Auditing Completed Notes

Sir M.
Faseeh khan
AUDITING
Lecture Notes
For
MBA/M.Com/BS/BBS/B.C
om
Sir M.Faseeh Khan
Federal Urdu Art and Science University
copyright @ TM Educational System
Lecture Notes
Sir M.Faseeh khan
AUDITING
For
BBA/B.Com/BS
Compiled by:
M.Faseeh Khan
Federal Urdu Art and science

University- Karachi
Lecture Notes
Sir M.Faseeh khan

DEFINITION, SCOPE AND
LIMITATION OF AUDTING
Q.1 Define Auditing? with difference point of view?
Ans. Auditing Defined:
Audit may be defined as the verification of accuracy and correctness of the books of
accounts by independent persons qualified for the job and not in any way connected with
the preparation of such accounts. It is an intelligent and a critical scrutiny of the books of
accounts of a business with the documents and vouchers from which they have been
written up.
Montgomery:
a systematic examination of the books and records of a business or other organization in
order to ascertain or verify and report upon the facts regarding the financial operations
and the results thereof
According to Taylor & Perry:
An audit is an investigation by an auditor into the evidence from which the final revenue
accounts and balance sheet or other statement, of an organization have been prepared in
order to ascertain that they present a true and fair view of the summarized transactions
for the period under review and of the financial state of the organization at the end date,
so enabling the auditor to report there of
J.R. Batlibol:
An intelligent and critical scrutiny of the books of accounts of a business with the
documents and vouchers from which they have been written up, for the purpose of
ascertaining whether the working results of a particular period as, should by the profit &
loss Accounts and also the financial position reflected in the Balance sheet are truly and
fairly determined and presented by those responsible for their completion.
Dickee:
An arrangement of accounting record undertaken with a view to establish whether they
correctly and complete reflect the transactions to which they purport to relate.
Auditing may further be defined as:
careful searching of the books of accounts by comparing them with the
documents and papers from which they have been written up. And thus trying to find out
whether the profit or loss for a particular period and the financial position, as shown by
the final Accounts are correct and true.
All the above definitions clearly show that the auditor has not only to see the arithmetical
accuracy of the books of accounts but has also to go further and find out whether the
transactions entered in the books of original entry are correct or not. It most of the cases
he is required to go behind the books.
In fact, audit implies the scouting of the complete course of a transaction in a
business. It is an important part of an auditors job to check up the authority behind the
transaction, the relation of the transactions with the business, examination of the book
entries their presentation of its results and lastly, the correct presentation of its results in
the final accounts.
An important objection of auditing is to satisfy those who are interested in the
financial affairs of an under taking that the books and accounts are accurate and reliable,
that all receipts and payments have been properly accounted for and that the Balance
sheet or final statement of accounts are true and correctly drawn up.
Lecture Notes
Sir M.Faseeh khan

Q.2
Define the scope of Auditing?
Ans.
Scope of Auditing:
1.
Legal Requirement:
The auditor can determine the scope of an audit of financial statements in
accordance with the requirements of legislations, regulations or relevant professional
bodies. The state can frame rules for determining the scope of audit work. In the same
way professional bodies can make rules to conduct the audit. The auditor can follow all
the applicable on the audit work while checking the accounts of a business concern.
2.
Entity Aspects:
The audit should be organize to cover all aspects of the entity as far as they are
relevant to the financial statement being audited. A business entity has many areas of
working. A small entity may have few functions while a large concern has many
functions. The auditor has duty to go through all the function of a business. The audit
report should cover all function so that the reader may know about all the working of a
concern.
3.
Reliable Information:
The auditor should obtain reasonable assurance as to whether the information
contained in the underlying accounting record and other source data is reliable and
sufficient as the basis for preparation of the financial statements. The auditor can use
various techniques to test the validity of data. All auditors while doing the auditor work
usually apply the compliance test and substance test. The auditor can show such
information in the report.
4.
Proper Communication:
The auditor should decide whether the relevant information is properly
communicated in the financial statement. Accounting is a information system so facts and
figures must be so presented that reader can get information about the business entity.
The auditor can mention this fact in his report. The principles of accounting can be
applied to decide about the disclosure of financial information in the statements.
5.
Evaluation:
The auditor assesses the liability and sufficiency of the information
contained in the underlying accounting records and other source of data by making a
study and evaluation of accounting system and internal controls to determine the nature,
extent and timing of other auditing procedures.
6.
Test:
The auditing assesses the reliability and sufficiency of the information
contained in the underlying accounting record and other source data by carrying out other
test, enquiries and other verification procedures of accounting transactions and account
balance as he considers appropriate in the particular circumstances. There are compliance
test in order to examine the data. The vouching, Verifications and valuations techniques
are also used.
7.
Comparison:
The auditor determines whether the relevant information is properly
communication by comparing the financial statement with the underlying accounting
records and other source data to see whether they properly summarized the transactions
and events recorded therein. The auditor can compare the accounting record with
financial statement in order to check that same data has been processed for preparing the
final accounts of a business concern.
Lecture Notes
Sir M.Faseeh khan

8.
Judgments:
The auditor determines whether the relevant information is properly
communicate by consideration the judgments that management has made in preparing the
financial statements, accordingly, the auditor assesses the selection and consistent
application of accounting policies, the manner in which the information has been
classified and the adequacy of disclosure.
The auditor must have the quality of judgment when accounting book do
not provide true data.
9.
Work
Judgments permeates the auditor work, for example in determining the
extent of audit procedures and in assessing the reasonableness of the judgments and
estimates made by management in preparing financial statements. The accounting data is
based on personal judgment of accountant and managers in preparing final accounts.
Such judgments also effect the working of an auditor. He is also bound to make guess
work on the basis of available data.
10.
Evidence:
The audit evidence available to auditor is persuasive rather than
conclusive in nature. Due to judgment and persuasive evidence absolute certainty in
auditing is really attainable. That is why the auditor can express an opinion as true and
fair instead of exact and cent percent correct. The personal judgment affects the value of
many items. The value of such items becomes an opinion so cent percent accuracy is not
there.
11.
Misstatement:
The Auditors carries out procedures designed to obtain reasonable assurance that
financial statement are properly stated in all material aspects. Because a test nature and
other inherent limitations of an audit, together with inherent limitations of any system of
internal control, there is an unavoidable risk that even some material misstatement may
remain undiscovered. The statements show true and fair view instead of exact view of
operations.
12.
Errors:
The auditor may get an indication that some fraud or error may have
occurred which could result in material misstatement would curse the auditor to extend
his procedures to confirm or dispel his suspicion. It is the duty of auditor to check cent
percent items in order to discover the error in accounting books and other records when
he smells any doubt. He should clear the doubt or confirm it while going through the
record.
13.
Opinion:
Constraints on the scope of audit of financial statement that impair the
auditors ability to express an unqualified opinion on such financial statements should be
seen out in his report, and a qualified opinion or disclaimer of opinion should be
expressed as an appropriate.
Q.No.3 Distinguish between Auditing and Accounting?
Accounting
Auditing
1. It is an art of recording, classifying,

summarizing and interpreting the
Transaction.
1. It is an examination and reporting

on their accuracy.
Lecture Notes
Sir M.Faseeh khan

2. It works with raw or primary data
and has primary responsibility for
bringing out useful results of
operation.
2. Auditing works beings, where the

accounting work ends
3. It is concerned with the preparation
& submission of report
3. Accountant is primarily responsible

for the preparation of financial
statements.
4. He must be a Chartered Accountant

in case of public limited company.
4. Accountant need not to be qualified

chartered Accountant
5. The extent of work is determined by

Companies Ordinance.
5. The management determines the

extent of work.
Q.No 4: Briefly state what is meant by preliminaries to a new audit?

Before commencing the actual audit, the auditor of a limited company should carry out
the following preliminary work.
1. PROFESSIONAL ETIQUETTE: If the organisation has an auditor who is ceasing
to act, i.e. one is replacing another, then the professional bodies required new auditor to
communicate with the previous auditor.
2. CONFIRMATION OF APPOINTMENT: The new auditor must confirm that he
has been properly and legally appointed. He does this by examining and obtaining a
certified true copy of the resolution of the Board of Directors or shareholders, as the case
may be, and placing it in the permanent audit file.
3. LETTER OF ENGAGEMENT: In companies, the auditors work is laid down by
the Companies Ordinance but even in these cases the auditor may be asked to perform
additional work, perhaps in the area of taxation, systems etc.
Therefore it is advisable for an auditor to write an engagement letter to an organization,
which sets out the agreement between the auditor and his client.
4. DOCUMENTS: A copy of the Memorandum and Articles of Association should be
obtained studied carefully. Particulars affecting the auditor in relation to accounts books
and internal procedures relating to relevant matters should be noted.
5. MINUTE BOOKS: He should go through the directors and shareholders minute
books and got down notes of important decisions.
6. TECHNICAL OPERATIONS: He should acquaint himself as far as possible with
the technical operations of the company. It is advisable that he should visit the works
before starting the audit.
Lecture Notes
Sir M.Faseeh khan

7. LIST OF BOOKS: He should obtain list of books statutory; statistical and
accounting, which are in use together with the names and duties of various clerks who are
to write them up.
8. SYSTEM OF ACCOUNTING: A note on the system of accounting employed by the
company should be obtained.
9. INTERNAL CONTROL: He should ascertain whether the system of internal control
is in operation.
10. PREVIOUS YEARS ACCOUNTS AND REPORT: The newly appointed auditor
should pay special attention to the accounts of the preceding period. This is particularly
important as, on many occasions, a change of auditor takes place following either a
change of management or change in ownership.
11. AUDIT PROGRAMME: He should then draft an audit programme and commence
the work of audit.
Q.No.5: What are the legal provisions relating to the appointment and remuneration
of Companys Auditors.
APPOINTMENT OF AUDITORS (Sec 252)
First Auditors: The legal provision relating to the appointment of first auditor are as
follows:
1. BY DIRECTORS: The first auditors shall be appointed by the directors of the
company within 60 days of the date of incorporation of the company.
2. BY COMPANY: If the directors failed to exercise their power of appointing the first
auditors, the company in general meeting may appoint the first auditor.
3. BY AUTHORITY: If the company in general meeting does not appoint the first
auditors within 120 days of the date of incorporation of the company, the authority may
appoint the first auditors to fill the vacancy.
They shall hold office until the end of the first annual general meeting, unless the
company in general meeting removes them and appoint other auditors.
SEBSEQUENT AUDITORS:
Every company, must, at each annual general meeting, appoint an auditor or auditors to
hold office until the end of the next annual general meeting. A retiring auditor shall
normally be appointed at the next annual general meeting.
CASUAL VACANCY:
The directors may fill any casual vacancy in the office of auditor, but while the vacancy
continues, the surviving or continuing auditor or auditors, if any, may act.
Where the casual vacancy is not filled within thirty days after the occurrence of the
vacancy, the Authority may appoint a person to fill the vacancy.
Any auditor appointed to fill in any casual vacancy shall hold office until the end of the
next annual general meeting.
Lecture Notes
Sir M.Faseeh khan

REMUNERATION FO AUDITORS:
The remuneration of the auditors if fixed:
1. In case of auditors appointed by the directors by the directors.
2. In case of auditors appointed by the authority by the authority.
3. In all other cases, by the company in general meeting or in such manner, as the
general meeting may determine [Sec 252 (8)].
Q.No 5: What are the qualification & Disqualification of Auditors
The following persons shall not be appointed as an auditor of a public company or a
private company which is subsidiary of a public company unless he is a chartered
accountant with in the meaning of the Chartered Accountant Ordinance 1961, namely:
1.
2.
3.
4.
5.
A person who is, at any time during the preceding three years was, a director,
other officer or employee of the company.
A person who is a partner of, or in the employment of a director officer or
employee of the company.
The spouse of a director of a company.
A person who is indebted to the company and
A body corporate.
If after his appointment, auditor becomes disqualified he shall be deemed to have vacated
his office. If he acts as auditor after disqualification he is liable to a fine not exceeding
Rs.5000/- [Sec 254].
OBJECTI VES OF AUDIT

Q.No.6 Write a note on the aims and objectives of an Audit.
The historic objective of auditing was detection of fraud and error and it remained so
until the Second World War. Hence, when the profession relegated this objective from
major to ancillary or subsidiary the general public did not realise and appreciate that the
change was of a fundamental. Therefore even now the general public considers detection
of fraud and error as the main objective of auditing.
But now International Auditing Guideline No.1 comes to our rescue and describes
objective of an audit, as
The objective of an audit of financial statement, prepared within a framework of
recognised accounting policies, is to enable an auditor to express an opinion on such
financial statements.
As regards audit opinion it should also be noted that section 255 of the Companies
Ordinance, 1984 requires auditors in Pakistan to state whether in their opinion the
financial statements they are reporting on give a true and fair view or not.
Therefore in the light of above discussion, the objectives of an audit are:
Primary
Subsidiary
To provide a report by an auditor of his i) to detect errors and frauds

opinion of the truth and fairness of ii) to prevent errors and frauds
financial statements so that any person iii) moral check.
reading and using them can have belief in
them.
Lecture Notes
Sir M.Faseeh khan

The auditor should be an independent person who is appointed to investigate the
organisation, its records, and the financial statements prepared from them and thus form
an opinion on the accuracy and the correctness of the financial statements.
Q.No.7: Define FRAUDS as applied to accounting matters. What are different
types of Fraud?
According to International Auditing Guideline No.11 on the subject Fraud and Error,
the term Fraud refers to intentional misrepresentation of financial information by one
or more individuals among management, employees or third parties.
Types of Fraud.
A) Manipulation, Falsification Or Alteration Of Records Or Documents:
This is usually committed by high officials of an enterprise with the object of either
showing more profits or less profits than they actually are. This type of fraud is
comparatively more difficult to detect. Example of such fraud are:
Inflation or suppression of sales; inflation or suppression of purchases;
overvaluation under valuation of assets and liabilities.
B) Misappropriation of Assets:
This is usually committed when there is very weak internal control. This type of Fraud is
committed by those staff which are delegated with number of works, but without any
check on such work, e.g. cashier is authorised to receive cash, made payments and record
all cash transaction.
C) Suppression or omission of the effects of transactions from records or
documents:
This is, again usually committed by high officials of enterprises. It may involve large
amounts. It may be done for number of purposes e.g. for the purpose of bolstering up a
business which is ain an insecure condition, on order to maintain the confidence of the
shareholders, creditors or the public.
D) Misapplication of accounting policies:
This is usually committed by directors of an enterprise with the object to show either high
or low profit. e.g. The Company has the policy to charge depreciation in the year of
purchase and no depreciation will be charge in the year of sales, but directors do not
charged depreciation in the year of purchase, with the intention of showing higher profit
than actually is.
E) Misapplication of accounting policies:
This is usually committed by directors of an enterprise with the object to show either high
or low profit. e.g. the Company has the policy to charge depreciation in the year of
purchase and no depreciation will be charge in the year of sales, but directors do not
charged deprecation in the year of purchase, with the intention of showing higher profit
than actually is.
Q.No 8 Discuss the types of errors which may be detect during the course of audit.
Write their impact on agreement of trial balance.
Lecture Notes
Sir M.Faseeh khan

