1

Verification

Chapter

*
*

Verification
Verification

Advantages

*
*

of

Objects

of

Techniques

of

Verification
Verification
Verification

Verification
It means to prove the fact and confirmation about the
both sides of the balance sheet as the assets and
liabilities. The auditor not only checks the accuracy of the
accounts in the arithmetic way but also check the
existence of the actual items and their actual possession.
Advantages

of

Verification

1.
Use
of
Assets
The merit of the verification is to check that management
had used the assets of the business properly. Through
verification the auditor can find out if the management
has misused the assets. By the verification the efficiency
of the business is improve because it is used properly for
the
business
purpose
only.
2.
True
and
Fair
View
By the verification the auditor can show the facts of the
business. For the report the auditor has to depend upon
the verification technique as well as on the other
techniques.

3.
Protection
of
Lenders
For the lender also it is beneficial, because the auditor has
to check the ownership, existence and the possession and
valuation of the business assets. So the tender can rely
upon
this
report.
4.
Risk
for
Creditors
As the auditor accounts provide the true and fair view
about the affair of business so it is also the protection for
the creditors. The creditors are those who provide the
goods and services to the business. And for them the risk
of
loss
is
eliminated.
5.
Location
of
Assets
Through the verification the correct view about the assets
of the business can be find out. The auditor can visit the
assets personally. He can cheek that the assets are not
stolen or destroyed. So the auditor beings the fair view
about
the
assets.
6.
Performance
of
Management
The verification is also very useful for the owners, because
by the verification the auditor can check the performance
of the management. So the management can improve the
efficiency
of
his
work.
7.
Loan
Arranged
The verification is also helpful for the protection of the life
of the business. Through verification the assets are
physically examined and these assets are used to take the
loan from the financial institution, which save the life of
the
business.
8.
Manipulation
of
Accounts
The verification is also very useful to check that there is
no manipulation of accounts and the figure are not
altered. It is the moral check on the management, which
shows
the
true
position
of
the
business.

9.
Embezzlement
The merit of the verification is also that there is no
embezzlement. The management cannot misuse the
stocks or cash or any other asset and cannot use them for
their personal use. So, the fair view of the statement can
disclose.
10.
Recording
of
Assets
The assets are recorded in a proper way and manners. For
the writing of all the information of the sale, purchase and
depreciation and other records. The GAAP (general
accounting accepted principals) are used. The auditor has
to
check
that
the
rules
are
followed.
11.
Valuation
of
Assets
The verification is also helpful for the valuation of the
assets properly. The assets may be fixed or floating. So
the valuations of these are also made in different ways.
The auditor can check the valuation of the assets through
the
accounting
principals.
12.
Stability
of
Business
Another benefit of the verification is that it is also helpful
in the disclosure of the true position of the assets and
liabilities. In the balance sheet the fictitious assets and
liabilities are usually recorded. The business is considered
stable when the real assets are in excess over the real
liabilities. On the other hand it is not stable. So the
verification
discloses
the
facts.
13.
Liabilities
Valuation
The verification is also helpful for the owner by the
verification they can come to know about the business.
Which must be valued under the accounting rules.
14.
Proper
Disclosure
It is also useful for the public. The true valuation and the

position of the assets and liabilities are disclosed and the

public can come to know the proper position of the
business.
15.
Business
Resources
There are many powers, which have a vital role in the
running of the business as the man, machine material and
also money. In fact it is the deriving forces of the
business. So, the reasonable rate of return puts on them.
In this way also the verification is helpful to determine the
true value of profit.
Objects

of

Verification

The object of verification of assets is the satisfaction by

the auditor as to its existence, proper disclosure, proper
valuation and correct ownership on the balance sheet. The
following are the main objects of the verification.
1.
Certify
the
Ownership
The object of verification is to certify the ownership. The
document deeds, vouchers and agreements etc can obtain
the
real
ownership.
2.
Position
of
Assets
The audit by the verification of the assets in the business
the assets may be mortgaged or pledged for borrowing
money. The auditor has to check that the same has been
written in the balance sheet in the proper way.
3.
Existence
of
Assets
The object of the verification is to ascertain the existence
of the assets. The existence of assets is stated in the
proper but there may be the assets be sold, stolen or
destroyed. In this case the auditor has to check the assets
physically.
4.
Detect
Fraud
Another purpose of verification is to find out the frauds if

conducted. In come cases the assets may be stole or

misused. The auditor can verify the real position of assets.
The responsibilities of fraud are to be the management.
5.
Verify
Possesssion
The purpose of verification is to check the possession of
the assets. The assets should be safeguarded the assets
of the business is used for the business only. The
possessions of the assets are in the management.
6.
True
and
Fair
View
Another object of the verification is to determine the true
and fair view about the business financial statements.
After the verification it is confirmed that the financial
statements are according to the requirements and is fact.
7.
Depreciation
Plans
Another purpose of the verification is the examination of
the depreciation of assets of the business. The auditor has
to check that the proper state the depreciation is charge
on the assets according to the accounting principal. As the
life of each assets is different, so the depreciation is
charged
as
per
rule.
8.
Valuation
of
Assets
The object of the verification is also to check the assets
valuation. Which does the management value. The auditor
has to fine that the valuation is true and according to the
accounting
principal.
9.
Valuation
of
Liabilities
The management determines the valuations of the
liability. The object of verification is to check that the
valuation is the true and according to the accounting
principals.
10.
Evaluation
Methods
The object of the verification is to the check the methods

of evaluation. To evaluate the recorded items the

compliance and substantive test are applied. According to
the business requirements the auditor can rely upon
anyone
method
from
above.
11.
Recording
Methods
The object of the verification is to determine the method
of recording of the both sides of the balance sheet as the
assets and liabilities. The auditor has check that all types
of assets recorded separately and the depreciation is
deducted and the value of asset is charged according to
the
rule.
12.
Internal
Control
To evaluate the internal control is also the object of the
verification. The business management is efficient if the
internal control is effective. And if the internal control is
not effective the assets cannot be used properly.
13.
Arithmetic
Accuracy
Another object of the verification is to note down the
arithmetical accuracy of the balance sheet. All the
recording of the transactions, their posting of totals, subtotals, addition and depreciation must required the
calculation. The auditor has to require the accuracy of the
figure
work.
14.
Treatment
of
Items
The object of the verification is to check that the different
items have been treated correctly as the treatment of the
taxes
and
discount
etc.
15.
Current
Period
The object of verification is to check that the transactions
of the business are related to the current year for which
the audit work is being done.
Techniques

of

Verification

In

the

process

verification

following

techniques

are

used

1.
Physical
Existence
of
Assets
Verification techniques of an asset are to check the physical
existence of the asset. The auditor can count, measure and also
the
inspect
of
the
various
assets.
2.
Proper
Disclosure
It is also the techniques of the verification that the auditor has
satisfied himself that the management has disclosed all the
assets
and
the
liabilities
as
required
by
law.
3.
Ownership
of
Assets
Another technique of the verification is to determine the
ownership of business. The assets must be held in the name of
the
business.
4.
Assets
in
Possession
In the technique of the verification the auditor has to check the
possession of the assets, which are in the custody of the
management. It is in the possession of the cashier and the stock
in trade is in the fold of the store officer. The auditor has to check
the
custody
of
different
employees.
5.
Proper
Valuation
of
Assets
The technique is also to check the valuation of an asset. The
assets may be fixed or circulating. The auditor can check the
valuation of assets, which are determined by the management. In
this case the arithmetical accuracy can be examined.
6.
Valuation
of
Liabilities
Auditors should also satisfy themselves about the liabilities that
these are properly valued, which are shown on the balance sheet,
overstated or understated liabilities do not give a true picture
about
the
financial
position.
7.
Correct
Valuation
Auditor should pay special attention to this point, because profit
and loss account also depends upon the accuracy of valuation of
assets and liabilities. Valuation main object is that balance sheet
should show a true and correct view about the financial position
of
a
client
firm.
8.
Purchase
By
Proper
Authority
Another technique of the verification is that The Auditor satisfied
himself that there is a proper authorization for any acquisition or
disposal or any other form of movement for the assets and
liabilities which is stated in the articles and memorandum of
association.

9.
Business
Motive
Keeping in mind the business motive, the auditor has to be
satisfied himself that all the assets, which are purchased are for
the business motive only and not for the use of personal
requirements.
10.
Charge
Free
The technique of verification is the examination of charge on
assets. In case of lend the loan the assets are transfered in the
name of the lender the auditor has to check that the assets are
free.

Divisible Profit

Chapter

Divisible

Concept

Principles

Importance

of

*
*

Divisible

Profit
of

Profit

Divisible

Profit

Correct

Profit

of
Secret

How

Secret

Profit

Reserves
Reserves

is

Created

* Advantages of Secret Reserves

Introduction

of

Divisible

Profit

Those profits are term as the divisible profit, which is

legally distributed to the shareholders of a company as
dividend.

Factors

of

Divisible

Profit

The following are the main factors, which influence the

divisible
profit.

1.

Capital

Profit

The divisible profit ca be paid, if there is some capital

profit
or
gain.

2.

Capital

Loss

If some part of the capital is lost or there is capital loss

the dividend can be paid out of the current profits without
making
any
provisions
for
any
capital
loss.

3.

Depreciation

The depreciation is charged before the distribution of the

divisible
profit

4.
Under

Transfers

of

company

ordinance

Reserves
1984,

Before declaring dividends the directors have powers to

make such reserves as they may think proper.

