the directors and other officers formally and informally. In case of important matters written replies are obtained and in case of other matters verbal answers are regarded as enough. The answers, though constitute audit evidence, still they must be thoroughly verified as they do not form the strongest evidences.

Satisfactory internal control:

Soundly conceived and efficiently operated internal control system would offer a reasonable assurance regarding correctness of accounting record. The internal audit evidence available ensues the reliability of the data.

Subsequent events:

Events after the balance sheet date but before the signing of accounts provides a reliable audit evidence.

Relationship evidence:

Audit evidence confirming the truth about one item may tend to confirm the truth about another item e.g. evidence supporting receipt of investment income also confirms the existence of investment.

Computation and comparison:

Verification is facilitated by ratios, budgets, graphs and diagrams showing comparison with previous charts provide good audit evidence.

Calculations and analysis by auditor:

Usually arithmetical calculations are made by audit staff. The auditor in order to prove their accuracy must recheck material items and record the fact of re-computation to create useful evidence for the future.

External events:

The auditor should use his knowledge of current events in assessing and examining financial statements.

What is Audit Evidence and give its examples

The overall objective of an examination of the financial statements is to render an opinion as to the fairness of the financial statements in conformity with the “Generally Accepted Accounting Principles (GAAP).” In order to render an opinion the auditor has to gather and evaluate certain information called audit evidence.

Meaning: “Audit Evidence” is a mixture of observations made by audit inquiry and data compiled via analysis of other data which, when combined, enables the auditor to from and substantiate an opinion on financial statement.

Audit separates all the confirmations that the auditor has obtained and that

(a) Is relevant to what the auditor is trying to determine.

(b) Influences the auditor in formulating an opinion as to fairness of the financial statements.

Assertion by Management

Financial statements assertions are the representations of the directors that are embodied in the financial statements. The directors by approving the financial statements are making representations about the information thereon. So every item in the financial statements constitutes one or more assertions from the management.

Examples

a. If there is an item in the current assets section of the balance sheet which states as: Cash Rs. 1, 00,000.

In this case the management’s assertions are:

• Company has cash in hand of Rs. 1, 00, 000.
• Asset cash is free and available for expenditure as the management directs.

b. Like wise an item is states as:

Accounts Receivables Rs. 3, 00,000 asserts that:

• company has accounts receivable from its customers of Rs. 3, 00, 000.
• such accounts are considered collectible within the operating cycle
• they are expected to receive Rs. 3, 00, 000 in cash or an amount very close to it from the debtors who purchased goods on credit.

Management produces financial statements and in doing so it asserts that the individual items are correctly described and show figures which are mathematically correct or fairly estimated. Further, the accounts are a whole show, a trace and fair view of financial state of affairs of the concerned enterprises.

The assertion of representations that are usually made are in this connection are:

a.         Existence: An asset or a liability exists on the date of balance sheet.

This is an obvious assertion in respect of items like land, building, merchandise and others.

b.         Rights and obligations: An asset or liability pertains to the entity on the date of balance sheet.

The enterprise has ownership of an asset i.e. it has all sorts of rights and obligations relating to a given asset or liability.

c.         Occurrence: A financial transaction or event took place which pertains to the entity during the relevant accounting period. Even when false transaction have been recorded, the assertion is that all record transactions actually took place.

d.         Completeness: There are no unrecorded assets, liabilities, transactions or events or undisclosed financial items.

This is essential for all items of balance sheet but is particularly important in respect of liabilities.

e.         Valuation: An asset or liability is recorded at an appropriate carrying value. Appropriate means it is in accordance with the generally accepted accounting principles, Companies Ordinance and Accounting Standards.

f.          Measurement: A transaction or event is recorded as the proper amount and revenue or expense allocated to the proper period.

g.         Presentation and disclosure: An item is disclosed, classified and described in accordance with applicable reporting framework.