According to International Auditing Guideline No.11, the term Error refers to
unintentional mistakes in financial information. Errors are of following types: CLARICAL ERRORS:
i) Error of omission
Such error takes place when a transaction is completely omitted and is not recorded at all
e.g. Electricity for 12th months for which bill has not received, has not been provided.
Such an error do not effect the accuracy of the trial balance.
ii) Error of Commission:
These errors consist of incorrect addition, carries forward, incorrect posting or amount
posted twice or amount posted in incorrect column and error in taking out balances of the
ledger accounts. These errors will effect the agreement of the trial balance.
iii) Compensating Errors:
A compensating error is one, which is counter balanced by another error, or errors; so
that it will not effect the agreement of trial balance. Such errors arise in various ways, but
most frequently in casting e.g. the cast of an expenditure account may be undercasted by
Rs.250/-, which may be counter, balanced by overcasting of an assets account by same
amount, the profit and the assets being thereby reported improperly.
iv) Trial Balance Errors:
These may consist of casting errors, entering an amount incorrectly or on the wrong side.
ERRORS OF PRINCIPLE:
i) Incorrect allocation:
This occurs when correct distinction between revenue and capital expenditure is not
strictly maintained.e.g repair is charged to capital expenditure instead of revenue
expenditure etc.
ii) Omission of outstanding assets and liabilities:
For example, 12th months Salaries is not recorded in the accounts, or insurance paid in
advance may be charge to profit and loss account instead of showing as prepayments.
iii) Incorrect Valuation Of Assets:
This occurs when assets are not valued as required by Ordinance e.g. depreciation is not
charged on fixed assets or is not on constant rate or basis.
Q.9: Define Objective of Auditing or Advantages?
Ans. Auditing main purpose or object is to find the opinion of an auditor about the
correctness and reliability of accounts and the financial position of the business concern.
For this purpose auditor has to check the arithmetical accuracy of the books of accounts
and to find out that whether the transactions entered in the books of account are correct or
incorrect. This is done by various methods like inspecting comparing and checking. So
all that work that is done by the auditor ensures him that figures are facts.
Following are the main objects and Advantages of Audit:
1.
Verification of Books and Statements:
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Lecture Notes
Sir M.Faseeh khan

The main object of audit is verification of the books of accounts and the
financial statements of the company concerned.
2.
Discover and Prevention of Errors:
While examining the books, auditors detect some errors. There are various
kinds of error so audit is very useful in preventing and detecting the errors.
3.
Discovery and Prevention of Fraud:
Fraud means false representation made intentionally with a view to
defraud somebody. It is the duty of the auditor that he should detect the fraud. So audit
main object and advantage is that fraud may be detected and prevented. Auditor may also
suggest various methods of internal check that will prevent fraud.
4.
Moral Check:
When each staff of the company knows that the auditor will examine his
financial transactions then he fears to do the fraud. The fear of their detection acts as a
moral check on the staff of the company.
5.
Independent Opinion:
Auditing is very useful to obtain the independent opinion of the auditor
about the business condition. If the independent auditor audits the accounts, the report of
the auditor will be a true picture and it will be very important for the management.
Keeping in view the report owner of the business will be able to prevent fraud and errors
in future.
6.
Protects the Interest of Shareholder:
Audits protect the interest of shareholders in the case of Joint Stock
Company. Through Audit shareholders are assured that the accounts of the company are
maintained properly and their interest will not suffer.
7.
Check on Directors:
Audit acts as a check upon the directors and a precautions against fraud on
the part of the management.
8.
Proper Supervision:
Sometimes owner of the business cannot look after the business
personally. Audit acts as a check on employees and it saves the owner from losses.
9.
Valuable Advice:
The auditor has expert knowledge about the accounts and finance
problems, so he may be consulted about these problems.
10.
Disputes Settlement:
In case of partnership audit very useful in setting the disputes amount the
partners. If any partner dies or retries the audited balance sheet will be very useful in
estimating the value of goodwill.
11.
Loan Facility:
If accounts are audited, then the financial institutions will know true
picture and they will never hesitate to lend the money.
12.
Insurance Claim:
In case of fire insurance participation of funds claims can be settled on the
basis of audited accounts of the previous years.
13.
Property Value Assessment:
If the accounts have been audited, then it is easier to value property when
the business is sold. In the eyes of Law audited accounts are considered more reliable.
14.
Correct Information About Business:
Due to the fear of audit of the work of accounting always remains up to
date and correct information is given to the members in time.
15.
Advantages for General Public:
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Lecture Notes
Sir M.Faseeh khan

Audited financial statements present the real position of the company
before the general public. Keeping in view the position of a company one can do the
investment.
16.
Useful for Tax Department:
Assessment of tax becomes very easy job for the tax department. Keeping
in view the audited accounts they impose the taxes.
17.
Information about Economic Conditions:
Economic condition of various companies can be judged through their
audited accounts. If these companies are improving their economic condition, it means it
is a good sign for the economy.
18.
Privatization:
Through audited accounts of various industrial units government of
Pakistan in 1991 came to know that there are one hundred industrial units that are
running in loss. So government decided to denationalized those units. It is the advantage
of auditing. If there would be no auditing, there would be no denationalization.
Q.10: Explain auditing standard and procedure.
AUDITING STANDARDS:
As applied to auditing, a standard is a measurement of perform once set up by
professional authority and consent.
As standard is a measuring device of applied procedures resulting in general
acceptability of the results of the performance.
The Committee on Auditing procedures of the American Institute of certified
public accountants, in Generally Accepted Auditing Standards has set forth the
following standards:
1.
General Standards
2.
Standard of Field work
3.
Standards of Reporting.
1.
GENERAL STANDARDS:
i)
The examination is to be performed by a person or persons having adequate
technical training and proficiency as an auditor.
ii)
In all matters relating to the assignment independence in mental attitude is to be
maintained by the auditor.
Due professional care is to be exercised in the performance of the examination
and in the preparation of the report.
STANDARD OF FIELD WORK:
i)
The work is to be adequately planned and assistants, if any, are to be properly
supervised.
ii)
There is to be proper study and evaluation of the existing internal control as a
basis for reliance thereon and for the determination of the resultant extent of the
tests to which auditing procedures are to be restricted.
iii)
Sufficient competent evidential matter is to be obtained through inspection,
observation, inquiries, and confirmations to afford reasonable basis for an opinion
regarding the financial statements under examination.
STANDARD OF REPORTING:
i.
The reports shall whether the financial statements are presented in accordance
with generally accepted principles of accounting.
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Lecture Notes
Sir M.Faseeh khan

ii.
The report shall state whether such principles have been consistently observed in
the current period in relating to the preceding period.
iii.
Informative disclosure in the financial statements are to be regarded as reasonably
adequate unless otherwise stated in the report.
iv.
The report shall contain either an expression of opinion regarding the financial
statements, taken as a whole, or an assertion to the effect that an opinion cannot
be expressed, the reason therefore should be stated. In all cases where an auditors
name is associated with financial statements the report should contain a clear cut
indication of the character of the auditors examination, if any, and the degree of
responsibility he is taking.
The auditing standards are measuring device or models to which the audit must
conform; the standards are established by authority of opinion, custom, and
general consent.
AUDITING PROCEDURES:
Auditing procedures are acts to be performed during the course of an
examination. By applying proper techniques, procedures lead to proof of accuracy
of the accounts and financial statements. Audit procedure constitute the course of
action available in determining the validity of standards and principles. In every
audit there must be review and observation, inspection and count, evidence, proof,
accuracy of proof and reconciliation. With these requirements in mind, auditing
procedures may be as follows:
1.
REVIEW OPERATIONAL ACTIVITIES:
Review such matters as the preparation and routing of invoices, payroll methods,
insurance coverage, depreciation methods etc.
2.
INSPECT AND COUNT:
Inspect and count procedures represent the competent examination of a clients
assets, such as Notes Receivable, Inventories, Investment, Securities, Machinery
and others.
3.
OBTAIN EVIDENCE PROOF:
There must be proof of the existence legitimacy and accuracy of documentary
evidence which resulted in entries in the clients records. The majority of
accounting entries normally are evidenced by a document available for
examination. The following few examples of documents that constitute evidence
proof:
(a)
Assets and revenues;
(b)
Liabilities and expenses, purchase requisition, purchase Orders creditors
invoices, contracts and confirmations;
(c)
Activities and agreements, partnership agreements code of regulations, minutes of
directors and shareholders meetings, loan agreements, and dividend declarations;
(d)
Internal and interdivision transaction, employment records depreciation analysis
cash transfers.
4.
OBTAIN ACCURACY PROOF:
There must be proof of the accuracy of entries in accounting record; the evidence
proofs are traced to the records on the basis of sampling and testing.
5.
PREPARE RECONCILIATIONS:
This involves comparing the clients records with data obtained from independent
sources. For example, the Bank balance is reconciled to cash ledger account
balance.
Audit procedures must be altered, refined and made more efficient from year to
year.
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Lecture Notes
Sir M.Faseeh khan

Q.11
What are the right, duties and liabilities of a company auditor?
Ans. RIGHTS, DUTIES & LIABILITIES OF AUDITOR:

Unlike the proprietary business, where the rights and duties of an auditor are determined
by the terms of the contract, law has fixed up minimum rights and duties of auditor in the
case of joint stock companies. They can be increased but cannot be curtailed Rights and
duties of the auditors are absolutely fixed and any restriction on or variation of the same
beyond the statutory limit will be ultra vies the provisions of law.
Rights of a Company auditor
Law has conferred the following powers on the auditor in order that he may perform his
duties without any interference or difficulty.
1.
Auditor has a right of access at all times without any prior notice to the books
accounts and vouchers of the company where they might have been kept whether
at the head office or at the branch office. He is free to pay surprise visit. Books
and accounts include all financial, commercial and memoranda book. Similarly,
the term voucher includes all or any of the correspondence which may in any way,
serve to vouch for the accuracy of accounts or are likely to have any bearing on
the accounts;
2.
Right to call for information and explanation from the officers of the company is
also available to a company auditor.
3.
Auditor has right to visit the branch office of the company where the branch
accounts are not audited by a duly qualified auditor and he deems it necessary to
do so for the performance of his duties as auditor;
4.
An auditor of a company has a right to receive notice of and to attend and to be
heard at any general meeting of the company. He is, however, not bound to attend
every general meeting of the company;
5.
He has a right to make any statement or explanation that he desires to make at
such a meeting, though he is not bound to do so. He is not bound to answer the
questions of the shareholders unless they are directly connected with his work.
6.
Auditor has a right to get his remuneration on the completion of the agreed work.
For the payment of his professional fees, an auditor can exercise right of lien over
the books and documents of his client, which are under his possession.
7.
He has a right to correct any thing wrong being spoken or done in the general
meeting;
8.
Auditor has a right to seek the opinion to the experts in order to perform his work
satisfactorily.
DUTIES OF A COMPANY AUDITOR:
Duties of a company auditor can be divided into three heads as under:
a)
Statutory Duties.
b)
Duties arising out of common law.
c)
Duties arising out of professional etiquette.
a)
1.
STATUTORY DUTIES:
Statutory duties of an auditor may be summarized as under:
The principal duty of an auditor is to report to the members of the company on the
accounts examined by him and on every Balance sheet, profit and loss account or
any document annexed to the balance sheet laid before the company in general
meeting during the tenure of the office.
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Lecture Notes
Sir M.Faseeh khan

2.
An auditor is required to certify accuracy of the contents of statutory Report as

regards subscription of share capital and cash received and paid on capital
account.
3.
The auditor will also report on the prospectus issued by an existing company
regarding the profit and losses and assets and liabilities of the company and the
rates of dividends paid by the company.
4.
In case of members voluntary winding up, auditor is required to certify the
directors declaration about the solvency of the company;
5.
It is the duty of an auditor to help inspectors to his best, while they are
investigating the affairs of the company;
6.
An auditor shall also be required to give to the Govt. all reasonable assistance in
connection with prosecution of Directors or other officers of the company.
b)
Duties Arising Out Of Common Law:
Under common law auditor is required o perform all those duties which he has expressly
or impliedly undertaken to perform by a contract with those who have appointed him. By
agreement an auditor may be required to perform several additional duties such as to
ascertain the unutilized capacity of the industry extent of overstocking of stores, position
of current assets etc.
c)
Duties Arising Out Of Professional Etiquette:
In exercising the professional duties the relations of an auditor to his clients and to his
professional colleagues are largely governed by certain rules of conduct which obviously
apply with special force to members of the institute of chartered Accountants of Pakistan
under the Act. Duties from professional etiquette are too many. However, a few examples
are cited below:
1)
An auditor is not allowed to advertise or can cass for business;
2)
An auditor is not allowed to give any share out of his remuneration to any person,
in order to get business.
3)
An auditor is not allowed to accept a new job before communicating with the
retiring auditor in order to know his objections, if any.
4)
A member of the institute of chartered Accountants of Pakistan is not permitted to
designate himself by any other description except as a chartered Accountant.
5)
A chartered Accountant cannot respond to tenders, respond to advertisements
inviting application for appointment of auditors or responding to enquiries asking
for quotations of fees etc, where it appears that the enquiry is of a public nature.
LIABILITIES OF A COMPANY AUDITOR:
The statutory liabilities of an auditor can be of the nature of either Civil or Criminal. An
auditor shall be liable to pay damages and to make good any loss suffered by the
company due to his (a) negligence, (b) breach of trust, (c) breach of duty.
Criminal liability of an auditor would arise only when he is guilty of.
a)
Willful non-compliance of the provisions of law:
b)
Destructions, mutilation, alteration, falsification or fraudulent concealment of any
books or papers thereto; or
c)
When he makes any false statement intentionally in any report or document which
he prepares;
d)
When he advises a client to commit a criminal offense.
Liabilities of auditors under common law are those which are not strictly defined
by the Acts, but are implied and are not tolerated in practice.
It is an important duty of an auditor to examine essential documents which will have
great bearing on his work before he commences his work. Auditor would be held liable
15
Lecture Notes
Sir M.Faseeh khan

for negligence if he does not see Articles of Association and satisfy himself that accounts
are drawn up as per terms thereof and are correct.
An auditor is liable for any damage sustain by a company by reason of falsification,
which might have been discovered by the exercise of reasonable care, diligence and skill
in the performance of his duties.
In Kingston cotton Mills Co. Ltd. Case an auditor was not held liable for negligence
when he did not take stock himself and accepted a certified stock sheet from a
responsible officer in the absence of suspicious circumstances.
Q No. 12:What are the rights of a company auditors?
Rights Powers Of Auditors (Sec 255)
1) FREE & COMPLETE ACCESS TO THE BOOKS: Every auditor of a company
shall have a right of access at all times to the books, papers, accounts and vouchers of the
company whether kept at the registered office or elsewhere. In case of a company having
a branch office outside Pakistan. It shall sufficient if the auditor is allowed access to such
copies of, and extracts from the books and papers of the branch as have been transmitted
to the principal office of the company in Pakistan.
2) INFORMATION & EXPLANATION FROM KNOWLEDGEABLE PERSON:
The auditor shall be entitled to require from the company and the directors and other
officers of the company such information and explanation as he thinks necessary for the
performance of the duties of the auditors.
3) TO ATTEND ANY GENERAL MEETING: The auditor of a company shall be
entitled to attend any general meeting of the company and to receive notice of, and any
communications relating to, any general meeting which member of the company is
entitled to receive, and to be heard at any general meeting which he attends on any part of
the business which concerns him as auditor.
Q.no13: Distinguish between: -
Articles of Association and Memorandum of Association.