Concept

of

Profit

Like the term "value" in economics accountants have used

the word. "Profit" for many years without assigning a
definite meaning to it. This state affairs has given rise to
much informed criticism of accountants and their work
added to this is the difficulty caused by the divergence
that exists in the concept of the profit between the
economist and an accountant for the purpose of
settlement of claims of parties to their shares in the profit
of
a
business.

Principles
1.

of
Articles

Divisible
of

Profit
Association

The articles of associations are the rules of the company

for managing the business activities. The articles
prescribe the rules for divisible profit. The directors are
entitled to distribute the profits under the rules. The
cannot
exceed
the
prescribed
limits.

2.

Companies

Ordinance

The companies ordinance 1984 states the rules and

regulation for distribution of the profits to the
shareholders. The dividend can be paid out of revenue
profit. The directors must follow the rules of companies
for distributing profits. They cannot violate the law.

3.

Accountancy

Principle

The accountancy principles must be followed for

calculating the divisible profits. The going concern,
consistency, conservation matching concepts is applied.
These principles must be applied other wise the reliable
result cannot be expected from the accounting books and
records.

4.

Legal

Decision

The legal decision must be kept in mind which calculating

the divisible profits. The court cases relating to auditing
must be followed if applicable to the conditions of
business. The auditor must know the decision announced
by
the
courts
from
time
to
time.

5.

Capital

Maintenance

The principles of capital maintenance must be applied.

The capital cannot be used to pay dividend. The revenue
profits can be utilized for payments of dividend. The
capital account must remain intact. It is illegal it the
directors pay dividend out of capital during any year.

6.

Shareholders

Approval

The divisible profits can be used to pay as dividend after

approval of shareholders. The annual general meeting is
called and the shareholders approve rate recommended
by directors. The rate of dividend proposed cannot be
increased
at
all.

7.

Capital

Profit

The capital profit can be used to pay dividend under

certain conditions. The capital profit should be realized.
All the assets should be revalued and even then there is
surplus. The articles of association allow the distribution
of capital profit as dividend. The depreciation on the
revalued assets has been recorded in the books of
accounts.

8.

Directors

Proposal

The directors have the right to propose the rate of

dividend under certain conditions. The capital profit
should be realized. All the assets should be revalued and
even then there is surplus. The articles of association
allow the distribution of capital profit as dividend. The
depreciation on the revalued assets has been recorded in
the
books
of
accounts.

9.

Capital

Loss

The dividend can be paid out of revenue profits even there

is capital loss. There is no need to adjust old capital loss
before payment of dividends. The current year revenue
profit can used to pay dividend. The capital profit must be
used to eliminate capital loss finest and then surplus can
be
used
to
pay
dividend.

10.

Depreciation

The dividend can be paid out revenue profits. The

depreciation on fixed assets must be charge to profit and
loss before declaring revenue profits. In case of
manufacturing company it is compulsory to charge
depreciation before declaration of profit or dividend.

11.

Past

Losses

The company may sustain a loss in one year. It can earn

profit in the next year. The company may adjust loss of
previous year. The remaining profit of current year can be
pay dividends. In 1918, Ammonia Soda Co. V Chamberlain
case the court decided that under the articles of

association the directors can pay dividend out of current

year
profit
with
out
adjustment
past
losses.

12.

Transfer

to

Reserve

The dividend can be paid of revenue profit remaining after

transfer to reserves. The articles of association empower
the directors to create at a certain rate. In case of banks
and financial institutions it is obligatory to set up
statutory
reserves.

13.

Secret

Reserves

Management creates the secret reserves by various

techniques. The financial institutions need such reserves
to develop the confidence of customers and owners. The
reserves can be created and used to pay dividend if
allowed under the articles. The misuse of such reserves
must
not
be
allowed.

14.

Undistributed

Profit

The directors for declaring dividend can use undistributed

profit or profit and loss appropriation balance. It is
revenue of the previous years. It is a right of the directors
to used such profit for payment of dividend at the end of
the
year.

15.

Profit

Prior

to

Incorporation

The profit prior to incorporation is a capital profit. It

cannot be used for payment of dividend. It is a profit
earned before the registration of the company. It can be
used to write off capital loss or issue of bonus share by

the

16.

company

management.

Asset

Revaluation

The management can revalue the assets. The surplus on

revaluation of assets can be started on liability side of
balance sheet. It can be used after realization. The assets
may
be
sold
and
profit
may
be
realized.

17.

Solvency

of

Company

The solvency of the business is very important than

payment of dividend. The management must determine
cash needs of the company. If cash is surplus than
business requirements then dividend then can be paid is
cash. In cash of storage of funds dividend should not be
paid
in
cash.

18.

Creditors

Protection

It is a principle of divisible profits that dividend must be

paid out of revenue profits. The correct calculation is
essential for all who depend upon business. The
overstatement can disturb one section of investors while
understatement can upset another group.
Importance
1.

of

Correct
True

Profit
Disclosure

The accounting principle requires true disclosure of profit. The

purpose of audit is also same. The auditor can form and opinion
of the financial statement when true disclosure is there. The true
disclosure
may
lead
to
show
correct
profits.
2.

Consistency

The importance of correct profit is felt to settle the dispute

among various sections of society. The owners need high profits.
The debentures holders demand low profits. The principle of
consistency can solve the problem by declaring true and correct
profit
instead
of
high
or
low
profits
for
the
year.
3.

Follow

Law

The calculation of correct profit is essential for the business. The

calculation of profit depends upon law. When the law is followed
there is true profit available for the shareholders. The
memorandum, articles of association and companies ordinance
must
be
followed
to
arrive
at
correct
profit.
4.

Protect

Creditors

The calculation of true profit is necessary for protection of

creditors. The true profit does not reduce the value of assets. The
creditors can collect their amount of loan and interest in goods
and
services.
5.

Correct

Valuation

The fair value of assets and liabilities is recorded. The correct

valuation is desirable for other parties who want to buy such
business. The admission of new partner is possible. The
amalgamation and merger can take place on the basis of correct
valuation
of
business
concern.
6.

Stable

Share

Prices

The benefit of correct profit is available in the shape of stable

prices. The investigators in shares can depend on the policies of
the company. The management can attract large funds for
expansion of business activities. The auditors must try to
calculate
true
profit
every
year.
7.

Manager

Remuneration

The benefit of correct profit is available in the shape of true

remuneration of management. The manager's commission may be
based on profits. The correct profit can pay correct commission to
the managers. They can review their progress through their
remuneration
received.

8.

No

Undue

Favour

The correct profit is useful for all sections of society. There is

conflicting interest of shareholders manager, creditors, lenders,
investigators and debenture holders. The correct profit favours
all
parties
according
to
their
interest
in
business.
9.

No

Dividend

Out

of

Anticipated

Profit

The anticipated profit cannot be used for dividends. The profit

means profit realized. The unrealized profits are excluded for
calculation of correct profit. The shareholders can be allowed
dividends
out
of
true
realized
profits
only.

Secret

Reserves

A secret reserve is a reserve that is created but not started in the

balance sheet. There are various ways secret reserves. The
banks, insurance companies and other financial institutions want
to win public confidence for their successful working. These
business concerns can create secret reserves. It is a technique to
show poor financial position to rivals and in case of need such
reserves are available to meet crisis. There are merits and
demerits of such reserves. The auditor can examine the existence
of such a situation. The amount may not be high. The director's
intention may be good. The auditor may not disclose such
reserves in the audit report. When the amount is high and
directors misuse such reserves the auditor must inform the
shareholders
through
his
report.

How
1.

Secret
Under

Reserves
Valuation

is
of

Created

Fixed

Assets

The management can create secret reserves by under valuation

of fixed assets. In fact the value of fixed assets is much higher
but it started at less value. The reserves of the same amount are
created. There reserves do not appear in balance sheet.
2.

Eliminating

Fixed

Assets

The management may decide to eliminate any fixed asset. In

preparing balance sheet such assets are not stated. The value
fixed assets can be used to create secret reserve of the same
amount. As the reserves are secret there is no need to show it.
3.

Under

Valuation

of

Current

Assets

The current assets may be recorded in balance sheet at less

value. In this way under valuation of current assets helps the
management to conceal profits and reserves from liabilities. The
management can be such reserves in times of financial needs.
4.

Excess

Provision

For

Bad

Debts

The excess provision for bad debts means decrease in the value
of debtors below the real value. Stating excess provision for bad
and doubtful debts creates the secret reserves. It is only possible
when
management
is
selling
goods
on
credit.
5.

Charging

Capital

Expenditure

to

Revenue

The management can play trick for creating secret reserves. The
capital expenditure can be treated as revenue. The profits will be
understated. The secret reserves are created to meet the demand
of
the
business
management.
6.

Overstating

Liabilities

The management can over state the value of any liability. This
action leads to creation of secret reserves. The profit and
reserves
are
reduced
by
equal
amount.
7.

Grouping

Dissimilar

Items

The different items appearing on liability side may be grouped.

The creditors, reserves and provisions may be stated under the
heading
Sunday
creditors
and
other
credit
balance.
8.

Contingent

Liabilities

The management can show contingent liability as actual liability

in order to create secret reserves. In fact contingent liability is
stated as footnote. But its inclusion in balance sheet met the
objective
of
the
management.
9.

Including

Fictitious

Liabilities

The management can show fictitious liabilities

liabilities. In this way the reserves and profits can be
for the same amount. The secret reserves are creating
obtain
certain
10.

Showing

Good

Will

At

as actual
eliminated
in order to
objectives.