Example: An overdraft of Rs. 80,000 appears in a balance sheet. So the directors are made the following assertions:

1. There exists a liability to companies’ bankers.

2. In balance sheet data the liability of Rs. 80,000 is exhibited.

3. The said amount is agreed by bank.

4. Overdraft was payable on demand.

5. Overdraft was unsecured.

6. Memorandum and Articles of Association authorise borrowings.

7. Bank reconciliation statement has been prepared.

8. Bank is willing to allow the overdraft to continue.

Notice that if no overdraft appears in the balance sheet, there is an assertion that on the date of balance sheet no overdraft liability existed.

What is Flexible Audit Programme

Nomenclature: Also called Progressive Audit Programme or Special Audit Programme.

Definition: A flexible audit programme may be defined as a plan which only outlines general scope, character and limitations of the audit engagement, and makes no mention of audit procedures to be followed, the nature of work to be performed by individual staff, and time allocated for each item.

Under flexible audit programme, the staffs have much discretion in improving it as the audit work progresses. The staff can also display its initiative.

Construction of Audit Programme:

Audit programme containing detailed directions to audit staff regarding the audit work to be carried out is prepared to ensure intended implementation of the strategy set up in the planning memorandum.

The audit programme of different clients would of course, contain similar points but still programme for each must be written individually in the light of the needs and circumstances of each particular audit. The programme for the current audit should be based on the planning memorandum (explained separately) using previous year’s programme and working papers as a guide. The check list issued by the Institute of Chartered Accountants of Pakistan should be referred to. The audit manager should before audit steps are carried out, should review the audit programme to ensure that the planned scheme would achieve the desired objectives.

The audit steps identified in the audit programme should be detailed enough to enable the audit staff to carry out any particular audit step without seeking further instruction. So each audit step should specify the relevant documents and records, direction for test, method of selection and cross-reference to relevant points in audit manual (if any) or permanent notes on record.

Every group of audit steps should be proceeded by a statement of the relevant audit objectives. Where reliance on internal control is planned the internal control objectives relevant to the audit objectives should be included in the audit programme and cross-reference should be made to the internal control and Accounting System Evaluation Schedules.

Audit programme may differ depending upon the nature of business but the principle behind the preparation of audit programme will remain the same. The programme will usually commence with the basic and routine audit tests and will lead up to the signing of the audit opinion (i.e. audit report). Care should be taken to ensure that audit steps are not repeated under different heads.

Types of Audit Programme

Types of Audit Programme

Definition: A fixed audit programme may be defined as a plan based on organized thinking and deep deliberations and contains general, standardized and all conceivable audit instruction and procedures irrespective of their applicability to the audit engagement.

Drawback of fixed audit programme are:

a. Fixed audit programme lays down a rigid framework for conducting audit examination.

b. Audit staff members are not free to use their own imagination and initiative.

c. It is unsuitable in case of clients where working conditions may vary from year to year.

Existing Concept of Fixed Programme

An audit process, from initial planning through formation of final audit opinion, is highly complex. From a liability point of view professional auditing firm cannot afford to allow each and every one of their qualified staff to determine their own personalized audit programme. Audit Manuals prepared by large audit firms dictate the course of both compliance and substantive audit testing, are an integral part of whole audit process Standardized audit testing, are an integral part of whole audit process. Standardized audit programme are made available for the following areas of audit work.

Liabilities

a. Share capital

b. Reserves

c. Borrowing-debentures, loans, etc

d. Creditors

Assets

a. Bank and cash transactions

b. Debtors

c. Investments

d. Stock and work-in-progress

e. Fixed assets

f. Inter-company accounts

General

a. Analytical review

b. Commitment and contingencies

c. Minutes of directors

d. Minute of AGM

e. Taxation

f. Statutory books

g. Balance sheet

h. Profit and loss account items

The standardized audit programme in respect of these items are not rigid but are only intended to be used as an indication of the way in which the areas should be audited. Such programme provide lowest common requirements and all audits should be carried out at least at that level. The audit manager should always modify such programme under specific situations.