Memorandum of Association.
1.
It contains the conditions upon
which
the company is
granted incorporation.
2.
It cannot give the company power
to do anything contrary to the provision of
the Companies Ordinance.
3.
It is in the nature of a contract
between the company and the outside
world dealing with the company.
4.
It contain the object & power of the
company
Articles of Association
1)The article is the internal regulation of
the company and over these the members
have full control and they can be easily
altered.
2) They are not only limited by the
Ordinance but they are also subsidiary to
the memorandum.
3) They do not create a contract between
the company & the outsiders.
4) They provide the regulations by which
those object and power are to be carried
16
Lecture Notes
Sir M.Faseeh khan

into effect.
5.
It cannot be altered except as
regards certain specified particulars & in

accordance with the provisions of the law.
5) The can be altered by a special

resolution at any time.
Q.No 14: is the audit partnership compulsory? Write advantages of audit

partnerships firm.
The audit of partnership firm (either roistered or unregistered) is not made obligatory
under the partnership Act. However, due to various advantages derived from the audit,
most of the firms get their get their accounts audited. Therefore, there are major
differences between the audit of companies and that audit firms. In case of companies,
the audit of accounts is made obligatory under the statue, and the right and duties of the
auditors are defined by it and they are appointed by the shareholders or by the directors or
the Authority on their behalf but they cannot limited their (auditors) statutory duties.
Against this, in case of a firm, the auditors are not appointed under statute, by agreement
between the partners and their rights and duties are defined by them and can be subject to
modifications.
Therefore, before commencing the audit the instructions regarding the rights, duties,
obligations, liabilities and scope must be obtained. In the absence of written instructions
from the client, the auditor must send an engagement letter, so that no dispute can
subsequently arise.
There was an impotent case on the above subject between Patel vs annen Dexter & co.
(1926) the facts of the case were that the plaintiff brought an action against the auditors
that her two sons who had acted as the manger of the firm defrauded her. It was argued
that the auditor committed an act of negligence and failed to uncover the fraud. A sum of
28,600 pounds were claimed as damages. The defendants (the auditors) argued that they
were engaged to do the accounting work and no audit was done by them. The certificate
given was: Prepared from the books of Mrs., Patel and in accordance therewith.
The learned court gave the verdict that it was apparent from the auditors certificate that
the nature of the work was that of accountancy and not auditing.
Advantages of the audit of Firms Accounts
In addition to the advantages common to forms of audit, the audit of partnership
account has the following further important advantages:
1. It affords a convenient means of settling accounts between the partners then
themselves, and so of avoiding the possibility of future dispute.
2. The management letter issued the auditor should also prove of advantage to the
dustiness.
3. The audit on behalf of a sleeping partner is highly advisable, since such a person,
as a rule, has little means of checking the accounts of the business. Or have
verifying the business, or have verifying the share of profit due to him.
4. Audited accounts are generally relied upon by the income tax authorities,
financial institutions, incoming partner etc.
17
Lecture Notes
Sir M.Faseeh khan

Q No. 15: It is audit of sole proprietors account necessary. Written the advantages
of audit of account of sole proprietor.
Although the audit of accounts of sole proprietor is not compulsory. But many people
whose income are considerable and derived from numerous sources and whose
expenditure is heavy, Usually get their accounts audited.
Therefore, as in case of partnership, before commencing the audit, the right, duties,
obligations, liabilities and scope must be obtained. In the absence of written instructions
from the client, the auditor must be sending an engagement letter, so that no dispute can
subsequently arise.
Advantages if the audit of sole proprietors accounts
The following are the advantages accruing from the audit of accounts of sole proprietor: 1.
The proprietor is assured of having his accounts properly maintained and that
his
employees are not defrauding him.
2.
The Presentation of accounts prepared as a uniform basis affords a valuable
means
of comparison of the various classes of expenditure between one year and another,
and thus enable the sole proprietor to examine the material fluctuations and to take
remedial measures.
3.
The tax departments assessments are completed without too many difficulties
and delay generally accept the Preparation of tax returns etc. is also greatly facilitated and
audited accounts.
4. Where agents are appointed for the purpose of controlling the business operations,
and the value of an audit to the principal concerned the value of an audit to the principal
concerned the value of an audit to the principal concerned is of great importance,
particularly where he has no effective check on the agents accounts.
TYPES OF AUDIT
Q.No.16 Write Short notes on:
(1). Continuous Audit
(2) Final Audit
Continuous Audit:
Continuous audit is one where auditors attend the office throughout the year a visit at
frequent interval in order to perform the audit. . Such audits are preferred when the work
involved is considerable and when it is desired that the audited final accounts should be
ready immediately after the close of financial year.
Advantages
Disadvantages
1. It is possible that figures to be
altered either ignorantly or
1. Indebt audit is possible in case of
18
Lecture Notes
Sir M.Faseeh khan

continuous audit.
deliberately after the auditor has

checked them.
2. The frequent visit by the auditor
may cause inconvenience to clients
staff.
2. The Final Audit can be computed

more quickly, and accounts can be
presented to the shareholders soon
after the closing of the financial
year.
3. This audit is comparatively more

expensive than final audit.
3. Errors can be rectified more quickly

and if any fraud has been taken
place it may be discovered sooner.
4. The frequent visit of the auditor has
the effect of causing the staff to
keep their work well upto date.
5. Continuous audit expedite the
preparation of final accounts, which
may be necessary for periodical
reporting or for the announcement
of in term dividend.
Final Audit:
Final Audit is one which is started at the close of the accounting year. This is the most
satisfactory form of audit from auditors point of view, and is usually adopted wherever
practicable. It is carried out until complete in the following are the advantages of final
Audit.
Advantages:
1. The chances of alteration of figures either intentionally or unintentionally by the
clients can be minimized, because once the figure have been finalized and given to
auditors, these cannot be changed without communication to the auditors.
2. The auditors are supplied with full facts relating to the year under review and he can
peruse the books and accounts duly completed.
3.
Thread of the of the work is neat likely to be lost, as the whole work is performed
at one strock.
4.
This type of audit is comparatively more economical than continuous audit.
Q.No.17 Distinguish between an external auditor and internal auditor
Although there are various similarities of work of an internal auditor and external auditor.
But still there are major differences between the two, which are narrated as under: -
19
Lecture Notes
Sir M.Faseeh khan
External Auditor
Internal Auditor
1 Main objective
To express an opinion whether the
financial statement discloses a true fair
view of the companys affairs.
To detect error and fraud or as determined

by the management.
2. Appointment
Appointed by the shareholders.
Appointed by the management.
3. Scope
Determined by statues (e.g. Companies
Ordinance 1984)
Determined by the management.
4. Status
He is working independently by his
responsibility is to report to the
shareholders.
He is an employee of the company and is

responsible to report to the management.
5. Qualification
In this case the qualification is determined
In case of public limited companies, the by the management.
auditor must be a chartered Accountant.
Q.18: Briefly describe External Audit?
External Audit
Fields of Auditing may be divided into two parts Internal and External auditor. Internal
Auditors are employees of the company whose services have been acquired by the
company to examine their financial records. They are working in between the Accounting
Department and management to assure the Management that the accounting department
is functioning as it should and that its report are accurate.
Independent or External Auditors are not directly affiliated with the companies or
enterprises whose financial statement they examine. They are independent contractors
who, after adequate examination and investigation, offer a profession opinion as to
whether the concerns financial statements which the have examined present fairly the
results of operations and the financial condition of the enterprise. In fact, External
Auditor stand mid way between the enterprise and other interests which use this
accounting data. Thus to some extent they report on managements influence on
accounting data as well as on the accounting department.
Although both the external and internal auditors are similar to each other in may
respects, yet they differ with each other.
1.
Objective: External auditors are engaged to give an unbiased and impartial report
on the financial position of the company to the share holder as well as outsiders.
2.
Appointment: External auditors are appointed by the proprietors of the business
such as share holders partner etc.)
20
Lecture Notes
Sir M.Faseeh khan

3)
4.
5.
6.
Scope: External auditors are required to ascertain the accuracy of the records of
the business and to communicate in an unambiguous language in the cases of
companies that the final accounts disclose true and fair view of the earning
capacity and the financial position of the business. External auditors are also
required to certify that the books of accounts were maintained according to
accepted principles of accounting. They have very wide powers to call for any
information and ask for explanation from any person connected with the business.
The rights, duties, liabilities of external auditors of companies have been
prescribed by law and they cannot be curtailed and restricted in any manner.
Independence: External auditors are completely independent of the management
of the concern, the accounts of which they are required to audit.
Internal check 8 Control: External auditors are only indirectly concerned with
the adequacy of internal checks and controls. They are not bound to suggest
introduction of internal checks in a business. They are free to determine for
themselves the extent to which they should rely upon the existing internal checks
in business. Even very efficient and reliable system of internal check will not be
able to minimize the extent of his liabilities.
Responsibility: External auditors can be held liable besides the share holders by
the outsiders also, who might have acted on their false reports. So they are serving
the interest of outsiders.
Q.19: Distinction between Financial Audit and Cost Audit.

Ans. It is difficult to make distinction between Financial Audit and Cost Audit from the
Practical point of view though in Principle the difference does exist.
As a matter of fact, in cost as well as in Financial Audit, the audit it is ultimately
concerned with the financial Audit, the auditor is ultimately concerned with the
financial aspect of every business transaction.
However, a few points of distinction between the two audits are given below:
Financial Audit
1. It is Compulsory under companies
ordinance 1984.
2. Objects are to find out proper
maintenance of accounts and representing
fair and correct view of the state of affairs
of the companys Balance sheet and profit
and loss Account.
3. The auditor does not go into the details
of the cost of records.
4. Auditor has to see whether inventories
have been properly valued and shown
correctly for the purpose of Balance Sheet.
5. Auditor has to see whether the ledger
entries and castings are correct.
6. Auditor is not concerned with the
issuance of Raw Material according to the
program.
7. The field audit is limited.
8. Auditor is concerned with the
examination of financial aspect of
Cost Audit
It is not Compulsory
21
Objects are to find out whether expenditure

involved has been wisely incurred or not
and to find out the cost of manufacture of
each unit of goods.
Auditor has to check details the cost
account to detect manipulations
Auditor has to see whether the inventories
are excessive or inadequate for the need of
the factory.
Auditor has to take into account the storage
cost.
Auditor has to see that materials issued
according to the program
The field of audit is wide.
Auditor is concerned with the cost aspect of
the accounts.
Lecture Notes
Sir M.Faseeh khan

accounts.
9. Primarily concerned to serve the
interests of the shareholders.
10. The role is in the office.
11. Auditor has to certify the arithmetical
accuracy of the entries in the proper books
of accounts.
Primarily concerned to serve the interests

of the management.
The role is in the factory.
Auditor has to go through Subsidiary /
ledger regarding material, labour and other
items of costs.
Q.20: Differentiate Between Continuous and Final/Completed Audit.

Ans. Continuous or Running Audit: is one where the auditor attends at intervals
during the financial years and checks the books to data as far as possible. It is applicable
in the following cases:1.
In the business with numerous transactions.
2.
In a business with large turnover or where there is the necessity of considerable
detailed checking.
3.
In establishments where the final Accounts and balance sheet are required soon
after the close of the financial year, e.g. banks.
4.
In the concerns where there is an inadequate or no system of internal check and
internal control system.
5.
In the concerns where monthly profit and loss Account and balance sheet and
other interim accounts are regularly required.
Final or Completed Audit: is one which is started after the close of the accounting year
of the business, and is then carried on until completion. This is the most
satisfactory form of audit from the auditors point of view and most common in
practice. The auditor is placed in possession of the full facts relating to the year
under review and he can peruse the books and accounts duly completed in respect
of that year.
CONTINUOUS AUDIT
FINAL/COMPLETED AUDIT
1.
Scope
In continuous audit there is detailed and In final audit there is no detailed and
complete checking of accounts books complete checking of accounts books.
Records
2.
Visit
The audit staff frequently visits and checks The audit staff visits once and checks the
the accounts.
Business accounts.
3.
Time
The continuous audit is possible as and The final audit is possible only when all the
when accounting entries recorded in books. entries are recorded in the books of
accounts.
4.
Cost
The continuous audit is expensive than The final audit is cheaper than continuous
final audit due to high audit cost.
audit due to less audit cost.
5.
Check
22
Lecture Notes
Sir M.Faseeh khan

The continuous audit can put more check The final audit can put less pressure on
on the accounting employees.
moral value of the accounting staff.
6.
Entity
The continuous audit is desirable for large- The final audit is desirable for small-scale
scale business.
business
7.
Continuity
The continuous audit may continue for The final audit cannot continue for whole
whole year with fixed or variable intervals Year, it is completed in one session
8.
Control
Continuous audit can be started even if Final audit requires effective internal
there is poor system of internal control.
control.
9.
Plans
In continuous audit the accounts are The final audit is made after the end of
prepared in time so plans can made in time. year. Planning for future period becomes
late.
10.
Chance
The chance of errors and fraud are reduced The chance of error and fraud are there due
to no big time gap between accounting to sufficient time between accounts work
work and audit.
and audit.
11.
Dividend
The management can declare interim The management cannot declare interim
dividend due to continuous audit.
dividend as audit is completed as the end of
the year.
Q.21 DIFFERENTIATE BETWEEN CONTINUOUS AND INTERIM AUDIT.
Continuous Audit
1. Object:
The object of continuous audit is to show
the trade and fair view of financial
statement.
2. Report:
The report can be presented at the end of
the accounting year under continuous audit.
Interim Audit
1. Object:
The object of interim audit is to determine
and check the profit or loss for the period
under audit.
2. Report:
The reported can be presented at the and of
the interim audit and it is submitted to
owners.
3. Period:
3. Period:
The continuous audit can examine the The interim audit can examine the accounts
accounts books and other record for one books and other records up to particular
whole year.
date.
4. Scope:
4. Scope:
There is detailed checking of accounting There are no detailed checking of
records under continuous audit
accounting records under interim audit.
5. Verification:
5. Verification:
23
Lecture Notes
Sir M.Faseeh khan

The continuous audit requires verification
of assets and liabilities at the end of
financial year.
6. Trial Balance:
The trial balance is not prepared at
intervals in continuous audit
7. Fee:
The auditor can take high fee according to
time period spent on audit work
8. Interest:
The third parties have some interest in
continuous audit as it can serve their
purpose
9. Regular:
Continuous audit is a regular feature of
business working. It goes from year to year.
In interim audit the verification of assets

and liabilities is made at the tone of such
audit.
6. Trial Balance:
The trial balance is prepared and in
checking at the time of interim audit.
7. Fee:
The auditor can charge less fee due to less
time spent on audit work.
8. Interest:
The third parties have no interest in interim
audit as it does not serve their purpose.
9. Regular:
Interim audit is not a regular feature of
business working. It is conducted
occasionally.
10. Size:
10. Size:
Continuous audit is possible for large-scale Interim audit is possible in large scale as
business units due to heavy work.
well as small scale business units.
11. Goals:
11. Goals:
The audit is conducted for many purpose or The audit is conducted for one purpose or
goals. It is legal duty to carry out audit`
goal only. The manager and owner can
determine the goals.
Q.22 What are the types of auditors?
TYPES OF AUDITORS:
Types of Auditors are classified in accordance with the Field of Auditing,
which may be as:
1.
Internal Auditor.
2.
Independent Auditor.
3.
Government Auditor.
1.
2.
3.
Internal Auditors:
Internal Auditors are employees of the enterprise whose records they examine.
They, in effect stand between the accounting department staff and management to
assure the latter that the accounting department is functioning as it should, and
that its reports are accurate.
Independent Auditors:
Independent auditors are public accountant directly affiliated with the companies
or enterprises whose financial statement they examine. They are independent
contractors, who, after qualifying the prescribed examination, offer a professional
opinions as to whether the concerns financial statements which they have
examined, present fairly the results of operations and financial condition of the
enterprise. They, in effect, stand midway between the enterprise and other
interested parties using accounting data.
Government Auditors:
Government auditors are those who are in the employment of Government
offices, working under Account and Auditors General of Pakistan.
24
Lecture Notes
Sir M.Faseeh khan

Q.23 is cost Audit necessary under companies Ordinance 1984? Explain relevant
provisions relating to Cost Audit.
According the sec. 230 (1) (e) Companies Ordinance 1984, where any company or class
of companies, engaged in production, processing, manufacturing or mining activities
shall keep at its registered office proper books containing such particulars relating to
utilization of material or labour or to other inputs of items of costs as may be prescribed,
if such class of companies is required by the Authority by a general or special order to
include such particulars in the books of accounts. However as such, no order is issued by
the Authority for the maintenance of books.
And according to Sec. 158, where any company or class of companies is required under
Sec. 230 (1) (e) to maintain such records, the Federal Govt. may direct that an audit of
cost accounts of the company shall be conducted. As maintained in preceding para that
the Authority has yet not issued any order for the maintenance of costing records,
therefore, there is no question for the conduct cost audit. Federal Govt. has not yet issued
any notification for the conduct of Cost Audit.
AUDIT AND INVESTIGATION

Q.24: What do you understand by investigation? Under what situations is an
auditor called upon to investigate [list situations only]?
Investigation implies a systematic examination or inquiry to establish a fact or to evaluate
situation. It can also be defined as an inquiry commissioned by a client for a specific
purpose. It covers not only an examination of the accounts but also an inquiry into other
relevant matters connected with the purpose for which it is undertaken.
The following are the more common situations when an investigator or an auditor is
called upon to investigate:
1.
2.
3.
Purpose of a business or shares.