Nominal

Value

The goods will have high value. It may state at nominal value. The
secret reserve is created equal to the difference between actual
value and nominal value. The directors can create secret in order
to meet business objectives.
Advantages
1.

of
Increase

Secret
Working

Reserves
Capital

The purpose of creating secret reserves may be increasing

working capital. The shortage of working capital may be lead to
failure of business. But use of secret reserves help to improve the
financial strength in order to make the business successful.
2.

Dividend

Equalization

It is a benefit of secret reserve that dividend can be paid at equal

rate. When there is sufficient profit there is no need to use secret
reserve. In case of low profit or loss the secret reserves can be
used to pay dividend. Thus fluctuating profit cannot affect
dividend
rate.
3.

Face

Competition

The benefit of secret reserves is available to the management. It

can face competition in the market. In order to eliminate or shrink
the size other business concern it can become loss leader. The
use of secret reserves is helpful to remain in market for long
period.
4.

Keep

Rivals

Away

The benefit of secret reserves is that management can keep rival

away. The financial position does not look attractive. The new
entrants are discouraged. They decide not to enter the field.
5.

Meet

Financial

Exists

The benefit of secret reserves is that management can meet

financial crisis in case of emergency. The loan facility may not be
available but such reserves are useful for meeting crisis.
6.

Win

Public

Confidence

The management is in a position to win the public confidence. The

equal rate of dividend provides confidence to the shareholders.
The
general
public
is
happy
over
the
reserves.
7.

Low

Profit

Years

The management can use secret reserves in low profit years. Due
to poor business activities there may be no profit. Such reserves
helps the management to follow the same policies of dividend.

Audit of Various Organization

Chapter

10

Audit

of

Various

Textile

Organization
Mill

* Sugar Mill

Textile

Mill

Auditor should give special attention to the following

points
while
auditing
the
Textile
Mill.

Textile mills is a concern where cloth is knit with the help

of
thread.

In any Textile Mill the cotton is the basic material. Trend is

prepared from cotton. Then the thread is rolled on cones.
These are used in knitting the clothes. In a textile mill
there are many departments as spinning department,
dying
department,
printing
department
and
etc.

Books

of

Accounts

The following are the main books, which are used to

textile
mills.
*
*
*
*

Sales
Sales
Petty
Salary

Stock

Purchase

Books
Return

Book

Cash

Book
Books
Register
Book

*
*

Purchase
Journey

Return
Day

Book

Special

Book
etc
Points

The following are the special points, which are used to

audit
in
the
textile
mills.

1.

Internal

Control

The auditor can examine the internal control of the mills.

If internal control is effective the auditor can easily
complete his work of accounted. In case of unaffected
control. There is difficulty in the completion of work of an
auditor.

2.

Raw

Material

The auditor can examine in different ways, the all material

that is purchased and consumed. The auditor can check
the ledger of the material to verify that the figures are
fact
or
not.

3.

Fixed

Assets

The auditor can also ask the management for the fixed
assets. The date is different for purchase the assets. The
purchase and sale of the assets is also possible. The
auditor has to find out the actual value of the assets.

4.

Expense

of

Purchase

The expenses, which are related to the purchases are

added in he material cost. So, the auditor has to check
that either these expense are related with the purchase or
the
nature
of
the
business
or
not.

5.

Closing

Stock

The auditor during his audit has an authority to ask for

the closing certificates so that the actual value of the
closing stock can be find out. He can also physically,
examine the store or the place where the stock is kept.

6.

Written

Down

Stock

The auditor has to check also that the stock is in its full
reality and the damaged material is also recorded at its
minimum
sale
price.

7.

Cash

The auditor should also check the cash in hand and in

office. The cashier is responsible for the shortage of cash
balance.

8.

Depreciation

The auditor has to check that the depreciation is correctly

charged. The depreciation is charged on the fixed assets
for the prescribe rate. The principle of consistency must
also
be
followed.

9.

Prepaid

Expense

The auditor has also be noted that the expense which are
paid in advance are properly recorded in the books of
accounts. The current year expense are actual expense
but remaining will be treated as the assets in the balance
sheet.

10.

Outstanding

Expense

The auditor can also check the outstanding expense. He

can also check that the management has treated the
outstanding expense properly and according to the rules
and
regulations.

11.

Balance

in

Bank

The auditor can also check the balance in bank. He can get
the statement from the bank. The bank reconciliation
statement can also be prepared to find errors and frauds.

12.

Valuation

of

Assets

The auditor can also check that the assets are to be

valued as per law. The management usually fixes the
valuation. If assets, which are circulating and price of
fixed assets are their cost price. The auditor in this way
can judge that either the management has determine the
cost
value
accordingly
by
or
not.

13.

Plant

and

Machinery

The auditor can also receive the schedule of plant and

machinery. The auditor has to check that either the plant
or machinery is in safe hands and used for the business
purpose only. The auditor has also to check the purchase

and

sale

procedure

of

the

14.

plant

and

machinery.

Verification

The auditor has an authority to check the goods

personally to verify that the goods which exits in the
balance sheet are also present in the store. Moreover he
can
also
verify
the
assets
personally.

15.

Vouching

The auditor can also vouch the transaction relating to the

receipt and payment of the cash. The term vouching is
usually concern with the comparison of the entries with
the
vouching.

16.

Cotton

Purchase

The auditor should take the proper care in checking the

inward documents. He should examine the purchase
quality and price and also that the purchases are
according
to
the
need.

17.

Sales

The auditor should also take care about the sale. The sale
may be of the thread yarn, or also fabrics. If the goods are
exporting, the auditor should also take care for it.

18.

Sales

Tax

The auditor has to check also that the company has

correctly recorded the amount of sale tax and that the

sale

tax

is

19.

paid

Export

properly.

Quota

The textile mills are provided the allocated export quota.

The auditor has to check that the company has operated
within
the
export
limits
or
not.

20.

Financial

Charges

In our country, the textile mills are usually, provided the

borrowing facilities from the bank. The auditor has to
check that either the interest or mark up etc is paid or
classified
properly
or
not.

21.

Provision

for

Tax

The auditor should also take care about provision of tax.

He can take help from the tax advisor of the company.

22.

Foreign

Exchange

Earning

The auditor has to check the utilization of foreign

exchange earning for business will be acquired into any
possible misuse will be prepared to the qualified.

23.

Excise

Duty

The payment was properly made and any aversion to be

qualified production schedule prepared in an explanatory
manner.

24.

Sale

of

Scrap

The auditor should see that the sale of the scrap is

properly
maintained
or
not.

25.

Wages

and

Salaries

The auditor has also to check that the wages or salaries

are properly paid to the workers or not and verify them.

Sugar

Mill

The auditor should keep in mind the following points while

auditing the accounts of a sugar mill or company.
Books

of

Accounts

The following are the main books of accounts, which are

used in the industries.

Day Book

Sales Book

Journal Ledger

Purchase Book

Sales Return

Purchase Return

Cash Book

Petty Cash

Stock Register

Form Register

Special

Points

1.
Internal
Control
The auditor has to check the internal control system of the
mill. If the internal control system is properly maintained
the auditor can easily fulfil his work. On the other hand he
has
to
work
greatly.
2.
Purchases
The auditor has to check the purchases, which are made
by the management. The sugarcane is the main product,
which is purchased for the industry. There is need to be
checked the auditor all the detail about the purchase to
know
the
nature
of
the
purchases
3.
Cash
Balance
The auditor can also examine the cash balance in the
office and can also note the usage of petty cash book.
4.
Sales
The auditor can also examine the sales of the mills from
the sales ledgers. Usually the main item of sales is the
sugar but the molasses candies chipboard and also the
mills
management
sells
the
wine.
5.
Vouching
The auditor can verify the entries with the actual
vouching. This is done to check the accuracy of the
accounts.
6.
Loans
The auditor has to check also either the management of
sugar mill has provided loan to the sugarcane suppliers.
And if so then the loan either is adjusted against the
payment to cultivators. The auditor has also an authority
to
check
the
vouchers
for
loan.
7.

Depreciation

The auditor can also vouch the depreciation on the fixed

assets. Their rates and also the way of calculating the
depreciation. The depreciation is charged the same rate
from
year
to
year.
8.
Carriages
of
Railway
The auditor can also examine the expense, which are to
paid or still payable to the railway company.
9.
Farming
Sometimes, the sugar mills may have their own
agriculture farms. In this case the auditor can check and
verify the income and expense of that farms.
10.
Prepaid
Expense
The auditor has to check also the expense, which is paid in
advance by the management. The auditor has to verify
that either these expenses are paid accordingly or not.
11.
Unpaid
Expense
The auditor has to check also if there are some unpaid
expenses. The auditor should be pointed out that the
adjusted entries are made and the amount can be verified
from
the
financial
statement.
12.
Accrued
Income
The auditor has to see if there is some accrued income. He
can vouch the income statement and balance sheet for
this
purpose.
13.
Unearned
Income
The auditor can also point out the income, which is not
earn still. For this purpose he can check the financial
statements. The account books are also helpful for this
purpose.
14.
Costing
The auditor can also check the totals, sub totals, cost and

carry forward of the balances. It is done to check that the

figures are fact and according to the documents.
15.
Research
and
Developments
Some sugar mills have better development and research
on the seeds and plantation of the sugarcane. The
scientist discovers new types of the seeds and also the
better varieties of sugar cane. The auditor checks and
verifies
that
expense
and
their
adjustment.
16.
Sales
of
By
Product
The molasses is the main by product of the sugar cane.
The auditor can check and verify the sale and its
treatment
in
the
accounts.
17.
Seasonal
Workers
A sugar mill operates on seasonal basis. Only in the
seasonal period workers are employed. The auditor can
check
the
record
for
attendance
etc.
18.
Fair
Price
Shop
In usually the sugar mills have the fair shops. In these
shops the sugar is sold at the subsides rate. The auditor
checks the sale of the year and stock at the end of the
year.
19.
Excise
Duty
First of all it will be checked where these sales were
understand. The auditor can evasion of excise duty on the
part
of
the
management
is
discovered.
20.
Exports
The auditor can point out if there are some exports. He
can be judged them by the valid letter of credit.