Prospective investment.
Ascertain value of goodwill of a partnership for adjustment of rights of
partners on change of compositions.
4.
Detection and thefts.
5.
Prospective lending.
6.
For settlement of tax liability or detection of undisclosed income.
7.
Review an investment proposal on behalf of investor.
8.
Under the provision of companies Ordinance 1984.
9.
Losses arising from systems breakdown.
10.
Special review for prospectus, profit, forecast, etc.
The range of clients who may commission investigations includes:
1.
Companies
2.
Individuals
25
Lecture Notes
Sir M.Faseeh khan

3.
4.
5.
Q 25:
The department of trade

Lending institutions
Local Authorities
(a) What are the stages of investigation?
(b) Distinguish between audit and investigation.
The following are the important stages of Investigation: 1.

Obtain written instruction regarding objectives, scope, limitations, etc.
2.
Communicate with auditors.
3.
Plan and prepare budgets etc, this will involve assessing the aims of the
investigation, estimating the time to be taken and the likely cost.
4.
Obtain background information of industry & company, regarding past history,
accounting system and control systems, future prospects, any special legislation affecting
the industry, personnel etc.
5.
Plan and write report outline.
6.
Collect facts and prepare working papers.
7.
Examine audited accounts, determine any adjustments necessary due to any
change in accounting policies, contingencies and treatment of extraordinary
and exceptional items.
8.
Review facts and draw conclusions.
9.
Prepare draft report and discuss with the client.
10.
Prepare final report.
The following are the distinctions between auditing and investigation:
26
Lecture Notes
Sir M.Faseeh khan

AUDITING
1. MAIN OBJECTIVES:
To verify whether the financial
statement display a true and fair view of
the state if affairs and working results of
an undertaking.
INVESTIGATION
To establish a fact or happening or to assess a
particular situation.
2.
LIABILITY:
Investigators liability is based on the
Auditor liability is determined by engagement letter and can be limited.
statute and cannot be limited.
3. Approach:
Relatively through examination of the select
a) Test examination based on review of areas.
internal control.
b) Auditor may rely on compliance and
prima facie evidence.
Investigators have to obtain substantive and

conclusive evidence.
c) Auditor should assume a figure or a

fact as correct unless evidences obtained
prove otherwise.
Investigator should not accept a fact as

correct until it is substantiated.
d) Auditor would reelect a

representative sample of transactions,
examine them in depth and if nothing
arouses suspicion he his conclude his
examination.
Investigator would attempt to locate

substantive evidence in support of the
quantitative and monetary figures and would
check all related records thoroughly and use
of statistical or discovery-sampling
techniques would assist him to narrow down
his inquiry.
4.Auditor is concerned about the Investigators may have no relevance with the
consistent use of accounting policies accounting conventions, disclosure
and compliance with disclosure requirements, etc.
requirements.
Q.26: writes a note on an investigation to be carried out under section 263

companies Ordinance 1984.
of
According to section 263 of companys ordinance 1984 an Authority may conduct an

investigation of affairs of company on application by members or report by the registrar.
The Authority may appoint one or more competent persons as inspectors to investigate
the affairs of any company and to report thereon in such manner as the Authority may
direct: a) In case of a company having a share capital, on the application of members
holding not less than one tenth of the total voting power therein;
b) In case of a company not having a share capital, on the application of not less
than one teeth in number of the person entered on the companys register of
27
Lecture Notes
Sir M.Faseeh khan

member;
c) In case of any company, on the receipt of a report from registrar.
Q. 27. Write a note on an investigation to be carried out under section 265 of
Companies Ordinance, 1984.
According to section 265 of companies ordinance 1984 the Authority:
(A) Shall appoint one or more competent person as inspectors to investigate the affairs of
a company and to report thereon on such manner as the Authority may direct, if:
i)
The company, by a resolution in general meeting, or
ii)
The court, by order, declares that the affairs of the company ought
to be investigated by an inspector to appointed by the Authority, and
(B)May appoint one or more competent persons as inspectors to investigate the affairs of
a company and to report thereon in such manner as the Authority may direct if in the
opinion on the Authority there are circumstances suggesting:
i) That the business of the company is being or has been conducted with intent to
defraud its creditors, members or any other persons or for a fraudulent or unlawful
purpose, or in a manner oppressive of any of its members or that the company was
formed for any fraudulent or unlawful purpose;
Or
ii) That persons concerned in the formation of the company or the management of its
affairs have in connection therewith been guilty of fraud, misfeasance, breach of trust
or other misconduct towards the company or towards the company or towards any of its
members or have been carrying on unauthorized business; or
iii) That the affairs of the company have been so conducted or managed as to deprive the
member thereof of a reasonable return; or
iv) That the members of the company have not been given all the information with
respect to it affairs which they might reasonably expect; or
v) That any shares of the company have been allotted for inadequate consideration; or
vi) That the affairs of the company are not being managed in accordance with sound
business principles or prudent commercial practices; or
vii) That the financial position of the company is such as to endanger its solvency;
Provided that, before making an order under clause (b), the Authority shall give the
company an opportunity to show cause against the action proposed to be taken.
The matters to be investigated and the reporting manner in all such cases are determined
by the authority. The approach and procedures would be similar to any other
investigations. However, provisions and duties are determined by the ordinance.
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Lecture Notes
Sir M.Faseeh khan

AUDIT WORKING PAPERS
Q.28: What is meant by audit working papers, Explain fully the significance and
contents of working papers.
According to International Auditing Guideline 3, Para 11, The Auditor should document
matters which are important in providing evidence that the audit was carried out in
accordance with the basic principles. To serve the about purpose, audit working papers
are the specific device used to accumulate the audit evidence in support the work carried
out and also support his opinion.
Working papers are the connecting link between the clients records and the audited
accounts. These includes what work has been done by him and procedures he followed in
the verification of particular accounts These provide a permanent historical record
logically arranged in order.
SIGNIFICANCE OF WORKING PAPERS
The audit working paper has a great significance, which are explain as follows:
a) TO CONTROL THE CURRENT YEARS WORK:
A record of work done is essential for:
I. The audit clerk to see that he has done all that he should.
II. His supervisor, manager and partner to whom he is responsible.
III. Review at final stage so that it can be considered whether the accounts shows a
true and fair view the companys affairs.
b) HELPS IN PLANING THE AUIDT OF FOLLOWING YEAR
Normally the starting point of years audit is to first review the previous years working
papers. However rigidly following the same procedures as previous years must be
avoided because client staff getting to know procedures and may design the frauds in the
area which the procedures will not uncover.
c) EVIDENCE OF WORK DONE:
More importantly in recent years, evidence that work was carried out may need to be
provided in the court of law in defence, if his audit report is challenged in the court of
law.
CONTENTS OF WORKING PAPERS:
According to International Auditing Guideline 9, para 10, working paper normally
include:
1) Information concerning the legal and organizational structure of the entity.
2) Extracts or copies of important legal documents, agreements and minutes.
3) Evidence of the planning Process of the audit & audit programmes.
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Lecture Notes
Sir M.Faseeh khan

4) A record of the study and evaluation of the accounting system and related internal
control e.g. questionnaires and flow charts.
5) Analysis of transactions and balances.
6) Analysis of significant ratios and trend.
7) A record of nature and extent of auditing procedures performed, and the results of
such procedures.
8) Evidence that the work performed by assistants was supervised and reviewed.
9) An indications as to who performed the audit procedures and when they were
performed.
10) Copies of communication with other auditors, experts and third parties.
11) Letter of representation received from the client.
12) Conclusion reached by the auditor concerning the significant aspects of the audit.
13) Copies of trial balance, trading profit and loss account, and statement of changes
in financial position and balance sheet and the related audit reports.
Q29: Describe the purpose and importance of Audit working papers.
PURPOSES:
The purposes of audit work papers are as under:
1.
Validity of records.
2.
Review of Internal control.
3.
Data Reference.
4.
Position defence.
5.
Review of the audit.
1.
2.
3.
4.
5.
Validity of Records:
In this working papers, the auditor compiles his data, analysis computations,
notes, schedules, confirmation and all other records pertaining to the audit. They
constitute the only proof of the validity of the records and the audit report. The
client is interested in the audit report, and the audit work papers constitute the
only tangible connecting link between the records of the client the audit, and the
report.
Review of Internal Control:
Audit work papers should indicate the accomplishment of the review of client
internal control. These accomplishments may be evidenced in the internal control
questionnaire, but comment on the internal control of specific items should appear
in each of the appropriate working papers:
Data Reference:
The audit work papers serve the auditor as one source of information for his
remarks and advice in discussing matter with the client. They also aid the auditor
in the solution of questions involving taxes with the reports to the government
agencies. They may be used for reference many years after the completion of an
audit.
Position Defence:
Audit work papers assist the auditor in justifying his position against criticism, in
offering court testimony and in defending himself in the event of legal attack.
They are the best protection of the professional integrity of the auditor.
Review of the Audit:
Audit work papers constitute the best aid for the review of the work and for the
audit report. The purpose of the review is to ascertain that:
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Lecture Notes
Sir M.Faseeh khan

a)
All statements are schedules have been properly prepared and are correctly
supported in accordance with accepted principles of accounting and auditing
Standards;
b)
Procedural technique has been suitable and adequate;
c)
Comments and recommendations are appropriate and reasonable; and
d)
All necessary comments have been included.
Audit Working Papers:
Important documents and papers regarding the business are collected that are
needed by the auditor during the course audits. These papers are called working
papers. These working papers contain essential facts about the accounts. So the
auditor without the working papers cannot examine accounts properly.
Audit working papers consists schedules statements, analysis, and other
statements essential for the preparation of final accounts and find report of the
auditor.
IMPORTANCE OF WORKING PAPERS
Importance of working papers can be judged by the following facts:
1.
These papers are very useful in framing the opinion about the efficiency of audit
team.
2.
These papers also throw light on the weak points of the client business.
3.
Working papers are the permanent record of the data examined.
4.
These are very useful for defending the auditor in case of negligence.
5.
Working papers are also very helpful for the auditor in preparing the audit report.
6.
Working papers are also very useful for future audit.
7.
Shifting of work from one clerk to another is also easy in the presence of working
papers.
Q.30: Discus the procedure to investigate in case of suspected fraud, fluctuation in
profit.
DEFINITION OF INVESTIGATION:
The term Investigation implies as examination of the accounts of a business for
some special purpose. It may be defined as:
An inquiry into the resultant profit or loss of any business for the past
several years in order to ascertain the normal profit earning Capacity and
the necessary average working capital required in earning such profits, or
with a view to ascertain the true financial condition of the business for a
particular object in view.
The duties of an investigator to detect suspected fraud will mainly depend upon
the nature of the fraud and the systems of accounting and internal check in force
in the business.
Auditor, at the outset will try to know from his client the reasons, for suspicious
the nature of suspected persons. He will obtain from his client written instruction
as to his duties and scope of work and a statement as to the records and
documents which will be available to him for examination. It is only through a
careful and through examination and verification of books and records that he can
detect frauds. He should be careful in not arousing the suspicious of the suspected
persons that they are involved in the fraud.
Frauds can easily be detecting if one has the knowledge of the different forms
which they may take. Frauds may be of the following types.
a)
Misappropriation of cash.
b)
Misappropriation of goods
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Lecture Notes
Sir M.Faseeh khan

c)
d)
Misappropriation of securities
Manipulation of Accounts.
Investigator shall have to follow a different procedure for detecting each
of these frauds. Since the procedure of investigating in to these fraud will largely
depend upon the methods commonly followed by the dishonest persons in
committing these frauds it shall be worth while to have a knowledge of the
ordinary methods of the commission of these frauds.
Misappropriation of cash
Misappropriation of cash may involve either cash receipts or cash
payments. Cash receipts may be misappropriation in any of the following ways.
a)
Cash receipts from cash sales, travelers collection, V.P.P receipt may be
misappropriated either by not recording them in the books at all or by passing
false enterprise in the books. Cash receipt may not be recorded in the Cash Book
at all.
b)
Unusual income from non-trading sources or income not arising in the ordinary
course of trade can easily be misappropriated by not recording in the books at all.
c)
Misappropriation of cash receipts may also be covered up and concealed by
allowing more cash discount or giving false credits for goods return etc. in the
customers ledger account or by writing off a good account as bad cash recorded
in all such cases is not recorded.
d)
Cash receipts can also be misappropriated by omitting to record casual collections
e.g. scrap sales etc.
e)
Cash can also be misappropriated by the process of short banking lapping,
teeming and lading, under casting the receipt side of the cash book and short
carrying over etc.
Cash payments can also involve misappropriation of the following kinds:
a)
Cheque may be drawn against false invoices or statement accounts which have
already been paid, may again be submitted in support of further cheques.
b)
Cash can be misappropriated while in course of transit or transfer from Branch to
Head Office or from one Bank account to another.
c)
Over casting the payment side of the Cash Book or over carrying of the totals
from one page to another is another device of concealing the amount of cash
already misappropriated.
d)
Cheques drawn for personal use may be charged as business expenditure
e)
Drawing cheque in the name of the person other than the actual payee.
f)
Misappropriation of petty cash transaction and wage payments.
Misappropriation of goods (Stock)
Goods which are readily convertible into cash are usually misappropriated.
Misappropriation of goods is possible only by the collusion of several persons under
circumstances where either the inventory system is very poor or good are of lessee bulk
but of greater value. Goods can equally be misappropriated by people of lower or high
ranks. Investigator in order to detect misappropriation of goods, will make a careful
scrutiny of the system of receipts and dispatches of the goods followed by the business.
Investigator must also compare sales invoices with the out ward stock and compare stock
figures as disclosed by the stock record with those shown by the financial books
Difference may be located by comparison of stock records with entries in the financial
book purchase and sales made towards the close of the financial year shall be paid greater
attention in their examination Investigator shall try to find out the discrepancies between
physical stock and recorded balance of stock.
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Lecture Notes
Sir M.Faseeh khan

Misappropriation of Securities
Securities are misappropriated by effecting their fraudulent sales. They are stolen
not for their income but for misappropriating the cash that will be obtained by selling
them in the market or from the loan taken against their security. People who have the
custody of securities alone will be able to effect their fraudulent sales and misappropriate
the proceeds. It will be very for the investigator to locate such frauds except in those
cases where securities are negotiable by delivery. The investigator shall prepare a list of
all the securities and then proceed to examine all the securities personally in the presence
of the officer who is responsible for their custody. Defalcations concerning securities may
also be discovered by vouching and comparing the income from securities.
Manipulation of Accounts
Accounts are always manipulated by senior officers of the firm with some
particular object in view. In case of joint stock companies, directors may
manipulate accounts for the following objects:
a)
To prevent disclosure of poor financial position of the company in order to tide
over a difficult period;
b)
To enable larger dividends to be declared than other wise justified by the real
profits of the company in order to restrict fall in the price of the shares;
c)
To show better results so that they may be allowed to hold their present offices in
the company;
d)
To manipulate share prices in order to earn speculative gains;
e)
To obtain fresh capital or outside financial accommodation.
Kinds of frauds relating to manipulation of accounts are so vast and varied that no
hard and fast rules or procedure can be laid down for detection of any of these frauds.
Procedure shall change with the circumstances of each individual case. Tact and
experience will alone give necessary guidance to the investigator with regard to the
procedure to be followed for the detection of such frauds. Since these frauds involve
serious consequences investigation with be very careful and thorough in his work. He
shall carry out a detailed checking of the book entries and the verification of different
assets and liabilities with as much independent documentary evidences as may be
available to him.
INVESTIGATION IN CASE OF ABNORMAL FLUCTUATIONS IN
PROFITS.
Sometimes, it happens that the profits of a business for a particular year may be
more of less than those of the preceding year. The proprietor of the business may
therefore approach an accountant for conducting an investigation of his accounts with a
view to ascertain the reasons for the fluctuations in profit. For this purpose, the
accountant will proceed his investigation as under:Fall in Profit: If the trading profits of a business for a year show a considerable reduction
on preceding years, although the sales of that year, have equaled the average of the past,
it means that the percentage of gross profit on turnover has fallen. The accountant should
inquire into the following causes which may be principally responsible for the reduction
in the rate of gross profit:
1.
The cost of purchases may have risen without a corresponding rise in selling
prices, or the selling prices may have fallen without a corresponding fall in the
cost of good purchased. Examine the sales and purchase invoices for the purpose
of ascertaining the process and compare them with those prevailing in the past.
2.
Sales may have been omitted. Check the sales Book with orders received and with
Goods Outwards Book and also verify the amount of sales returns.
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Lecture Notes
Sir M.Faseeh khan