Investigation - Meanings, Kings, Objects, Types of Investigation

Chapter

14

Meaning

Kinds

Objects

Meaning

of
of
of

of

Investigation
Investigation
Investigation
Investigation

Investigation

Investigation implies an inquiry into the accounts and records of

a business concern. It is an examination of accounts and records
of an undertaking with some special purpose in view. The main
purpose of such inquiry is to ascertain the true financial position
of the business concern or its normal profit earning capacity or
the extent of fraud, if any or to inquire about the suspected
mismanagement etc. So, the investigation is a sort of special
audit with a particular job in view.

Auditor's Report

6 Chapter

15

Auditor's

Audit

Essentials

of

Report
Report

Audit

Report

Qualified

Report

Auditor's

Duties

Audit

Report

Auditor's report is the expert's opinion expressed by the

auditor as to the fairness of financial statements.
The audit report is the end product of every audit. It is the
medium through which an auditor expresses his opinion on the
financial statements. Audit report is an important part of audit
process since it summarize the results of the examination work
conducted by the auditor. The report shows the scope of the
work done and the responsibility assumed by the auditor
regarding the fairness or otherwise of hte financial statements.
The auditor draws appropriate conclusions by examining the
various statements and accounts, which he conveys through
the audit report. It is a formal communication by the auditor to
the shareholders throwing light on the state of affairs of the
company. Audit report is addressed to the members of the
company and is considered at the Annual General meeting of
the company. Audit reports should be so drafted that they
remain simple and intelligible to a common man. The audit
report should be explicit so as to provide greater information
and protection to the interest of shareholders and others.
7 Essentials
1.
An

auditor

of

report

must

Audit

have

appropriate

Report

title,

Title
such

as "Auditor's Report". It is helpful for the reader to identify the

auditor's report. It is easy to distinguish it from other reports.
The management can issue any report about the business
performance. The title o the report is essential.
2.
Addressee
The addressee may be shareholder or board of director of a
company. The auditor can audit financial statements of any
business unit as per agreement. The report should be
appropriately addressed as required by engagement letter and
legal requirements. The report is usually addresses to the
shareholders
or
the
board
of
directors.
3.
Identification
The audit report should identify the financial statement that
have audited. The financial statement may include trading
profit and loss accounts, balance sheet and statement of
changes in financial position and sources and application of
frauds statement. The report should include the name of the
entity. Moreover the data and period covered by the financial
statement
are
also
stated
in
it.
4.
Reference
to
Auditing
Standards
The audit report should indicate the auditing standard or
practice followed in conducting the audit. The international
auditing guidelines need assurance that the audit has been
conducted
as
per
set
standards.
5.
Opinion
The auditor's report should clearly state the auditor's opinion
on the presentation in the financial statement of the entity's
financial position and the result of its operations. The
statement give a true and fair view is an auditor's opinion. This
opinion is usually based on national standard or international
accounting
standards.
6.
Signature
The audit report should be signed in the name of the audit
firm, the personal name of the auditor or both as appropriate.

7.
Auditor's
Address
The address of auditor is stated in the audit report. The name
of city is stated in the report for information of the readers.
8.
Date
of
Report
The report should be dated. It informs the reader that the
auditor considered the effect on the financial statements and
in his report of events or transactions about which he become
aware the occurred up to that date.
8 Qualified

Report

A qualified opinion is given when the auditor fells the he

cannot issue an unqualified opinion. The effect of
disagreement or limitation on scope is not so material as to
require an advance opinion or a disclaimer of opinion. A
qualified opinion should be expressed as being except to the
effects of the matter to which the qualification relates.
1.
No
Proper
Books
A qualified repeat is issued when proper books of accounts
have not kept by the business concern. The law estates the
number of books to be maintained by the companies by the
companies. The failure to keep necessary books of accounts
induces the auditor to mention the fact in the reports.
2.
Informal
Statement
The law states the formal for financial statement. The fourth
schedule and fifth are given in the companies ordinance 1984.
The companies must prepare their statement according to
schedule otherwise the auditor can mention weakness in the
report.
3.
Disagreement
Between
Books
and
Statements
The financial statement figures must tally with figures
recorded in journal and ledgers. The different in figures is not
acceptable as it may lead to receive the shareholders. The
auditor can qualified his report that figures of books and

statement

are

different.

4.
Inconsistent
Accounting
Policies
The accounting policies must remain the same from year to
year. The changes in depreciation rate valuation of stock and
provision for bad debts can disturb the financial statements.
The auditor can state the inconsistency in accounting policies
toward
by
the
management.
5.
Ultra
Vires
Payments
The management can misuse the power of doing the business.
They may not followed articles of association or companies
ordinance 1984. The payment of dividend out of capital is an
example. The auditor must report to the shareholders about
the
misuse
of
powers.
6.
Expenditure
Incurred
The expenditure incurred during the year must be to the
purpose of business of company. The expenses incurred
objective may be state by the auditor in the report. The
management is responsible to these wrong payments.
7.
Business
Conducted
The business conducted investment made and the expenditure
incurred during the year may not meet the requirement of
memorandum of association, articles of association and the
companies ordinance. The auditor can inform the owners
about
the
violation
of
law.
8.
Scope
Limitations
The management may have valued closing stock prior to date
of appointment of auditors. There is a scope limitation as
auditor was absence at the time of stock valuatio. The auditor
can qualify his report as to the valuation of stack talking.
9.
In
Appropriate
Accounting
Method
The auditor may note that depreciation has not been charged
on building. The depreciated on plant and machinery may be

recorded at fewer rates. The difference in actual and recorded

expenses
may
be
stated
in
the
report.
10.
Inadequate
disclosure
The management may have entered in to an agreement for
issue of debentures for plant and expansion. The agreement
may restrict the right to pay dividend to shareholders for next
years. The auditor can disclose such agreement to the owners
of
the
company.
11.
Departure
from
Accounting
Practice
The qualified report is issued when an auditor is not satisfied
with the management policies. The company may not record
the provision for loss on long-term contract. The disagreement
with management can be recorded as adverse opinion in the
report
for
the
information.
12.
Breakdown
of
Accounting
System
The auditor can issue the qualified report when he is unable to
form an opinion about the financial statements. There may be
fire at computer center business office. The figures may be
estimated
so
auditor
can
disclaim
his
opinion.
13.
Failure
To
Prove
Case
Sales
The auditor can check the internal control system. The
company may be dealing on cash basis. All sales may be in
terms of cash. The poor internal control system may create
hurdle to verify cash sales. The auditor can submit qualified
report
with
out
opinion.
14.
Contingency
The auditor may qualify his report where there is contingency
(tax dispute court case) which is significant to affect the
financial statement of the company. The auditor has the right
to report the matter to the shareholders. The items must be
stated in the footnote as well as audit report.
15.

No

Zakat

Deduction

The Zakat may be deductible at sources under the Zakat and

usher ordinance 1980. The auditor may examine the relevant
law. He can not the weakness of the management for
deduction of Zakat. This weakness may be present in the audit
report.
16.
Incomplete
Information
The auditor may not obtain complete and full information and
explanation for the purpose of audit. The facts can be
presented to the owners that he is unable to collect necessary
information. He can submit qualified report in order to draw
attention. He can submit qualified report in order to draw
attention
of
owners.
17.
No
Access
to
Books
The auditor may be refused to have access to the books of
accounts and other relevant record. In this case the auditor is
unable to collect true information necessary for the purpose of
audit. The qualified report can be presented to the shareholder
due to non-availability of all or any book.
9 Auditor's

Duties

in

Respect

of

Statutory

Report

1.
Statutory
Report
The report, which is submitted by the directors in the first
general meeting of the shareholders is called statutory report.
The auditors should duly verify it. The auditor will take
following important steps before certifying the statutory
report.
2.
Study
of
Legal
Documents
The company Memorandum and Articles as also the
prospectus should be carefully studied and notes should be
made of items affecting terms of share capital issue, minimum
subscription, brokerage on shares or underwriting commission,
acquisition of assets and liabilities from vendors, mode of
satisfaction
of
purchase
consideration
etc.
3.

Checking

of

Shares

A complete and exhaustive audit should be made of share

capital and debentures issue, including checking of entries in
the Register of members and he Register of Debenture
holders.
4. Checking of Cash in Hand and Cash at Bank
In order to ascertain the correct balance of cash in hand and in
bank, it would be necessary to include in the checking the
revenue
receipts
and
payments
also.
5.
Verify
the
Capital
Receipts
and
Payments
A through vouching and checking of the cash book
transactions for the purpose of verifying the capital receipts
and
payments
will
be
necessary.
6.
Checking
of
Commission
Auditor should check all types of commission paid or unpaid
with the issue or sale of debentures to any one.
7.
Verify
the
Borrowing
Power
It should be seen that the limit, if any placed on the borrowing
powers
of
the
company
is
not
exceeded.
8.
Verify
the
Minimum
Subscription
The auditor should ascertain that the requirements of the law
as to minimum subscription have been duly complied with.
9.
Checking
of
Bio
Data
Auditor should also verify the names, addresses and
descriptions of the directors manages agents and auditors.
10.
Verify
the
Arrears
Auditor should verify the arrears due on calls from directors,
managers
and
agents
etc.
11.
Scrutiny
Auditor should examine very carefully all the items, which are
included
in
the
preliminary
expenses
account.