3.
Purchases may have been inflated. Check the Purchases Book with the Goods
Inwards Book and the Stock Book to see that all goods entered as purchases: have
been actually received during the year.
4.
Inventories may have not been properly valued. Examine in detail the Inventory
sheets of the past and current years.
5.
Compare the Profit and Loss Account for the very in question with that of
previous years.
Rise in Profits:
If trading profit of a business for a year show a considerable
increase on preceding year, although the sales of that year have equaled the average of
the past, It means that the percentage of gross profit on turnover has gone up. The
accountant should inquire into the following causes which may be principally responsible
for the rise in the rate of gross profit:
1.
The cost of purchase may have fallen without a corresponding fall in the selling
prices, or the selling prices may have risen without a corresponding rise in the
cost of goods purchased. Examine the sales and purchases invoices for the
purpose of ascertaining the prices and compare them with those prevailing in the
past.
2.
Purchases may have been suppressed. Check the Purchases Book with the Goods
Inwards Book and the Stock Book to see that all goods received during the year
have been recorded in the books.
3.
Sales may have been inflated. Check the Sales Book with orders received and
with the Goods Outwards Book and also verify the amount sales returns.
4.
Inventories may not have been properly valued. Examine in detail the stock sheets
of the past and current years.
5.
The Profit and Loss Account for the year in question may not have been prepared
on the same lines as in the past. Ascertain this fact by comparing the Profit and
Loss Account of this year with that of previous years.
AUDIT PROGRAMME
Q.No 31 What is an Audit Programme? List the factors you would bear in mind in
constructing an Audit Programme.
An audit programme is a written scheme of exact detail of the work to be done by the
auditor and his staff in connection with particular audit. Professor Meigs defines an Audit
Programme as An audit programme is a detailed plan of the auditing work to be
performed, specifying the procedures to be followed in verification of each item in the
financial statements and giving the estimated time required. Programme is essential to
ensure that all-important areas of activities are covered and completed within the
allocated time. After considering certain formalities such as type of audit, scope of audit,
purpose of audit, date of submission of audit report, an auditor prepares an audit
programme. The audit programme is a confidential documents prepared for the use of
auditor only. While preparing of an audit programme for the first time, he has to proceed
on the following lines.
1) Conduct the survey of system of internal control and effectiveness of internal control
and review the internal audit procedure to determine the extent to which the auditor may
resort to testing and sampling.
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Lecture Notes
Sir M.Faseeh khan

2) He should obtain:
i. Copies of financial statements
ii. Trial Balance
iii. Schedules of Account Receivable, Account Payable, inventories and securities
etc.
iv. A copy of partnership deed or in case of a corporation the Memorandum of
Association and Articles of Association and related minutes.
After review of internal control and procedures of internal audit, study of audit papers &
rules & regulation of financial setup, delegation of financial powers & review of
accounting books, a workable audit programme is prepared.
After preliminary enquiries and review the auditor must consider the following points.
i. The area to be covered during the audit.
ii. Steps to be taken on the audit of each accounts and schedule.
iii. Allocation of duties among the audit crew/ Staff.
iv. Probable time to be spent in each area, accounts or schedule.
v.Observation /queries raised and clarification obtained.
vi. Control of all working paper.
After preparation of audit programme the senior auditor should brief and explain his crew
each phase.
Q.32: Audit Working papers are the property of an auditor and he destroys them,
sell them or give them away? Criticize this quotations?
According to International Auditing Guideline No.9 para 12 Working papers are the
property of the Auditor. The question of ownership of working was also arose in the
case of Sockockinskyvs. Bright Grahme and Co. The case was decided in the favour
of the auditor on the ground that they were independent contractors and not an agent of
the clients.
Although working papers are the property of an auditor but he has no rights to sell them.
International Auditing Guideline 3, para 6 specially says that the auditor should respect
the confidentiality of information acquired in the course of his work and should not
disclose any such information to a third party without specific authority or unless there is
a legal or professional duty to disclose.
The auditor should retain the working papers for a period of time sufficient to meet the
needs of his practice and satisfy any pertinent legal or professional requirements of
record retention International Auditing Guideline 9, para 13.
Q.33: What are the essentials of Good Working Papers?
The following are the essentials of Good Working Papers:
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Lecture Notes
Sir M.Faseeh khan

1.
2.
3.
4.
5.
6.
7.
8.
Completeness i.e., They should contain all the essential information so that they
may
be of maximum utility.
Properly organized and arranged. The working papers should be so arranged that
one may not find any difficulty in locating a particular paper. If they are not properly
arranged it will entail loss of time in finding a particular fact while preparing the
report.
Clearness. The facts in the working papers should be set out clearly.
The facts in the working papers should be readily apparent to the reader later on.
i.e. Schedules and working should contain adequate explanatory notes.
Stationary used for working papers should be of good quality so that by frequent
handling, it may not be damaged.
Papers used should be of convenient and uniform size.
Papers should be carefully fastened together, arranged in a logical order, properly
and adequately referenced and the subject matter clearly marked on the top.
Sufficient space should be left after each note so that any decision taken may be
taken
down in that space.
AUDIT EVIDENCE
Q.34 What is meant by audit evidence. List the types of audit evidence available to
an auditor and explain any two of them in detail?
Evidence in auditing means any document, piece of information, voucher, written or oral
statement or any procedure which assist an auditor in forming his opinion in regard to the
accuracy of data under audit check. The nature and type of audit evidence differs from
situation. In some situation, the auditor may like to see all original documents connected
with a particular transaction and in different situation he may be satisfied with verbal
explanation given to him. And in other situation he may form his opinion by only
examining the procedures designed, enforced and followed. However, it is necessary that
evidence should always be in the form of document a written statement. Evidence,
therefore, could be any thing which assists and auditor in the approval of financial
activities, transactions and statements and in the award of opinion on such financial
statement.
Types of Audit Evidence:
There are following different types of audit evidence collected by the auditor during the
course of his audit.
1) Observation Physical Examination:
This is the best audit evidence in auditing. The auditor verifies the physical existence for
the items like: i) Machinery and equipment
36
Lecture Notes
Sir M.Faseeh khan

ii) Furniture and fixture
iii) Stores and spares
iv) Inventories
v) Investment
vi) Cash in hand etc.
Normally the auditor visits the client at years end to physically verify the above
mentioned assets. The auditor should obtain the schedule as of above-mentioned assets
and see that they are physically available at location indicated in the schedule.
2) Authoritative Documents
The reliability of authoritative documents is influenced by its source. Basically there are
two types of authoritative documents, such as: a) Authoritative documents prepared OUTSIDE the firm is more reliable then
prepared inside the firm Example of such documents are title deeds, share and
loan certificates, leases, contracts, invoices from suppliers etc.
b) Authoritative documents prepared INSIDE the firm is reliable if related internal
control is satisfactory. Example of such documents are minutes, copy of sales
invoices, vouchers etc.
3) Testimony:
Under certain circumstances the auditor obtains testimony/confirmations. These are again
of two types, such as:
a) Testimony from independent third party e.g. bank confirmations, debtors
circularisation etc.
b) Testimony from directors and officers, e.g. letter of representation, replies to
Internal Control Questionnaire questions.
4) Calculation and working by Auditor:
Evidence of the correctness of many figures can be obtained by this way. During the
process of auditing an auditor has to do arithmetical calculation and castings to ascertain
the accuracy of accounts. It must be checked properly.
5) Satisfactory Internal Control:
Large-scale organisation follows internal control system to prevent and detect error and
fraud and to ensure accuracy and completeness of accounting records. When these
internal controls are effectively followed, this gives most useful evidence by itself and
the auditor could rely on the data produced to him for audit.
6) Subsequent Events:
The audit is usually performed well after the year-end and many assertions can be
verified by reference to subsequent events. Generally the adjustments of the following
nature can be verified by reference to subsequent event.
a)
b)
c)
d)
Bad debts provision

Interest accrued
Contingent liabilities
Provision for various expenses etc.
The auditor has to Perform audit procedures on subsequent events.
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Lecture Notes
Sir M.Faseeh khan

7) Relationship Evidence:
Evidence confirming the truth about one item may tend to confirm the truth about another
For example, evidence confirming the correctness of investment income also confirm
some aspects of the item Investment.
8) Agreement with Expectation Ratios:
Verification can assisted by the calculation and comparison of ratios with the data of (a)
past years; (b) other related companies & (c) budgets. Inconsistencies and unusual
differences will alert the auditor.
Q.35: What should be the auditors attitude in collecting evidence? What are the
Difficulties faced by the auditor in collecting evidence?
While collecting adult evidence, he auditor has to follow the following attitude, because
The director and shareholders expect the auditor to be fair and impartial in the conduct of
his audit and to express his opinion on the accounts of the company:
1. The auditor must be objective and independent in all his decision. He may have a
close contact with the members of the companys accounts department, but he
must consider himself independent and should examine the evidences critically.
2. Identify the express and implied assertions made by the directors in including or
excluding the items in the accounts.
3. Evaluate the evidence collected for:
a) Validity
(b) Relevance
(c) Sufficiency
4. He must refrain form coming Hasty conclusion.
5. He must not permit personal relations with the member of the clients staff.
6. He must be honest in his profession.
Difficulties in Obtaining Audit Evidence:
The difficulties that an auditor faces in collecting audit evidence are as follows:
1.
2.
3.
4.
5.
Inadequate information due to lack and absence of records or poorly kept

records presents frustrating situation, an auditor is unable to form and offer an unqualified opinion.
Stores inventories of an airline, securities of big trust, physical cash in bank and
fixed properties in a manufacturing concern are some example where he size of
individual accounts are very large. In such a situation it is difficult for the auditors
to obtain evidence in respect of each individual items.
Lack of cooperation on the part of those who keep the part of the auditor to make
complaints to executives about any staff, not extending cooperation. This action
will multiply his difficulties.
It will be very difficult for the auditor to lactate error, frauds and falsifications, if
these are intentionally, committed. To over come these difficulties to great extent,
it is advisable for the auditor to obtain representation letterform the management
specifically stating, All the information, books and records have been provided
to you.
Time is limited. Accounts must be produced written a specific time and therefore
auditor is unable to collect all ideal evidence within the time allowed.
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Lecture Notes
Sir M.Faseeh khan

6. Cost factor is also important while collecting evidence. The ideal evidence may
be too expensive to obtain.
7. Determination of materiality level relating to audit evidence is always a problem.
AUDIT TECHNIQUES
Q.No.36. What do you understand by Audit Techniques. List the types of audit
Techniques and write note on them.
Audit techniques are the methods generally applied in the collection of audit evidence.
The application of audit techniques largely depends on the intelligence of the auditor and
also the type of transactions being examined by him. The approach of applying audit
techniques may differ from auditor to auditor and from one situation to another. Only by
applying appropriate audit techniques, the auditor can successfully complete the audit
assignment & confidentially award the audit report.
There are following common types of audit techniques applied during the course of audit:
1) Physical examination
2) Confirmation
3) Examination of original documents
4) Recomputation
5) Retracing of book keeping procedures
6) Scanning
7) Inquiry
8) Examination of subsidiary records.
9) Correlation with related information
10) Observation of pertinent activities & conditions.
The above techniques are discussed in detail as under:
1) Physical Examination:
Physical examination and physical count is known as eye witness in auditing because the
auditors personally and physically examined the particular item. This is the best audit
evidence in auditing. This technique is generally applied to the items of property for
instance;
I. Machinery and equipment
II. Furniture and fixture
III. Tools
IV. Inventories
V. Investments
VI. Cash in hand, etc.
Normally the auditor visits the audit at year end to physically verify and count the
inventories at year end as shown by records. Similarly if investment figures is shown in
the ledger at considerable big amount, the auditor satisfy himself by examining the
investment documents physically.
2) Confirmation
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Lecture Notes
Sir M.Faseeh khan

According to International Auditing Guideline 8 para16 Confirmation consists of the
response to an inquiry to corroborate information contained in accounting record. The
accounts which generally needs confirmation from outside sources are as follows:
i)
Sundry Debtors.
ii)
Bank deposits and current accounts.
iii) Advance to outside parties.
iv)
Any assets held by outside parties as security.
v)
Inventory held by third party/out sider.
Generally it is not easy to obtain confirmation from outside sources because outside
parties do not bother to reply the auditor and also they are not under any obligation to
supply any information to the auditor.
However there are some guiding points which helps the auditor in applying the said
technique i.e. first of all , the auditors should discuss matter with the client and obtain its
consent, then few accounts should be selected for confirmation or ask 100%
confirmation as the case may be . After doing so letters should be typed which must be
signed by an auditor. It will be good practice if confirmation requests are mailed by an
auditor and ask the parties to send their statements direct to the auditor.
3) Examination of Original Documents
This is the best technique available to an auditor. But it is not necessary that every
original documents provided in support of accounting transactions are correct. However
an intelligent approach to various aspects covered by the transaction may discover and
bring to light any errors including concealment, misappropriation and intentional fraud
and error. While examining original documents, following are the main points, which are
to be kept in mind:I. To see that documents under examination are authentic.
II. To see that transactions covered by the documents are genuine and are
related to the organization
III. To see that approval on the documents is genuine & staff really
authorized to accord approvals.
IV. To see that transaction have been duly incorporated and posted to the
respective ledger account.
V. To see that document is related for the period under review.
4) RECOMPUTATION:
It consists of recasting and re-calculation of work performed by the accounting staff.
However, it is not possible for an auditor to re-check all the casting & computation.
Normally it is done on test basis. The extent of test depends upon the existence and
effectiveness of system of internal control. The auditor usually recasts the selected ledger
accounts and recomputed calculation of inventory extractions, depreciation schedule,
interest calculation, bad debts provision, salaries and wages, bonus calculations etc. He
should do the whole working himself. It should be noted however, that an auditor is not
supposed to make mistakes in computations and if he does so he lacks a most important
technique of auditing.
5) Retracing Book Keeping Procedures:
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Lecture Notes
Sir M.Faseeh khan

In this technique, the auditor has to repeat what the accounts staff has already done. This
technique is applied in order to ensure that the accounts were correctly processed, posted
and incorporated in the books of accounts and finally presented correctly in the Balance
Sheet.
6) Scanning:
Scanning is a critical study of accounts, documents, statements, information, book of
original entry, and the financial ledger. The senior of the audit team usually applies this
technique. Normally this technique is applied on unusual transactions, event and
activities, for instance:
i)
ii)
iii)
iv)
Transaction involving unusual fluctuations in amount.