12.
Checking
of
Minutes
Director's minutes will have to be referred to in order to see
that the allotment of shares and debentures is properly done
and that all capital expenditure and loans borrowed are duly
sanctioned.
13.
Examine
the
Passbook
Auditor should examine the bank passbook and verify the
receipts
and
payment
with
it.
14.
Specimen
of
Auditor's
Certificate
If the undersigned being the auditor of the company, hereby
certify that so much of the report are relates to the shares
allotted by the company and the cash received in respect of
such shares and receipts and the payments of the company is
correct.

10 Audit Evidence
apter
*

16
Meaning

Audit

of

Audit

Evidence
Evidence

Importance

of

Audit

Evidence

Objectives

of

Audit

Evidence

Procedure

of

Audit

Evidence

* Key Points for Collecting Evidences

Meaning
of
Audit

Evidence

Any document, piece of information, voucher written or oral

statement of any procedure which assists an auditor in forming
his opinion in regard to the accuracy of data under audit.
The role of the auditor is that of an independent professional
critic who investigates, analyses and evaluates the information
underlying the statement as a means of reaching a conclusion as
to their fairness. Before and auditor can express an opinion on
financial statements, he must have sufficient evidence that

The items in the financial statements are supported by the balances in the ledger
accounts.

The balances in the ledger account summarize correctly the numerous debit and
credit entries.

These debit and credit entries in the accounts represent proper accounting
interpretation of all the transaction entered into be the business.

Importance

of

Audit

Evidence

While accepting the appointment, an auditor accepts to

discharge certain legal obligations and responsibilities. In
discharging his responsibility, the auditor should convince
himself, in the first instance, that the accounts, he is
reporting upon, are correct and the financial transaction
recorded are duly supported by the documentary evidence.
If he is not satisfied with the accuracy of the accounts or the
authenticity of evidence, there is no point in certifying the
accounts as correct. The examination of evidence is
therefore necessary, so that strength would be based for
independent, impartial and expressed opinion of the auditor.
On auditor's opinion, the Directors, Shareholders and other
initiative action.

Objectives

of

Audit

Evidence

The objects of verifying evidence are

To ensure that the errors, if any, in the data would be discovered by verifying the
evidences.

To facilitate the completion of audit programme scheduled and undertaken.

Procedure

of

Audit

Evidence

The following procedure is generally followed for the

verification of evidences

Verification of accounts of account balances shown in the financial statements or

the accounting reports

To ensure that the procedure installed for control purposes is properly followed

11 Looking at the evidence for the balance amount shown in the

ledger, the auditor has to work backwards in order to ensure
that all those transactions responsible to give rise to that
balance
is
also
duly
supported
with
evidences.
The auditor should also carefully ensure that procedures being
followed by the organization are effective and do not have any
room for leakages. In the area where the financial involvement
is heavy, the auditor should carefully review internal control
procedures and the implementation of procedures designed
and installed for an effective control of function.
12 Key

Points

for

Collecting

Evidences

1.
Physical
existence
of
the
assets
2.
Authoritative
documents
3.
Statement
by
third
parties
4.
Calculation
by
the
auditor
5.
Satisfactory
Internal
Control
6.
Subsidiary
or
detailed
records
7.
Subsequent
action
of
the
company
8.
Formal
statement
by
company's
officers
9. Interrelationship with in the data examined.

13 Auditor - Qualification, Appointment, Removal, Rights or Power,

Qualities of a professional Auditor
14
Chapter

13

Auditor

Qualification

of

an

Auditor

Appointment

of

an

Auditor

*
*

Removal
Rights

Or

of
Power

an
of

Auditor
an

Auditor

* Qualities of a Professional Auditor

Qualification of an Auditor (Section 226 (1) and (2)

Following persons are qualified to be appointed as auditor
of
a
company.
1. Practicing Chartered Accounts (Sec 226 (1)J)
A person shall not be qualified for appointment as auditor
of a company unless he is a chartered accountant within
the meaning of the chartered accountant act 1949.
A chartered accountant means a person who is the
member of the institute of chartered accountant of
Pakistan. He will be Deemed to be in practice. When
individually or in partnership with other chartered
accountants in practice he for consideration received or to
be
received.
Practice
of
Accountancy
He engages himself in the practice of accountancy.
Verification
He offers to perform or performs the services involving
the auditing or verifications of the financial transactions,
books of accounts or records or the preparation,
verification or certification of financial accounting and
related statement or holds himself out to the public as an
accountant.
Professional
Services
He renders the professional services or assistance in or

about matters of principal or detail relating to accounting

procedure to the recording, presentation or certification of
financial
facts
or
data.
Renders
the
Services
Renders the services as, in the opinion of the council are
or may be renders by a chartered accountant in practice.
2.
Certified
Auditor
(Sec
226
(2))
A part from practicing chartered accountants, a person
holding a certificate under the restricted auditor's
certificate rules, 1965 is also qualified to be appointed as
auditor of a company. Such certified auditors are subject
to the rules framed in this behalf by the central
Government.
The object of the provisions as to qualified is to ensure
that only persons of proven worth and standing and under
the discipline of a statutory body, are appointed as
auditor.

Disqualification

{Sec

226

(3)(4)(5)}

The following person cannot become the auditor of the

company according section 254.

A body corporate

An officer or employee of the company

A person who is the employment of an officer or employee of the company.

A person who is indebted to the company for an amount exceeding Rs. 1000 or
who has given any guarantee of any third person to the company for an amount
exceeding Rs. 1000.

The spouse of a director of the company.

A person who was a director other officer or employee of the company at any time
during the preceding three years.

A person who is a partner of a director, officer or employee of a company

15
According to Section 226(4) a person shall not be qualified for
appointment as auditor of any body corporate. Further if the
auditor already holds the appointment as auditor in the
specified number of companies as per Section {Section 224(113)}, he will be disqualified for further appointment as auditor
in any other company.
Appointment
Section 252 throws light upon the appointment of an auditor:
Appointment
of
First
Auditor
By
Directors
First
Auditor
The co-operative law authority can appoint the first auditor of a
company if the company in the general meeting does not appoint
the first auditor within 120 days of the date of incorporation of a
company.
Casual
Vacancy
The board of directors is empowered to fill any casual vacancy in
the office of an auditor except one, which is caused by prior
resignation.
Appointment
By
Shareholders
In case the board of directors fails to appoint the auditor, the
company can appoint the first auditor within 120 days of the date
incorporation of the company.

16 Removal

of

an

Auditor

According to Section 224(3)of the Companies Act, any auditor

may be removed from the office before the expiry of his term
but it can be done only by the company in it general meeting
and with the previous approval of the control Government.
The auditor may be removed in the following cases.
1.
Removal
of
First
Auditor
The first auditor can be removed by the members in the
general meeting of the company. It is immaterial whether the
auditor has completed his term of appointment or not. Another
person can be appointed in place of first auditor in the general
meeting. Notice of nomination of such other person to be
appointed, as auditor must be given at least 14 days prior to
the
general
meeting.

2.
Removal
of
Other
Auditor
Other than the member in the general meeting of the
company prior approval of the central Government to remove
can remove the first auditor the auditor must be obtained in
that behalf.
17 Rights
Following

Or
are

the

Power

of

important

rights

an
of

Auditor
the

auditor

Access
To
Books
According to Section 227(1) the auditor of a company has a
right of access, at all items to the books and accounts and
voucher of the company, whether kept at the head office of
the right of access to books etc is an absolute right and is not
subject to any restriction exception or qualification. This
means that the auditor can examine the books vouchers etc at
any
time
during
normal
working
hours.
Right
of
Inspection
It is a right of the auditor that he can inspect the record of the
company at any time. He can visit without any notice and
verify
the
cash
or
any
document.
Right
of
Information
According to Section 227(1) the auditor has the right to obtain
any information and explanation from the officers or directors
of the company as he may think necessary for the
performance of his duties as an auditor. If any information or
explanation is refused on the ground that it is not necessary
for the performance of his duties as auditor. He may report to
the
members
accordingly.
Access
to
Branches
According to Section 228(2) the auditor has aright to visit the
branch office of the company if any, if a duly qualified auditor
has not audited the accounts of company branch and if he
deems it necessary to do so for the performance of his duties

as

auditor.