Transaction, which does not, relates with the nature of business.
Transaction of the type that never took place in the past.
Types of Transactions largly affecting the operating results.
7) Inquiry
According to International Auditing Guideline No.8 para 15, Inquiry consist of
seeking appropriate informations of knowledgeable person inside or outside the entity
Response to inquiries may provide the auditor with information which he did not
previously possess or may provide him with corroborative evidence
Inquiries may be formal written inquiries addressed to third parties or it may be
informal inquiries addressed to persons inside the entity. The auditor should decide under
a given situation as to which type of inquiry is to be resorted to form his purpose.
8) Examination of Subsidiary Records:
In large organization, numbers of accounts are operated, for all these accounts;
there is an account, known as control account. The auditor must compare the controlling
and subsidiary accounts in order to locate the discrepancies, irregularities, wrong postings
or castings in the subsidiary record and if this record is not checked, the errors may pass
undetected resulting in the control accounts being inaccurate. The subsidiary record may
be checked on test basis depending on the existence, effectiveness and continuation of
internal control. Example of accounts where subsidiary accounts are maintained are
inventory purchases, accounts receivable, accounts payable etc.
9) Correlation with Related Information:
In most of the operating accounts a correlation is generally found. The auditor should
note such operating accounts and study the relationship between them. For instance,
reserve for bad debts be correlated with bad debts expenses for the period. Similarly
allowance for depreciation be correlated with depreciation expense for the period.
The auditor should make sure that consistency has been maintained in the operation of
various accounts.
Q.36: a) what do you understand by Audit Techniques and Audit Evidence?
b) Name only two specific audit techniques & its relevant in the
Verification of the following: (i) Bank Balance (ii) Accounts Receivable
(iii) Allowance for Bad debts (iv) Mdse.Inventory (v) Loose tools
(vi)
Allow. for Depreciation (vii) Investment
41
Lecture Notes
Sir M.Faseeh khan

Audit techniques are the methods generally applied in the collection of audit
evidences. The application of audit technique largely depends on the intelligence of
he auditor and also the type of transactions being examined by him. The approach
of applying audit techniques may differ form auditor to auditor and form one
situation to another. Only by applying appropriate audit techniques, the auditor can
successfully complete the audit assignment and confidently award the audit report.
Audit evidence means any documents, piece of information, voucher, written or oral
statement or any procedure, which assist an auditor in forming his opinion. The
nature and type of audit evidence differs form situation to situation. In some
situation, the auditor may like to see all original documents connected with a
particular transaction and in a different situaiton he may satisfied with verbal
explanation given to him. And in other situation he may form his opinion by only
examining the procedures designed, enforced & followed. Evidence, therefore,
could be anything, which assists an auditor in the appraisal of financial activities,
transaction and statements and in the award of opinion on such financial statements.
Q.37: Vouching is the essence of Audit? Discuss.
Ans. Vouching is the Essence of Auditing:
1.
Accuracy of Books:
Vouching is the essential of auditing. It is concerned with checking entries
in the books of accounts with the help of vouching. The entry is recorded and posted on
the basis of voucher only.
2.
Location of Errors:
Vouchering is the essence of auditing. The comparing of figures in entries
and vouchers can help the auditor to located errors. The location and correction of errors
leads to reliable data. The vouching is thus the backbone of auditing for discovery of
errors.
3.
Detecting Frauds:
Vouching is an element of auditing. The minor fraud are detected by it.
The management can fix the responsibility of fraud. Vouching is the tool in the hands of
auditors for ensuring that the books of accounts are accurate.
4.
Correct Totals:
Vouchering is essential for checking totals and subtotals. The total
vouchers are tested. The deduction of discount are checked. The additions of taxes or
other charges are noted. The net amount is recorded in journal and ledgers. There is a
need of correct total for accuracy.
5.
Complete Posting:
In vouchering there is a demand for accurate recorded of audit. When
pasting is complete in all respect, it means the work of vouchering is under process. The
trial balance is extract from such record. It will facilitate audit work.
6.
Thorough Checking:
All vouchers may be compared with all entries in journal and posting into
the ledger. In small companies or where internal control system is weak through is highly
essential. Vouchering is the only way of thorough checking.
7.
Reliable Final Accounts:
There is also a need of reliable final account. It is only possible when
accounting record is correct. Thus vouching helps to produce true journal and ledger
books upon which we can draw true final account.
8.
Alternates are not Possible:
42
Lecture Notes
Sir M.Faseeh khan

Vouching is the essence of auditing. The alternates in figures after voucher
are not possible at all. All entries are ticked with the help of special symbol used for this
purpose. Thus vouching discourages the changes in figures for maintaining accuracy.
9.
Related Vouchers:
The related vouchers are acceptable for recording of business transactions.
The irrelevant or doubtful voucher can not be used for making the business record.
Vouchers accepts only real and genuine vouchers relating to nature of work.
10.
Relate to Business:
Vouching is necessary for auditing routine business activities the voucher
must be relevant to business transactions. The nature of business will determine the
relevance to business. The personal activities of owners or manager do not relate to the
business.
11.
Current Year:
The expenses and income, assets and liabilities of the current year must be
recorded in the current year. The adjustment for outstanding prepaid accrued and
unearned items must be made. The matching revenue and expenses of current year is
needed.
12.
No Omission:
There must be no omission of any business transaction. The omission of
transaction can not show true and fair view of business affairs. Vouching is useful tools in
the hands of auditor. The omission can be traced and corrections can be made for true
business position.
13.
Actual Transaction:
There is a demand of audit that actual transaction be recorded. The
fictitious transaction must be avoided. The auditor can use vouching technique to trace
actual transactions. The possibility of fictitious transaction is altogether eliminated
through vouching.
14.
Business Policies Followed:
Vouching is helpful to find that business policies have been followed. The
policies are broad guideline for doing the business. The business objectives are achieved
only when policies are implemented. Vouching is used to examining the policies adopted.
15.
True Financial Statement:
The auditor can see whether there is link between books of accounts and
financial statements. Therefore vouching is a means of tracing truth in financial statement
of business concern.
16.
Help to Form Opinion:
The auditor can form an opinion on the books of accounts and financial
statements. His opinion is based on accounting principle followed and completion of
legal formalities. Vouching tells us about accounting principles and legal obligation. Thus
vouching is the absence of auditing.
17.
Proper Authority:
Proper authority supposes every transaction. The signature of
management on every voucher shows proper authority.
Q.38: What points should be considered while examine the vouchers of a
company?
Vouching:
By vouching is meant the verification of the authority and authenticity of
transactions as recorded in the books of accounts. This is done by checking the books
with reference to the available documentary evidences, e.g. vouchers receipts, invoices,
43
Lecture Notes
Sir M.Faseeh khan

minutes, contracts etc. Vouching also includes routine checking. Vouching it the essence
of auditing. It is suggested that this part of the auditors duty should be conducted with
the greatest care and skill in as much as extensive frauds have more than often been
detected through vouching.
Voucher.
A voucher is any documentary evidence by which the accuracy of the entries
appearing in the books of account may be proved. Evidence may be primary evidence,
while other constitute collateral.
Examination of Vouchers.
The auditor should remember the following points while examining the vouchers
presented to him:1.
See that vouchers are filed serially and in order of entries in the books.
2.
Use a special tick or, to be more perfect rubber stamp to mark the voucher which
has once been inspected, thereby canceling the same, to prevent the presentation of the
same more than once.
3.
Where further enquiries and explanations are required, the particular voucher
should be specially marked and careful notes taken on the same.
4.
He should carefully examine the date, the amount and the name of his client on
the voucher, as also the account to which it is to be debited or credited.
5.
In the event of any voucher bearing the name of a partner, manager or some
official, he should enquire whether the transaction falls within the scope of the business.
6.
He should see that every voucher is passed by some responsible official, so as to
which it is debited or credited.
7.
A list of all missing vouchers and receipts should be prepared and satisfactory
explanations as to the reason of their loss should be demanded from some responsible
person.
8.
Duplicates of such missing voucher should be obtained and other available
evidence should be examined for complete assurance.
9.
Under exceptional circumstances, when the volume of work is so large as
to render detailed vouching impossible, the auditor may rely on test checks but
the extent of such reliance should be carefully determined by him with reference
to the system of internal control in operation.
Q.39: Explain the importance of an accurate valuation of inventory. List steps for
the verification of Inventory?
Normally inventories are relatively large in value in the current assets category an
error in the valuation of inventory may cause a material misstatement of financial
position. The correctness of the profit and loss account of a concern depends to a
great extent upon the correctness of the value of stock of goods in hand at the
close of the period. The auditor has, therefore, not only to verify he existence of
the stock in hand but he has also to see that it is valued according to certain
accepted principles of accountancy, which is consistently applied.
Steps for verification of Inventory
44
Lecture Notes
Sir M.Faseeh khan
While verifying the quantity of stock, he should find out whether the internal
check system in connection with stocktaking is efficient enough to prevent
any manipulation.
He should ask his client to produce the stock sheets and enquire into the
method of stocktaking. He should obtain a copy of the stocktaking
instructions issued to the clerks who took stock. Where practicable he should
attend and observe whether stocktaking instructions are being followed
properly.
If a stock book has been maintained, he should compare it with the purchases
and sales books in regard to quantity.
He should check the stock sheet provided to him duly authorized by
responsible person. If he fined any alteration in stock sheet he should insist
upon the initials against each alteration.
He should check the calculations, additions and castings.
He should check a few items in stocks sheet especially the bigger ones and
compare them with the stock records.e.g. bin cards or store ledger control
accounts.
He should see that the goods which have been sold but not delivered to the
buyer on the stocktaking day are not included in the stock in hand.
He should see that the goods, which have been purchased and he relative
invoices of which have been entered in the purchases book, are included in the
closing stock.
He should see that goods received from others to be sold on their behalf are
not included in stock-in-hand.
He should see that assets like furniture, tools etc, are not included in the stock
in hand.
Determine the polices of pricing observed for different classes of inventories
by the company and ensure that these are consistently followed.
Obtain a certificate from the managements as to facts regarding inventory
taking, pricing and conditions.
Q.40: State the necessary steps for the verification of: (a) Cash in hand (b) Cash in
bank.
Verification Steps for Cash on Hand
To verify cash on hand, the auditor should take the following steps:
1. He should review the internal control system operated by the organization.
2. He should obtain details of the funds limits.
3. Visit the client at year end to physically count the cash.
4. He should himself count the cash, irrespective of the size of cash funds.
5. He should count in the presence of cashier or imprest holder.
6. The custodian acknowledges he return of cash and signs to this effect on the
work sheet prepared by he auditor.
7. For I.O.Us, see that the recipients sign the chits. Ensue that a responsible
official approves the same.
8. Obtain balance confirmation certificate from management and trace with
cashbook and working papers prepared at the time of physical count.
45
Lecture Notes
Sir M.Faseeh khan

Verification Steps for Cash at Bank:
To verify the bank balance auditor should:
1. Appraise and evaluate the internal control system.
2. Obtain the list of banks operated by the company.
3. Obtain bank reconciliation and agree the balance of cashbook as at the date of
balance sheet with the balance shown in the bank statement. .
4. Scrutinises all outstanding items and note their subsequent clearance.
5. Determine deposits in transit from comparison of cash receipt book and
subsequent bank statement.
6. Obtain direct bank confirmations in support of the bank balances.
7.
Q. 41: How would you verify: (i) Accounts Receivable/ Debtors
(ii) Bad & Doubtful debts (iii) Investment
(i) Accounts Receivable/ Debtors:
Debtors form a large item among the assets of most companies and therefore, it is
necessary to pay due attentions in its verification. The general method to verify debtors
is: 1) Determine the system of Internal Control over sales and debtors in order to ensure
that.
a) Only bonafide sales bring debtors into being debtors into being.
b) All Sales are to approved customers. .
c) All such sales are recorded in correct accounting period.
d) Once recorded, the debtors are only eliminated by receipt of cash or on he authority
of responsible official.
e) Outstanding balances are regularly received and aged, and if necessary adequate
provision for bad debts is made.
2) Obtain schedule of debtors.
3) Trace the balances from ledger accounts to he schedule and vice versa.
4) Test casts of the schedule.
5) See all relevant documents on test basis for the certain and deposition of accounts,
6) See that debts due by directors a and other official of the company are shown
separately.
7) Ensure that the segregation of debts into secured and unsecured is properly made.
Check the nature of security and its value and ascertain that the debts is fully
secured. .
8) Pay special attention to any big items of sales passed at the close of the accounting
period and see that such sales are not shown as sales return subsequent to the date
of accounts.
9) Note subsequent clearance.
10) Enquire into credit balances.
11) Select number of debtors to be circularized under audit control and obtain direct
confirmation.
(ii) Bad & Doubtful Debts:
The auditor should consider the following matters in the verification of Bad &
doubtful debts.
1) The adequacy of the system of Internal Control relating to the approval of credit
and following up of poor payers.
2) The period of credit allowed and taken.
3) Whether balances have been settled by the date of audit.
46
Lecture Notes
Sir M.Faseeh khan

4) Whether an account is within the maximum credit approved.
5) For the purpose of review of collectibles of the accounts receivable, prepare as
schedule of each accounts balances still outstanding.
6) With the help of the above age schedule, he should examine every debtors
account and note down those balances that appears doubtful to him i.e.
a) Those accounts in which balances are constantly increasing.
b) Those that overdue for a very long period.
c) Those debtors whose bills have been dishonoured or are constantly being
renewed.
d) Those that are marked bank rupt, disappeared e.t.c
7) Comparison of ratio of debtors to sell should be made with those of previous
years and those achieved by other companies.
On the basis of above factors and discussion with the responsible official, the auditor
would form his opinion as to the adequacy of the provision for bad and doubtful debts.
(ii) Investment:
The following steps should be taken for the verification of investment:
1. Obtain schedule of investment as at the close of the accounting period, showing
full particular of the investment. e.g. , name of the investment, cost price, the
market price, face value, date on which investment acquired, rate of interest e.t.c
2. Make arrangement for the physical count along with physical count of cash.
3. The auditor should examine and count all the investment at one sitting. If the no.
of the investment is large and they cannot be inspected at one sitting, the
investments which have been checked must be identified so that they may not be
produced again at the time of next inspection.
4. If the bank holds investments, obtain a direct confirmation stating the object of
holding it, i.e. , for safe custody or as a cover against loan.
5. Compare the schedule with the investment ledger and the previous years schedule.
Vouch any movement in investment account,
(i) For purchases see brokers what note and note the turns of purchases. A
comparison of rates at which security are bought should be made with
stock exchange quotation.
(ii) For sales, see brokers sold note and rate should be verified with stock
exchange quotation.
6. Work out the interest and dividend received and receivable on this investment.
7. Note any amount of un called capital relating to shares held as investment and
give a footnote of it in the balance sheet.
Q.42: (a) What is an audit confirmation? What procedures should an auditor adopt
to obtain it?
(b) Distinguished between a positive confirmation and a negative
confirmation in the auditor examination of account receivable?
(a) According to the international the guideline 8, para 16. Confirmation consist of the
response to an inquiry to corroborate information contain in the accounting records.
There fore confirmation is the reply from third parties of an enquiry made by an audit in
order to confirm those information contained in the accounting records.
47
Lecture Notes
Sir M.Faseeh khan

Generally it is not easy to obtain confirmation from out side sources because out side
parties do not bother to reply auditor and also they are not under any obligation to supply
any information to the auditor.
How ever there are sum guiding points which helps the auditor in applying the said
techniques i.e., first of all the auditor should discuss the matter with the client and obtain
its consent, then few accounts should be selected for confirmation or ask for 100%
confirmation, as the case may be, after doing so letters should be typed by an auditor. It
will be good practice of confirmation request are mailed by an auditor and ask the
practices to send their statements to the auditors.
(b) TYPES OF CONFIRMATION:
Positive confirmation: Under this method written requests are sent to the customers to
confirm the balance outstanding in the companies with the balance as per their books and
particular date. The customers is asked to reply whether he agrees the balance or not. This
method is used where there is:
i)
ii)
iii)
Weak internal control

Suspicion of irregularities or items in dispute.
Numerous bookkeeping errors.
Negative Confirmation: Under this method customer is asked to communicate only if he

does not agree the balance. This method is mostly used where internal control is very
strong.
Q.43: Outline the procedure of verification of the following:
i) Fixed Assets
ii) Prepaid Assets
Fixed Assets:
The following steps should be taken for the verification of fixed assets:
1) Obtain a complete and classified schedule of fixed asset.
2) Trace opening balances from previous years audit file.
3) Verify any addition during the year with documentary evidence e.g.
invoices, contracts, correspondence etc.
4) Vouch disposal was duly authorized and in according with the
company policy.
5) See the companys policy regarding depreciation and amortization of
assets and ensure these policies are consistently followed.
6) Recalculate the amount of charges of depreciation.
7) Check cast and cross cast of depreciation schedule.
8) Trace closing balances into the ledger.
9) Ensure that adequate disclosure is made in according with the international
Accounting standard and companies ordinance 1984.
ii)
Prepaid Expenses:
The following steps should be taken in their verification of prepaid expenses:
1) Obtain the schedule of prepaid expenses.
2) Trace opening balance from last years file.
48
Lecture Notes
Sir M.Faseeh khan