Receiving
Notices
According to Section 231 a company auditor has a right to
receive all notices and other communications relating to any
general meeting of the company, which any member of the
company
is
either
to
have
sent
to
him.
Right
of
Attending
the
Meeting
According to Section 231 the auditor has a right to attend any
general meeting and to be heard there at any part of the
business, which concerns him as auditor, however, the right to
attend a general meeting and to speak there at in not
mandatory.
Report
to
Member
According to Section 227(2) the auditor has a right to make a
report to the members on the account examined by him and to
state whether the said account give the information required
by the companies act in the manner which is required.
Sign
Audit
Report
According to Section 229, the auditor has a right to sign the
auditor's report or authenticate any other document of the
company.
Seek
Legal
and
Technical
Advice
The auditor has a right to seek opinions of experts in different
fields whenever he feels it necessary as he is not expert in all
the
areas.
Receive
Remuneration
According to Section 224(8) the auditor has a right to receive
remuneration for auditing the accounts of the company after
he has completed the work of audit even if he is dismissed in
the middle he has a right to get full remuneration of the year.
Speak

The auditor has a right that he can speak in the annual general
meeting for the explanation of some matters, which are
related,
with
the
accounts
of
business.
Present
in
Meeting
For the safeguard of his right the auditor has a right to remain
present in the meetings of the company. Sometimes the
business accounts may not be presented before the
shareholders for the approval. In this time the auditor can
protect
himself.
Opinion
The auditor has also a right to consult the experts for some
matters. In order to clear the doubt he may get the help of the
technical services. So the auditor has also a right of seek the
opinion.
Correction
The auditor has also a right of correction. He can make
correction in the written or spoken matters. Even that he can
make a revised statement if he founds any written mistake in
it.
Representation
The auditor has also a right to defend himself if he is asked to
leave the office in the meeting. So he can make the
representation in meeting. He has a right to remain in business
for
the
full
tenure.
Important
Note
It is clear that the right of an auditor cannot be limited either
by the articles of association or by the resolution of the
members
Essential
Following
1.

are

Qualities

of

the

qualities

essential

Professionally

an
of

Auditor
an

auditor:

Competent

It is the basic quality of an auditor. He must have a complete and

thorough knowledge of the accountancy. To understand the
accounting details he can apply his knowledge and skill. It is only
possible if he has a sound background in accountancy and he is
professionally
competent.
2.

Honest

This is the personal quality of an auditor. He should have the high

moral standard. It is his duty to report on the fact basis. The
auditor must be honest and sincere with his profession. He is
responsible not to sign any paper which is no correct under his
observation.
3.

Up

to

Date

Knowledge

An auditor's knowledge of auditing must be up to date. He must

know the techniques of auditing. He must have the knowledge of
other
subjects
relating
auditing.
4.

Knowledge

of

Business/Mercantile

Law

It is the professional quality of an auditor to aware of

mercantile law, he has a complete knowledge of Contract
Sales of Good Act, Agency, Negotiable instruments
Partnership
Act

the
Act,
Act,
etc.

5.

Law

Knowledge

of

Taxation

It is also a professional quality of an auditor. He is aware of

income tax ordinance 1979, sales tax and excise act and wealth
tax etc this is helpful in checking the correct return of income etc.
6.

Intelligent

It is also important quality of an auditor that he should be

intelligent.
7.

Qualification

For a professional auditor it is necessary that he should be

charted accountant. According the company's ordinance 1984 it is

essential

qualification

for

8.

auditor.
Tactful

It is also the personal quality of an auditor. Technical information

is required to comment and criticize the policies of management.
In
case
of
missing
can
collect
it
from
the
client.
9.

Maintain

Secrecy

It is another basis personal quality of an auditor. In the business

world there is a keen competition and if the auditor does not care
of the secrecy of the business, then the client of the auditor has
to face a lot of difficulties. So, the auditor must maintain the cent
percent
secrecy
among
the
clients.
10.

Patience

It is also the personal quality of auditor when any document is

received by him he cannot make hurry to sign it or express or
implied promise to provide the proof later on. In spite of it he
personality check the records to know the true views.
11.

Critical

Attitude

The attitude of an auditor must be positive. By this quality he can

get the desirable results due to favourable thinking. If he is
confused about some matters he can go into the details to clear
it.
12.

Bold

and

Courageous

Auditor should be bold and courageous person. Any authority

should not influence him. He should possess the courage to face
the difference of opinion between him and client on any issue.
13.

Courteous

It is an important quality, which the auditor should possess. His

attitude towards the staff of client should be very humble and
polite. He should also stress on his own staff to be courteous with
the
client.

14.

Budget

Preparation

The auditor has a quality of preparing the budget. According to

the facts and figures of the Previous year, the estimates are
established for the next year. The auditor can check that these
budgets
are
according
to
their
facts
and
corrects.
Personal

Qualities

15.

Independence

Independence is the personal quality of an auditor. This quality is

desirable for independent opinion on business activities. He
cannot be influence directly or indirectly by other people. An
auditor must be independent at the time of programming
investigation and reporting. He cannot change his programme
due
to
management
interference.
16.

Vigilance

This is also the quality of an auditor. By this quality the auditor

can discover the errors arid frauds. The auditor can also watch
and check that if accounting staff has made any fraud or error.
Because he has to be alert minded so that he cannot avoid errors
and
work
well.
17.

Judgement

An auditor must have the qualities of judgement. Judgement is

involved in selecting depreciation, provision for bad debts,
inventory valuation. The auditor can apply professional
knowledge; experience and ethics to make decisions, which have
no,
prescribe
areas.
18.

Common

Sense

An auditor must have common sense. He can make difference

between essential and non-essential information. An item, which
can influence the decision of other people, is considered as
material. The auditor can use common sense to declare it as
important
rather
then
application
of
principles.
19.

Prudence

Prudence is the personal quality of an auditor he can be asked to

give advise on financial matters. He can be allowed to suggest
improvement in accounting methods and techniques. There is a
need to use prudence for guiding the businessman when he is
asked
to
do
so.
20.

Practical

An auditor must have practical training. He can seek training in

the field of finance, management and business organization. An
audit staff is able to pass through a comprehensive training. This
practical
training
is
part
of
this
professional
life.
21.

Self

Control

An auditor must have qualities of self-control. The balance work

shows regular progress on the part of audit. There is no over
work or less work every day. A discipline is created in every work.
The quality of audit work is improved due to discipline.
22.

Initiative

An auditor must have the quality of initiative. He can start and

complete an audit work without any help. The auditor must have
experience, qualification and courage to complete the auditor
work. He has courage to deal with audit work even in difficult
situations.
23.

Leadership

An auditor must have leadership. He is the working under his

leadership. He must have communication ability. He can motivate
and control the audit staff. As a team leader he can guide the
auditor
through
practical-demonstration.
24.

General

Knowledge

It is also a professional quality of an auditor. He is aware of the

economic and political conditions. He is also aware of the latest
knowledge,
which
affects
the
business
concern.
25.

Electronic

Data

Processing

The auditor should also aware of the use of computer in the

business for getting the information. He is must also trained in
handling the data through the computers

18 Internal Audit & Internal Check

Chapter

12

Internal

Audit

&

Internal

Internal

Check
Audit

Objectives

of

Internal

Audit

Essentials

of

Internal

Audit

Functions

of

Internal

Audit

Advantages

Internal

Audit

of

* Limitations of Internal Audit

19 Internal

Audit

Internal audit is an evaluation and analysis of the business

operation conducted by the internal audit staff. (who are
employee of the business). It is the part of over all system of
internal
control
established
in
an
organization.

Internal audit is the independent appraisal of activity with in

an organization for the review of accounting, financial and
other business practices as protective and constructive arms
of management. It is a type of control which functions by
measuring and evaluating the effectiveness of other type of
controls.

Professor

Walter

B.

Meigs

define

internal

audit

Internal auditing consist of a continuous, critical review of

financial and operating activities by a staff of auditors
functioning
as
full
time
salaried
employees.

Objectives
1.

of

Internal
Proper

Control
Control

The purpose of internal control is to keep proper control over

business activities. When there is proper control there is
maximum efficiency. The internal control can determine the
degree
of
control
over
work.

2.

Accounting

System

The purpose of internal audit is to evaluate the accounting

system. It is concerned with checking proper authority for
transactions like purchase, retirement and disposal of fixed
assets. The voucher can be compared with entries on order to
determine
that
figures
are
facts.

3.

Help

Management

The purpose of internal audit is to help the management.

Internal auditor can point out the weaknesses. The internal
audit can be used as a tool to correct the situation. The
management
functions
can
be
performed
properly.

4.

Working

Review

The purpose of internal audit is to review the working of

business. The working of current year can be reviewed in detail
just the successful area of working. There is a need to locate
the weak points. The corrective measures can be taken for
proper
working.

5.

Asset

Protection

The purpose of internal audit is to protect the assets. The

proper record of assets must be there. Internal auditor can
examine the valuation, verification and possession. The
purchase and sale of assets must be made under properly
authority.

6.

Internal

Check

The purpose of internal audit is to evaluate the internal check

system. There is division of duties among the emp is to loyees.
When all staff member are working properly it means there is
effective internal check system. The work of an auditor is
reduced. He can apply test checks to complete audit duty.

7.

Fair

Statements

The purpose of internal audit is to detect the error in the

accounting records. The work of internal audit can help the
management to see that accounting record is in order.

8.

Check

Error

The purpose of internal audit is to detect the errors in the

accounting records. The work of internal auditor goes side by

side there fore there are minimum chances of errors. The
accounting staff can rectify mistake to prepare accounts at the
end of year in order to help the external auditor.

9.

Detect

Fraud

The purpose of internal audit is to detect frauds in the books of

accounting. As the work of accounting staff is over the internal
audit is started. Accounting staff remains alert because there
is no time gap between recording and checking. Thus
detection
of
fraud
is
possible
with
it.

10.

Determine

Liability

The purpose of internal audit is to determine liabilities of

employees. The duties are divided among the staff. It is easy
to note the negligence on the part of employees. The internal
audit can pin point the person responsible for carelessness.

11.

Help

in

Independent

Audit

The purpose of internal audit is to help an independent audit.

The external auditor can rely on internal auditor and there is
no need of cent percent checking. In this way there is saving of
time
and
money
due
to
internal
audit.

12.

Performance

Appraisal

The purpose of internal audit is to check the performance

appraisal. The management must achieve the targets fixed in
budgets and plans. The internal audit is a tool to evaluate the
working
of
each
management
function.

13.
The purpose
improvement
suggest the
Anyhow the
implement

Provide

Suggestions

of internal audit is to provide suggestions for

of business activities. The internal audit staff can
ways and means to remove the difficulties.
audit cannot compel the management to
suggestions.

14.

New

Ideas

The purpose of internal audit is to seek new ideas relating to

procedures, marketing, financing and other business matters.
The internal audit staff can provide new ideas about various
business matters. The viable ideas can be put in to practice for
the
benefit
of
business.

15.

Use

of

Resources

The purpose of internal audit is to determine the proper use of

resources. The misuse of resources can increase the cost of
doing the business. The proper use of resources means there is
efficiency
on
the
part
of
management.

16.

Accounting

Policies

The purpose of internal audit is to examine the accounting

policies. The understanding of accounting system and
procedure is helpful to device the effective audit plans
procedures. The internal auditor may find any weakness in the
internal control. He can comment on the accounting policies.

17.

Special

Investigation

The purpose of internal audit may be to conduct special

investigation about any business matter. Internal audit can be
used as a tool to note the effectiveness of management
function.
Essentials
1.

of

Internal

Audit
Planning

Planning is an essential feature of internal audit. The auditor can

plan to check the accounts system. The plan may relate to
accounting functions like purchase, sales, income, expenses and
shares. The planning includes degree of risk and extent of audit.
It
also
states
the
nature
of
audit
work.
2.

Controlling

Controlling is an essential feature of internal audit. The auditor

examine the operation of accounting system. He can control audit
work through audit programme. The whole work is distributed
among
audit
staff.
3.

Recording

Recording is an essential feature of internal audit. The auditor

can record the facts and figures in order to express his views in
the business activities. The auditor notebook and audit working
papers
are
used
to
record
the
information.
4.

Independence

Independence is essential element of internal audit. An employee

of the company does the work of internal audit. Management
must not influence him. He must be free in developing audit
programme,
audit
investigation
and
audit
reporting.
5.

Staffing

Staffing is an essential part of internal audit. The trained staff is

needed to conduct internal audit. The reasonable number of
persons can perform the work of examination. The inadequate
and untrained staff cannot serve the purpose of checking
efficiency
of
managers.

6.

Training

The internal audit staff must be trained. In order to achieve

better results there is a need of training in audit work. Proper
arrangements should be made to provide training to internal
audit
staff.
7.

Relationship

The internal audit staff must have friendly relations with

management, external audit staff and consultants. There is a
need of complete harmony among various groups of people.
8.

Evidence

Evidence is essential part of internal audit. The evidence must be

reliable, relevant and sufficient. The business documents are
sources of entries in accounting books and records. The reliable
can be seen through signature of manager. The relevant
documents
show
the
name
of
concern.
9.

Due

Care

Due care is an essential part of internal audit. The auditor must

use skill, care and judgement. He should have technical
knowledge,
honesty
and
integrity.
10.

Reporting

Reporting is an essential part of internal audit. The auditor can

inform the management through audit report. It may be long or
short report. The finding of the auditor is put before the
management. There is a need to act upon the advice of the
internal
auditor
for
better
result.

Functions

of

Internal

Audit

The function of internal audit is concerned with analysis of

internal check. The internal auditor can look in to the duties of
each employee. All employees are provided jobs on the basis of
their
abilities.
2.

Application

of

legal

Requirements

The function of internal audit is the examining of the application

of legal requirements. The accounts are prepared under certain
legal framework. The Company's Ordinance 1984, the Stock
Exchange and Security Rules 1971, the Banking Companies
Ordinance 1962, The Insurance Act 1938. The Modaraba
Ordinance 1980 and similar other laws are followed for preparing
finance
statement.
3.

Verification

of

Accuracy

Verification of accuracy is a function of internal audit. The

accuracy of accounting books and records can be verified with the
help of auditing techniques. The audit techniques include
inspection, observation, inquiry, confirmation, computation and
review. An auditor can check the accuracy through these
techniques.
4.

Confirmation

of

Liability

Confirmation of liability is a function of internal audit. The

internal auditor can determine the work done by every person.
The careless or negligence on the part of worker is noted. The
concerned person is given a chance to explain his position. If the
reason
is
not
justified,
the
liability
is
confirmed.
5.

Examination

of

Assets

Protection

The function of internal audit is to examine the assets protection.

The proper record is to be maintained. The possession must be in
the hands of senior officer. The assets are used for business only.
There is proper purchase and disposal of these assets. The
internal auditor can check that assets are protected.

6.

Detection

of

Fraud

Detection of fraud is a function of internal audit. The work of

accounting and auditing go side by side. When accounting work is
over it is checking by audit staff. There is not time gap so fraud is
detection at an early date. The plan of fraud requires time to
think. When time is not allowed it is detected on the spot.
7.

Ascertain

Proper

Authority

The function of internal audit is to ascertain the proper authority.

The shareholders, partners and single owners have full authority.
They can delegate such authority to managers. The signature of
owners or managers must be noted on every voucher in order to
ascertain
that
transaction
is
proper.
8.

Detection

of

Errors

The function of internal audit is to detect errors in the accounting

records. The audit staff can check the records in detail. There is
not time limit. There is possibility of disclosed of error due to cent
percent checking. The corrections can be made as early as
possible
to
reflect
the
true
and
fair
view.
9.

Make

Investigation

The function of internal audit is to make investigation. It is an

inquiry in to business activities by specially assigned staff. The
facts and figures are collected; analyzed and true position is put
before the management. The grey area can be spot lighted by an
auditor
in
the
interest
of
business.
10.

Performance

Appraisal

The function of internal audit is to note the performance of

business employees and management. The standard are fixed and
performance is compared with standards. The management can
feel
satisfaction
if
the
performance
is
at
standard.
11.

Give

Suggestion

The function of internal audit is to give suggestion for business

problems. These suggestions are not costly. In the long run there
may be large number of benefits from such ideas. The

management has

the right to

accept or reject the ideas.

12.

Reporting

Reporting is a function of internal audit. The auditor can find out

the weaknesses of various functions. The report is submitted to
the management. There is a need to go through the report. The
weakness
and
proposal
can
be
examined
in
detail.

Advantages
1.

of
Proper

Internal
Accounting

Audit
System

The benefit of internal audit is that proper accounting system is

introduced. Accounting system is a chain of activities in an entity
by which transactions are processed for maintaining financial
record. There is a need of orderly devices to achieve desirable
results.
2.

Better

Management

The benefit of internal audit is that there is better management

of business concern. The auditor can point out the weak areas of
management. The goals of business can be achieved if there is
proper internal control, internal check and internal audit. It

should be noted that management could rely on internal audit for

best
results.
3.

Progressive

Review

The internal audit is beneficial to review progress of a business

concern. The figures of previous years are compared with this
year. Moreover the performance result of similar companies can
be compared to determine the progress made by the entity. The
management can review progress through internal audit.
4.

Effective

Control

The internal audit is helpful to have effective control over

business activities. Control is a management function, which
related to supervision and direction of on going activities. The
manager concerned can remove the difficulties for smooth
working internal audit alerts the management for effective
control.
5.

Assets

Protection

The assets protection is possible through internal audit. The

management can use the assets for the benefit of business only.
The assets cannot be used for private purposes. The
embezzlement of cash, misappropriation of stock and misuse of
other assets is not possible as the internal auditor keeps close
watch
over
assets.
6.

Division

of

Work

The internal audit is helpful to apply division of labour. The

division of labour is necessary to watch the activities of all
employees including management. The auditor can suggest the
way and means improve the performance of business.
7.

No

Error

The internal audit is used to protect accounting records from

errors. The accounting and auditing go side by side when
accounting work is over there is start of audit. There is not time
gap. In such situation the accounting staff is not in a position to
commit
any
error.

8.

Fixing

Responsibility

Internal audit is used to fix the responsibility of people having

poor performance. The management establishes the performance
standards. The internal auditor can evaluate the result of all
persons. The people can be help responsible for below standard
work
and
action
can
be
taken
against
them.
9.

Helps

External

Auditing

The work performed by internal auditor can be helped for

external auditor. The auditor procedure of internal and external
audit is almost the same. The auditor can go through the internal
audit report at the time of starting audit work. Anyhow external
auditor
is
responsible
for
external
audit.
10.

No

Fraud

The internal audit is beneficial to detect frauds in the books of

accounts and other records. The auditor provides no time tag lag
to continue any fraud. The work of accounting staff is examined
on daily basis. The accounting staff has no time to plan any type
of
fraud.
11.

Performance

Improves

Internal auditor is helpful to improve the performance of the

organization. The achievements of previous year are the basis of
preparing budget for the next years. The projected income
statement and balance are drawn up. An attempt is made to get
the positive result. Thus internal audit improves performance of
business
and
employees.
12.

Proper

Use

of

Resources

Internal audit is used to check the proper use of resources. The

misuse of resources can increase the cost of organization. The
optimum use of resources can be determined to control the cost
of output. In this way internal audit is a tool to use the resources
in
the
best
internal
of
the
business.
13.

Investigation

Internal audit is help to investigate in to the business matters. In

case of doubt internal auditor can be asked to examine the facts
and figures to confirm or clear any doubt. The internal auditor can
investigate the matter in any manner. Such investigation can be
made
at
the
request
of
management
or
owners.
14.