3) Check adjustment made with reverent supports out of opening balance.
4) Enquire about those balance in which there is no movement during the year.
5) Vouch additions during the year and check subsequent clearance through relevant
supports.
6) Trace closing balance into ledger.
7) Compare the opening and closing schedule of prepaid expenses and note any
unusual addition during the year.
Q.44: List the points, which an auditor will see in the examination of: i)
Prospectus of a public limited company; &
ii) Minutes books of the Annual General Meeting of the shareholders.
(i) Prospectus of a public company:
The auditor should see the following points: (a) The amount of the share capital offered for the subscription, the different classed of
shares and the rights attached there to.
(b) The terms of issue.
(c) The amount of minimum subscription.
(d) Particulars of any contract entered into with vendor.
(e) Amount payable fo0r underwriting commission on shares and broker age.
(f) The amount of preliminary expenses.
(g) The qualification, remuneration and powers of directors and managing agents.
(h) The particulars of any interest of directors in the promotion of the company.
(i) The issue of redeemable share, if any.
(ii) Minutes Book:
The auditor should see the following points: (a) Adoption of annual accounts.
(b) Any resolution affecting accounts.
(c) Appointment and remuneration of directors, managing agents etc.
(d) Appointment and remuneration of auditor.
(e) Alteration and reduction of share capital.
(f) Alteration of the articles of association of the company
(g) Reconstruction of the company.
(h) Appropriation of profits by way of dividends, reserves, etc.
The auditor should examine the memorandum of Association of the company for the
following purposes: 1. To see weather the company is carrying on the work according to the Object Clause
of the Memorandum. If it is not the case, the transactions will be void and it will be the
duty of the auditor to bring that fact to the notice of the shareholders, otherwise he will be
held guilty.
2. Whether the issue of the share capital only those classes of shares have been issued as
are mentioned in the Memorandum of Association.
3. The Memorandum of Association is examined as it relates to the accounts of the
company.
49
Lecture Notes
Sir M.Faseeh khan

4. If authorized capital has been increased or if capital structure has been changed, he
should get a copy of the resolution and ensure that it is in accordance with the law.
The Auditor should examine the Articles of Association for the following purposes:
1) The Extent to which the provisions of Table A are to apply and the extent to which
they are expressly excluded.
2) Whether the shares have been issued according to the rules and regulations laid down
in the Articles.
3) Whether the minimum subscription had been applied for before the share was
allotted.
4) Ensure that full amount of share is payable on applications.
5) Whether any underwriting commission or brokerage was to be paid and, if so at what
rate.
6) Terms regarding forfeiture of shares transfer of shares, transmission of shares etc.
7) Rights attached to different classes of shares.
8) To know the borrowing power, appointment, remuneration, powers and duties etc. of
the managing agents, directors, etc.
9) Creation of reserves and disposal of profits.
10) To know about accounts and audit of the company.
11) Meeting and how they can be held.
12) Voting powers of shareholders,.
INTERNAL CONTROL
Q.45: What is internal Control? Clearly distinguish between Internal Check,
Internal Audit and Internal Control.
Internal Control
According to International
Auditing Guideline No. 6,
the system of internal
control is the plan of
organization and all the
methods and procedures
adopted by the management
of an entity to assist in
achieving
management
objectives of ensuring, as
far as practicable, the
orderly
and
efficient
conduct of its business,
including adherence to
management polices, the
safeguarding of assets, the
prevention and detection of
frauds and errors, the
Internal Check
Internal Check can be
defined as the checks on
the day to day transactions
which operate continuously
as part of the routine system
whereby he work of one
person
is
proved
independently, the objective
being the prevention or
early detection of errors and
frauds, it includes matter
such as the delegation and
allocation of authority and
he division of work the
method
of
recording
transactions, and the use of
independently as-certained
total against a large number
50
Internal Audit
Internal Audit can be
defined as, An independent
appraisal activity within an
organization for the review
of operations as a service to
management, it is a
managerial control which
functions by measuring and
evaluation the effectiveness
and other control.
Internal Audit acts as a
separate, higher level of
internal control to determine
the level whether the
underlying
accounting
system
and
internal
accounting controls there in
a re functioning effectively.
Lecture Notes
Sir M.Faseeh khan

accuracy and completeness of individual items can be
of the accounting records, proved .
and he timely preparation of
reliable
financial
information. The system of
internal control extends
beyond
those
matters,
which relate directly to the
functions of accounting
system.
Q.46: (a) Point out the essential features of a good systems of internal control.
(b) Discuss what interest does an auditor has in internal control. (OR)
For what purpose does an independent auditor review a client system
of Internal control.
Features of Internal Control:
Internal Control System varies according to the needs of the firm but here are some
important features, which occurs in most system.
1) Adequate and competent personnel:
Personnel must both understand and be competent to carry out the work entrusted to
them.
2) Separation of Duties:
The internal control is always effective if the following functions are separated:
i) Initiation and authorization of transaction.
ii) The custody of the assets in volved.
iii)The documentation and recording of the transactions.
3) Establishment of Responsibilities
Large organizations generally prepare manuals where internal control involves, with
clear definition of scope and areas of responsibilities. This helps in fixing he
responsibility in case of error or fraud is occurred.
4) Acknowledgement of all work done.
Persons performing operations should acknowledge their activities by means of
signatures, rubber stamps (normally using the words Checked a and found corrected.)
E.g. If invoice calculations have to be checked, the checker should initial each invoice.
5) Physical protection of property and records:
These includes safes, locked cash registers, secure premises etc. Their use is not only in
safeguarding assets physically but also in securing reliable records.
6) Proof Measures:
Proof measures include total accounts, trial balances, pre-list etc. For example, in
entering purchase invoice details into the books a pre-list on an adding machine will
ensure that all the invoices have been entered.
7) Review of Work done
Generally the employee is efficient in discharging their duties if their supervisor reviews
their work. Regular review of work of subordinate ensures efficiency and improvement
and control procedures become effective.
International Auditing Guideline No.3 states that, the auditor should again an
understanding of the accounting system and related internal control and should evaluate
51
Lecture Notes
Sir M.Faseeh khan

the operation of those internal controls upon which he wishes to rely in determining the
nature, timing and extent of other audit procedures.
Therefore system of internal control helps an auditor in determining extent of audit test
Where the auditor concludes that he can rely on certain internal control, his procedures
would normally be less extensive than would otherwise be required and may also differ
as to nature and timing.
In the light of above discussion evidence hat the auditor has great interest in internal
control. It helps him making audit programme, completing the audit in time and offering
his opinion on the financial statements.
However, it is important note that the existence of good internal control reduces to a great
extent the work of the auditor, but does not reduce his liabilities.
Q.47: (a) describes the methods required to review the internal Control.
(b) Under what circumstances auditor may decide not to rely on
particular Internal control.
The method in required in reviewing the system of internal control is to first of all obtain
a manual regarding the system of internal control and obtain a detail description of the
system in operation. The auditor should read the manual carefully and note down the
important points and weak areas.
After considering the manual, prepare a questionnaires which is to be filled up with the
replies from the staff within the entity to whom functions were allocated and were
responsible for the functional discharges of their duties. An experienced auditor applies
his intelligence to design and prepare the questionnaire.
After the replies are received, the questionnaire the information and also by the
departmental head. Complete and signed questionnaire become a support for the auditor
to complete his assignment and form an opinion on financial statement.
The auditor may decide not to rely on particular internal controls because, for example:
a) They are defective in design and therefore their operation would provide insufficient
assurance as to the accuracy and completeness of information produced by the
accounting systems, or
b) The efforts required to test effectiveness of internal would exceed the reduction of
efforts e.g. total time required to test and evaluate the existence and effectiveness of
internal control and then to apply the audit tests and procedure would require eight
days while the extensive procedures otherwise than reviewing the internal control
system would require 5 days.
Q.48: Suggest outline of internal control procedure of Purchases of a large
trading
Concern.
The internal Control Procedure to Purchases of a large trading concern is as following:
1)
Initiation Of Purchase:
All purchases should be based on purchase requisitions initiated by those having
appropriate authority.
2) Quotation and Tender:
52
Lecture Notes
Sir M.Faseeh khan

Before placing an order quotation or tender should be called and the Director
should make decision or other authorized person regarding the best economic
price and also appropriate quality of material.
3) Placing Order:
An order for the purchase should then be sanctioned asking the supplier to supply
goods within a stipulated time. All copies of purchase order should be
consecutively numbered. All unused purchase order should be kept under lock.
4) Receipt of Goods:
All goods received should be physically checked, counted or weighted and
compared with the particulars of Purchase order and then a document called
G.R.N (Goods Received Note) should be prepared and signed by the store keeper. A copy of G.R.N should be sent to accounts department.
5) Invoice:
The invoice should be internally checked before payment. Special attention
should be paid on the date of invoice, that it falls in the year under review,
quantity and description of goods should agree with purchase order and G.R.N,
the rate should be verified with the purchase order & calculation of the invoice
should be checked. After performing above work, rubber stamp should be affixed
and signed by the person who performs the above task.
6) Payment:
A responsible official, who should satisfy that step number 5 has been performed,
should pass the payment.
7) Purchase Book:
All Entries should be recorded in purchase book and stock register.
8) Filling:
All vouchers with all supporting documents should be serially numbered and
filed to facilitate its subsequent checking by Auditors.
Q.49: Suggest outline of Internal Control procedure of Sales of a large trading
concern.
The internal control procedure relating to sales of large trading concern is as follows:
1) Order Received
An attempt must be made to obtain orders in writing. In case of verbal orders
conformations in writing should be obtained. All orders should be entered in to
Order Received Book.
2) Execution of Orders:
The orders then be executed within the desired time and marked off from the
orders received book.
3) Invoice:
Desired number of the copies of invoices should be prepared. The responsible
Person should mark the rate at which goods are to be the invoiced.
4) Dispatch of Goods
Good should be compared with the invoices and then goods outward note should
be prepared.
5) Receipt of Money:
Proper follow-up procedure for the collection of money should be made and
ensure that sales return, price adjustments and special allowances are operated
under efficient system of internal check.
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6) Discount and Bad Debts:
The proper allocation of authority with regard to arrangements for special terms
and discounts and the writing off bad debts should be established.
7) Sales Book:
The entries should be made promptly in the Sales book and Stock Register.
8) Filling:
All sales invoices should be serially arranged and filed to facilitate their
subsequent checking by the auditor.
9) Access to Ledgers:
The person making the sales should have nothing to do with the office where sales
ledger are posted, nor with the cahsirs office where the cheques in payments of
customers s account is received.
Q.50: What are the objects of Internal Controls?
Ans. Internal Control:
The whole system of business control organized by the management to
carry on the business is called internal control. Internal audit internal check and other
such forms of control are also included in it.
Main Objects:
To achieve the following objects internal control systems is employed:
The errors and frauds of clerk may be prevented.
To prevent the goods and cash misappropriation by keeping check on the receipts and
delivery.
To keep an accurate record of all the business transaction.
Objects of Internal Control in Detail:
1.
Assets Protection:
The purpose of internal control is to protect the assets of business entity.
The assets are used in the custody of responsibility officers. So assets can not be
destroyed or misused.
2.
Accurate Record:
The purpose of internal control is to maintain accurately accounting
record. The business transactions are processed under generally accepted accounting
principal after authorized of competent person.
3.
Follow Policies:
The purpose of internal control is following policies of management. The
policies are guidelines for obtaining the business objectives. All employees try their best
to follow the rule of the game.
4.
Prevention of Error:
The purpose of internal control is to prevent errors. There may be
unintentional mistake due to overwork or carelessness. There is normal load work with
every person. Others check the work of one person.
5.
Prevention of Frauds:
The purpose of internal control is to prevent fraud. It is an intentional
misrepresentation of financial information by one or more individuals among
management, employees or third parties.
6.
Best Use of Resources:
The purpose of internal control is the best use of resources. There is need
of optimum combination of resources for maximizing profits. Internal control can point
out weakness, which can be removed.
7.
Nature of Audit Test:
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The purpose of Internal control is to determine nature and extent of audit
test when there is effective internal control there will be few audit test otherwise there is
need of through checking.
8.
Reliable Record:
The purpose of audit is to maintain reliable accounting record. The equal
distribution of work among the employees provides complete and reliable records, as it is
free from error and fraud.
9.
Reduces Work Load:
The purpose of internal control is the reduction of workload. The effective
internal control can be useful for auditors. They can check few items and remaining items
will be treated as checking by the auditor.
10.
Location of Errors:
The purpose of internal control is the location of errors. There are many
types of errors, which may be found in the accounting record. The Internal control
procedures are useful to locate the error in accounting.
11.
Detection of Fraud:
Detection of fraud is the purpose of internal control. The compliance
procedure and substantive procedures can be applied to detect the fraud. Basically it is
management responsibility.
Q. 51: What are the various types of Internal Control?
Ans. Types of Internal Control:
1.
Organization:
Organization is concerned with placement of workers on their jobs.
Authority and responsibility go together. The workers are responsible for their activities.
The head of department is responsible for looking after the worker of his own
department.
2.
Segregation of Duties:
the segregation of duties is necessary. There are many employees. All
aspects of a transactions are not complete by one person. The recording of transaction by
many persons can reduce the risk of errors and frauds. The division of duties can improve
the working of workers.
3.
Physical:
The physical internal control is desirable to safeguard assets. The access to
assets. The person may visit the warehouse or they may release the assets require lockers,
iron safe possession of keys and use of passes of warehouse.
4.
Approval:
All transaction in any business requires proper approval of responsible
person. The limit for approval may be fixed. The creditor recovery officer can approve
credit sales. The foreman can approve overtime wages. Purchase officer can approve the
purchase of goods.
5.
Accounting:
The accounting control is concerned with approval of transactions,
accurately processing and correctly recording. The control of total, preparation of trial
balance, reconciliations and control account is necessary. There is examination of
vouchers that every aspect is not overlooked so far this type of control is concerned.
6.
Management:
The top-level management can apply certain controls beyond the routine
working of business. The management control, include internal audit review of
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Sir M.Faseeh khan

management accounts comparing actual result with budgets, supervisory control, and
many other review procedure of business functions.
DISVISIBLE PROFIT
Q.53: Explain in detail the difficulties in determination of Divisible profit?
OR
What are the divisible profit? What should be the guiding principles in
determining the divisible profit?
Ans:
DISVISIBLE PROFIT AND DIVIDENDS.
Concept of Profit.
Authorities on the subject have defined the word Profit as under:
1.
Generally speaking, the profit of the business during a given period of time is the
excess over the expenditure for the period.
2.
It is the excess of assets over the liabilities and the capital between two period ?
Difficulties in the determination of Profit.
Following are the difficulties in the determination of profit:
1.
How to value the assets at the close of the period?
2.
How should the liabilities be valued?
3.
Whether the previous losses must be written off before arriving at the correct
amount of profit?
4.
Whether or not it is necessary that reserves, special provisions for depreciation
etc., be given a careful consideration?
5.
The question of capital expenditure being treated as revenue expenditure and vice
versa, is to be given a careful consideration.
6.
A careful consideration should be given to those expenses, the benefit of which
may be divided in the subsequent accounting period.
Effects of incorrect determination of profit.
1.
Understatement of profit: if profit are understated, they result in depriving the
present shareholders of their dividends to which they were entitled. This will
decline the value of shares in the market.
2.
Overstatement of profit: If profit are overstated, they result in an improper
payment of dividend an overstatement of the profits may result in increased
remuneration payable to managing agents, thereby causing a corresponding loss
to the company.
Dividends paid out through an overstatement of profit will mean payment out a
capital of the company and it may become insolvent.
Divisible Profit.
The term divisible profit means all profits that can be legally distributed to the
shareholders of the company.
General Rules
Rule (A):
The excess of current income over current expenditure is divisible as profits
provided that:
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Sir M.Faseeh khan

i)
ii)
iii)
iv)
Depreciation has been allowed for on floating assets and in some cases on fixed
assets but not necessarily so.
Sufficient reserves are retained to cover liabilities.
Revenue losses are made goods before profits are distributed but capital losses
need not necessarily be made good before revenue profits are distributed.
Depreciation of wasting assets of a company formed to work a wasting property,
e.g. mines etc., need not be made good in arriving at net profit for distribution.
Rule (B)
Capital profits are divisible if they are realized and a surplus remains after making
good any capital losses. It is, necessary, however, that:
i)
The Articles of the company shall not prohibit distribution
ii)
Capital losses be made goods before capital profits are divided, i.e., the capital
profits remain after the whole of the other assets have been valued.
Rule (C):
Capital expenditure which has been charged to revenue can be subsequently
recouped to Revenue Account out of Capital and thus become available for
distribution if a profit is shown. This also applies where a loss on Capital Account
has been debited to Revenue account, and the assets have subsequently
appreciated by the amount.
Rule (D):
Capital profits due to an actual appreciation of fixed assets based on a revaluation
made bonfire can be set against a debit balance on Profit and Loss Account
brought forward from previous period, thus permitting dividend to be paid out of
current profits.
Rule (E):
When goodwill and presumably, other assets have been written down excessively
out of profits, the excess may be credited back to profit and loss account
distributed as dividend. The above rules are largely dependent on particular
circumstances and subject to the Memorandum and Article of Association of the
company.
Factors for consideration by directors.
The directors should consider the following factors:
1.
The liquidity position of the company.
2.
Liquidity requirements in future for operative expenses and for expansions etc.
3.
The dividend payments made in the past and the rates approved by the directors.
4.
Other requirements against the payment of dividend.
5.
The industrial outlook and the competitive position in the industry.
6.
Overall economic condition of the country.
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Audit Report
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AUDIT REPORT
Q.54: Describe the contents of an audit report ?
According to international Auditing guidelines 13 the auditors report should
include the following basic elements:
Title:
An appropriate title such as Auditors Report should be used. This helps the
reader to identify the auditors report and to easily distinguish it from reports that
might be issued by others e.g by management.
Addressee:
The report should be appropriately addressed as required by the circumstances
of the engagment and local regulations.
Identification Of Financial Statements:

The report should identify the financial statements that have been audited. This
should include the name of the entity and the date and period covered by the
financial statements.
Reference To Auditing Standards Or Practice:

The report should indicate the auditing standards or practices followed is
conducting the audit. The reader needs this as an assurance that the audit has
been carried out in according with established standards or practices.
Opinion on the financial statements:

The report should clearly set forth the auditors opinion on the presentation in the
financial statements of the entitys financial position and the results of its
operations.
Signature:
The report should be signed in the name of the firm, the personal name of the
auditor, or both, as appropriate.
Auditors Address :
An appropriate title such as Auditors Report should be used. This helps the
reader to identify the auditors report and to easily distinguish it from reports that
might be issued by others e.g by management.
Date of the report:

The report should be dated. This informs the reader that the auditor considered
the effect on the financial statements and on his report of events or transaction
about which he become aware that occurred up to that date.
Q.55: What do you understand by clean audit report ?
Clean Audit Report:

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Sir M.Faseeh khan

Clean audit report is a report which is issued by an auditor when he is satisfied in
all material respects, such as whether:
a)
The financial information has been prepared using acceptable

accounting policies, which have been consistently applied;
The financial information complies with relevant regulations and
statutory requirements;
The view presented by the financial information as a whole consistent
with the auditors knowledge of the business of the entity; and
There is adequate disclosure of all material matters relevant to the
proper presentation of the financial information.
b)
c)
d)
The auditors report should express this satisfaction in a clear and affirmative
manner [IAG13].
Q.56:
What do you understand by qualified audit report ?
Qualified Report :
An auditor may not be able to express an unqualified opinion where any of the
following circumstances exist ;
a) There is a limitation on the scope of his work ;
b) There is a disagreement with management in respect to the financial
statements ; or
c) There is a significant uncertainty affecting the financial statements; the
resolution of which is dependent upon future events
Such a report is known as qualified audit report [IAG13].
Q.57:
Discuss the circumstances which warrants of a qualified
report to the shareholders of a company ?
Circumstances which warrants of a qualified report:

There are following circumstances giving rise to
qualification :
A)
Limitation on scope of audit:

Under this category, may be included circumstances where the
auditors is unable to obtain satisfactory evidence:
i)
ii)
iii)
iv)
B)
Of the existence or ownership of material assets;

Of the validity of payments;
Because of the timing of his appointment is such that he is unable
to observe the counting of physical inventories;
When there is material inadequacy in the clients accounting record.
Disagreement with the management:
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Sir M.Faseeh khan

Under the category, may be included circumstances where;
i)
ii)
iii)
C)
Faliure to comply with international accounting standards.

No provision for doubtful debts have been provided.
Contract loss not provided for in accordance with international
accounting standard 11.
Significant Uncertainty:
Under this category, may be included circumstances where there is:
i)
ii)
Major ligtigation
Unability to substantiate cash transactions.
Q.58:
Write a detail notes on the contents of statutary report
and the scope of statutary audit ?
According to Sce. 157 (1) of companies ordinance 1984, every company limited
by shres & limited shall, with in a period of not less then three months, nor mare
than six months, from the date at which the company is entitled to commence
business, hold a generally meeting of the members of the company, which shall
he called The Statutary Meeting.
The directors shall, at least twentyone days the date on which the meeting is
held, forward a report to every members [Sec 157 (2)].
Contents of statutary report:

1) The total number of shares allocated, distinguish shares allotted
otherwise than in cash and stating the consideration for which they
have been allotted;
2) The total amount of cash received by the company in respect of all the
shares allotted;
3) An abstract of the receipts of the company and of the payments made
there out up to a date within seven days of the date of the report and
particulars concerning the balance remaning in hand;
4) The name, addresses and occupations of the directors, chief
executive, secretary, auditors and legal advisors of the company and
the changes, if any, which have occurred since the date of the
incorporation;
5) The particulars of any contract the modification of which is to be
submitted to the meeting for its approval;
6) The extent to which underwriting contracts, if any, have been carried
out; [Sec 157 (3)]
Scope of statutary audit:

The statutory report shall, so far as it relates to the shares allotted by the
company, the cash received in respect of such shares and to the receipts and
payments of the company, be accompanied by a certificate of the auditors of the
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Sir M.Faseeh khan

company as to the correctness of such allotment, receipt of cash, receipts and
payments.
Q.59: What do you mean by audit report? What are the types of audit report?
OR
What is Qualified report, explain and give at least examples of
qualification
Ans:
AUDIT REPORT:
Auditors independent opinion regarding the accounts examined by him is called
audit report. After having completed his examination of books of accounts and financial
statements, the auditor submits his report to the client, in which he expresses his opinion
with regard to the financial statements he has examined Report writing is essentially a
matter of communication of conveying information and ideas to some one else. The
reporting auditor has message which he wishes to convey to those who will read his
report, the report should be written in such a way as best to convey that message, giving
due consideration to the difficulties of the information to be conveyed and to the
knowledge and abilities of the anticipated readers.
Information in the report:
An audit report will be concerned with one or more of three kinds of information;
1.
It may discus the nature of the examination on which it is based.
2.
It may explain the significance of the facts and figures discovered or verified
during the course of the examination.
3.
It may offer suggestions for improvement in internal central or operating
procedures.
Types of Reports:
During the course of examination the auditor has many opportunities to convey
his ideas to the management and after the examination of the books of account, he
is required to give his opinion thereon. Such communications of the auditor made
to the management may be included within the general field of reporting.
Following may be the types of reports:
1.
Informal Reports:
a)
Oral
b)
Written
2.
Formal Reports:
a)
Short form reports
i)
Clean clear or unqualified report:
ii)
Qualified reports:
b)
Long form Report:
Informal Report:
During the course of examination of the books of account, there may be certain
matters which auditor would like to bring to the notice of the management but
would prefer to exclude them from his formal report:
i)
Oral Reports:This report include conversations held between the auditors and
clients staff during the course of examination of the books of accounts. For example
clients staff may ask oral questions as to preferred method of accounting for given
transactions or operations, as to special problem. The oral answers to such questions are
extremely informal and a brief conversation on matters leads to a conclusion.
ii)
Written reports:
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Sir M.Faseeh khan

This report include communications in writing made to the management during
the course of examination and are not included in the formal audit report for example, an
auditor may like to bring to the attention of the management an item of inadequate
insurance coverage for valuable assets immediately rather than to wait until the time
comes for presenting his formal report.
Formal Reports:
They are made in writing after the examination of special investigation of the
books of account with the purpose to inform the readers on the extent and results of the
work done. A formal reports may have the following principal alternatives in reporting:
a)
An Unqualified Opinion (Clean or Clear)
b)
A Qualified opinion
c)
An adverse Opinion
d)
A Disclaimer of opinion.
Un Qualified, Clean or Clean Report:
This report may also be called unqualified audit reports. When the auditor has
completed the examination and he has found that the clients financial statements are
accordance with generally accepted principles of accounting applied on the basis
consistent with the preceding year and disclosing all material facts, be should issue the
report which will be called Clean Report on Unqualified Audit Report.
In other words, when the auditor is entirely satisfied with extent of his
examination and the fairness of the financial statements of the client, he issue clean or unqualified audit report.
ii)
Qualified Report:
It is a report in which qualification are recorded by auditor when there are
legitimate differences on the following points.
1.
Accepted principles of Accounting.
2
Disagreement with the client or his executive regarding a material point.
3.
In-ability to make certain verification as an independent auditor either because of:
a)
Limitation of his assignment by the client or
b)
Impracticability of verification due to inherent nature of circumstances.
Examples of Qualifications:
1.
In-adequate provision for depreciation on plant assets.
2.
Change in profit due to change in the basis of valuation of inventory.
3.
No provision made for contingent liability.
4.
Loan granted to a director of the company in contravention of rules.
---------------------------------------------------------------------------------------------------
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AUDIT REPORT
FORMAT
----------------------------------------------------------------------------------------------------
Q.60:
Unqualified Report
Auditors Report to the Member
We have audited the annexed balance sheet of ___________________________ as at
___________________ and the related profit and loss account, statement of changes in
equity ans cash flow statement together with the noted forming part thereof, for the year
then ended and we state that we have obtained all the information and explanations
which, to the best of our knowledge and belief, were necessary for the purposes of our
audit.
We conducted our audit in accordance with the auditing standards as applicable in
Pakistan. These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the above said statements are free of any material misstatement
In Our Opinion
In our opinion, proper books of accounts have been by the company as required by the
companies ordinance, 1984;
In our Opinion:
The balance sheet and profit and loss account together with the notes thereon have been
drawn up in conformity with the companies ordinance, 1984, and are in agreement with
the books of account and are future in accordance with accounting policies consistently
applied;
The expenditure incurred during the year was for the purpose of the company
The business conducted, investments made and the expenditure incurred during the year
were in accordance with the objects of the company;
In our opinion and to the best information and according to the explanations given to us,
the balance sheet, profit and loss account, statement of changes in equity and cash flow
statement together with the notes forming part thereof conform with approved accounting
standards as applicable in Pakistan, and give the information required by the companies
ordinance, 1984, in the manner so required and respectively give a true and fair view of
the state of the companys affairs as at December 31, 2000 and of the profit, changes in
equity and its cash flows for the year then ended; and
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In our opinion Zakat deductible source under the Zakat and Ushr Ordinance, 1980 (XVIII
of 1980), was deducted by the company and deposit inn the central Zakat Fund
established under section 7 of that Ordinance.
A.F. FERGUSON & CO.
Charter Accountants
Karachi: Sep. 20, 2010
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Sir M.Faseeh khan

Q.61:
Qualified Report
Auditors Report to the Member
We have audited the annexed balance sheet of
as at
and the related profit and loss
account, statement of changes in equity ans cash flow statement together with
the noted forming part thereof, for the year then ended and we state that we
have obtained all the information and explanations which, to the best of our
knowledge and belief, were necessary for the purposes of our audit.
We conducted our audit in accordance with the auditing standards as applicable
in Pakistan. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the above said statements are free of any
material misstatement.
1)
The liabilities for deferred taxation in respect of the year ended

works out Rs. 2,500,000 against which provision for
Rs. 1,500,000 has been made in these accounts. Had full provision in
respect of deferred tax liability for the year ended
has been made in the accounts, the profit available for
appropriation would have been less by Rs. 1,000,000.
2)
No depreciation has been provided in the accounts which is not ion

accordance with generally accepted accounting principles. The
provision for the year ended
should be
Rs
based on straingt line method of depreciation
using rates out lower than rate prescribed for tax depreciation under
the income tax ordianance, 1979. Accordingly, the fixed assets should
be reduce by accumulated depreciation of Rs
and
Rs
respectively.
3)
No provision has been made against book debts aggregating Rs

Which are doubtful of recovery for which full
provision, in our opinion, shoul be made.
4)
Long terms loan includes borrowing from an associated undertaking

amounting to Rs
as at as at
, which information should have been disclosed in the accounts as
required by companies ordinance, 1984.
5)
Except for the above qualifications for the which satisfactory

explanation was not obtained, we have obtained all the information and
explainations which to the best of our knowledge and brief were
necessary for the purpose of the audit.
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Sir M.Faseeh khan

Subject to the above reservations, in our opinion:
(a)
In our opinion, proper books of accounts have been by the company as

required by the companies ordinance, 1984;
(b) In our Opinion:

a. The balance sheet and profit and loss account together with
the notes thereon have been drawn up in conformity with the
companies ordinance, 1984, and are in agreement with the
books of account and are future in accordance with
accounting policies consistently applied;
b. The expenditure incurred during the year was for the purpose
of the company
c. The business conducted, investments made and the
expenditure incurred during the year were in accordance with
the objects of the company;
(c) In our opinion and to the best information and according to the
explanations given to us, the balance sheet, profit and loss account,
statement of changes in equity and cash flow statement together
with the notes forming part thereof conform with approved
accounting standards as applicable in Pakistan, and give the
information required by the companies ordinance, 1984, in the
manner so required and respectively give a true and fair view of the
state of the companys affairs as at December 31, 2000 and of the
profit, changes in equity and its cash flows for the year then ended;
and
(d) In our opinion Zakat deductible source under the Zakat and Ushr
Ordinance, 1980 (XVIII of 1980), was deducted by the company and
deposit inn the central Zakat Fund established under section 7 of
that Ordinance.
A.F. FERGUSON & CO.
Chattered Accountants
Karachi: Sep. 20, 2010
<<< The End >>>
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Federal Urdu Art and Science University

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Federal Urdu Art and science

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Define the scope of Auditing?

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1. It is an art of recording, classifying,

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1. It is an examination and reporting

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2. Auditing works beings, where the

3. Accountant is primarily responsible

4. He must be a Chartered Accountant

4. Accountant need not to be qualified

5. The extent of work is determined by

5. The management determines the

Q.No 4: Briefly state what is meant by preliminaries to a new audit?

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OBJECTI VES OF AUDIT

To provide a report by an auditor of his i) to detect errors and frauds

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What are the right, duties and liabilities of a company auditor?

Ans. RIGHTS, DUTIES & LIABILITIES OF AUDITOR:

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An auditor is required to certify accuracy of the contents of statutory Report as

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Articles of Association and Memorandum of Association.

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It cannot be altered except as

regards certain specified particulars & in

5) The can be altered by a special

Q.No 14: is the audit partnership compulsory? Write advantages of audit

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1. Indebt audit is possible in case of

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deliberately after the auditor has

2. The Final Audit can be computed

3. This audit is comparatively more

3. Errors can be rectified more quickly

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