Suggestions

Internal auditor is used to suggest the ways and means for

improving the business performance. The management can rely
on the internal auditor. The workable ideas of the internal auditor
can
be
put
into
practice.

Limitations
1.

of

Internal

Incompetent

Audit
Staff

The limitation of internal audit is that audit staff may be

incompetent. The purposes of internal audit fails to help the
management. There may be lack of experience and training on
the
part
of
internal
audit
staff.
2.

Staff

Shortage

The limitation of internal audit is staff shortage. There may be

need of reasonable audit staff to examine the record. The
shortage of staff is a hurdle to get benefit of internal audit.
3.

Time

Lag

The limitations of internal audit starts when true is time lag

between recording and checking of entries. The accounting and
internal audit must go side by side with minimum time gap.
4.

Executive

Function

The limitation of internal audit is that the internal audit may be

linked with executive function. In this case he cannot examine the
accounting books and other records. He cannot find out his own
weakness. It will be wastage of time and money to conduct
internal
audit.
5.

Error

The limitation of internal audit is that there may be error in the

books of accounts. It depends upon the expertise of internal audit
staff. If audit staff is competent there is less chance of error. In
case of poor audit staff there is no guarantee that audited
accounts
are
free
from
errors.
6.

Responsibility

The limitation of internal audit is that management may not feel

their responsibility in completing the audit formalities. The audit
staff may responsibility in completing the audit formalities. The
audit staff may give suggestion for proper working of business.
The top-level management may not pay attention to suggestions.
In this way the audit work cannot help the business.
7.

Duties

The limitation of audit is that there may not proper division of

duties. In this case the internal auditor is unable to fix the
responsibility for negligence of duties. The management must be
aware about division of duties. The audit work can point out the
weakness of business employee, otherwise whole arrangement
goes wasted.

20 Audit Programs and Procedures

Chapter

11

Audit

Programmes

Audit

Kinds

*
*

Audit

of

Advantages

Procedures
Programme

of

Contents

and

Audit

of

Audit

Programme
Programme
Programme

* Disadvantages of Audit Programme

21 Definition
Audit programme is a list of work to be done by an auditor. The
time period is started for completing the work. The duties are
assigned to audit staff. The procedure that will help to verify
each time of financial statements. The duplication of work is
avoided and an pace of audit work. The auditor is able to have
control over the audit staff and their work. The cost of audit
remains in line with the audit fee. The auditor can handle audit
of many concerns at the same time. Every aspect of financial
activities require audit program. The combination of all such
programs is considered as master audit programme. The
auditor can make changes from time to time in order to meet
the requirements of nature and size of business.

Kinds
1.

of
Standard

Audit
Audit

Programme
Programme

This type of audit programme is preprinted and suitable for all

purposes. It saves time and gives added assurance that no
important procedure will be overlooked while in the opinion of
some others, this type of audit programme is too much
mechanical. Due to complexities in the business conditions
system of accounting and internal control system, it is not
possible
to
follow
a
standard
audit
programme.

2.

Modified

Standard

Audit

Programme

These type of audit programme contain the usual audit

procedures, common to most business and provide space for
other specific procedures applicable to the business under
examination. This modification of the audit steps and the
insertion of the steps that are peculiar to the audit in
questions, make the audit programme a modified standard
audit
programme.

3.

Tailor-Made

Audit

Programme

This is individually written programme prepared specially for

each audit. It is known as tailor made because a tailor cuts the
cloth according to the body of every person. The auditor
should take care of such a programme so that no important
steps is overlooked or missed. It lists the procedures to be
followed on any specific engagement indication any departure
from normal practices and specifying the extent of the test of
transaction.
22 Contents

of

Audit

Programme

1.
Name
The audit programme contains the name of client. The auditor
can write the name of business. There is a need of complete
address of the concern in case of public limited company.
2.

Objects

The audit programme contains the objects of the business

enterprise. There are various objects of any business unit. A
small business has few objects while large companies have
many
objects.
3.
Date
The audit programme contains the date of start of an audit.
The auditor can consult the client before fixing the audit date.
It must be convenient to the management. The audit
programme can show the details of audit work date wise.
4.
Duration
The audit programme contains the time limit of starting and
completing the work. The duration of audit period may be one
month. The size of audit work becomes the basis of duration.
5.
Accounting
System
The audit programme contains information about accounting
system. The auditor can examine the accounting system and
procedure in operation. The understanding of accounting
system
helps
to
develop
the
audit
programme.
6.
Internal
Check
The audit programme contains the effectiveness of internal
check system. The effective internal check is helpful for
auditors. He can apply test checking due to proper internal
check system. If the system is not good it increases the duties
of
audit
staff.
7.
Old
Reports
The audit programme keeps the contents of old audit report.
The auditor can pay attention to old reports. The weakness
reported in previous reports must not be repeated in present
accounting records. It is the duty of the audit staff to note the
performance
of
management.
8.
Checking
Books
The audit programme contains the details of checking

accounting books. The number of books kept is stated in the

programme. The books are distributed among audit clerks so
that whole data may be examined.
Advantages

of

Audit

Programme

1.
Supervision
of
Work
The editor can judge the efficiency of his audit team with the held
of an audit program. He is in a position to know the progress of
the work. He can see at any time that what part of the work has
been
completed
and
what
remains
to
be
done.
2.
Division
/
Distribution
of
Audit
Work
The division of audit works is very useful for the audit staff for
maintaining the difference of works among senior or junior clerks
according to their ability and skill so that the work is divided to
get
better
results.
3.
Systematic
and
Uniformity
of
Work
Audit program helps in setting all the things in advance. So the
systematic and uniformity of work is necessary to achieved the
desire.
4.
Basic
Instrument
of
Training
Audit program is infact a training instruments for the audit staff
and also very useful for the new auditors. It provides training and
guidance to him. So, it is rightly called the basic instrument for
training
for
the
staff
at
the
right
time
of
need.
5.
Fixation
of
Responsibility
Audit programmes fixed the responsibilities of the staff. If any
error or fraud remains undetected the responsibility of
negligence will fall on that particular assistant who has
performed that job and no one can blame on each other.
6.
Several
Audit
May
be
Controlled
The auditor controls the audit of various companies at the same
time. In the absence of audit program he cannot supervise them
effectively.
7.
Easy
Transfer
The principle auditor can transfer to any other person easily. If
one assistant is unable to continue the work given to him it can
be given to another person. Audit program guides him that what
is
done
and
what
is
remaining.
8.
Final
Review
Before signing the report, Final Review is made and for this
purpose also auditing program is very useful and any deficiency

or

missing

in

steps

can

be

identified

and

completed.

9.
Useful
For
Future
The audit programme is very useful in the future. On completion
of an audit. It serves the purpose of audit record that may be
useful for future reference. In case of auditor is appointed for the
same concern in any future time the auditor can use the same
audit
programmes
with
some
changes.
10.
Progress
of
Audit
Work
Audit programme is useful to note the progress of work. Audit
programme is a timetable, which can show the work done on any
particular date. The pace of work is going on with the passage of
time. The adjustment can be made if there is more work and less
time and vice versa. In this way work can be completed in time.
11.
Supervision
of
Audit
Staff
Audit programme is beneficial for auditor. He can supervise the
activities of audit staff. He can use the audit programme as basic
of supervision. Every part of audit work can be complete as per
schedule. He can control the activities of audit staff through
observation and direction when the audit work can be complete in
time.
12.
Audit
Staff
Needed
Audit programme is helpful to determine the number of persons
needed to do the work. The staff requirement is essential for
every auditor. The shortage of staff means slow progress. The
exact number of senior and junior audit clerk can be determined.
In this way an auditor is able to handle the audit work properly.
13.
Same
Work
The benefit of audit programme is that new instructions are not
issued due to change in staff. The nature of work remains the
same. The audit clerks can know their job just by reading the
written programme. The time is saved due to written
instructions.
14.
Time
Table
The benefit of audit programme is that work is complete with in
stated time period, the saving of time means saving of labour.
The saving of time means saving can control the cost of audit due
to fixed time. He can arrange audit work of other business
concerns.
15.
Responsibility
for
Poor
Work
The benefit of audit programme is that auditor can fix
responsibility for negligence. Audit programme is a timetable of
whole audit work to be done by auditors. Every staff member is

given some sort of duty to do the audit work. The staff is

responsible for completing of work. The performance is noted and
responsibility
if
fixed
poor
work.
16.
Guide
To
Audit
Assistants
The merit of audit programme is that it serves as a guide to audit
assistants. The junior audit staff can start and complete the audit
work with the help of audit programme. There is no need to
repeat the instructions every time. Moreover it serves as a guide
for future. The new audit programme can be developed can be
developed
on
the
basis
of
old
work.
17.
Dealing
with
New
Clients
The merit of audit programme is that it helps to deal with client.
The spare time of audit staff can be used for doing with new
clients. The whole year time can be divided. The auditor can audit
the accounts if various concerns under audit programme.
18.
Proof
for
Audit
Work
Done
The merit of audit programme is that auditor can use it as proof
for work done. In court of law the auditor can avoid liability for
negligence. Audit programme is a permanent record of an audit
process. The audit programme shows the work performed datewise. In this way he cannot be held responsible for carelessness.

23 Disadvantages

of

Audit

Programme

1.
Not
Comprehensive
Auditors may have covered the whole fie but I cannot be said
with certainty that all the necessary work has been done.
2.
Rigidness
Audit program looses its flexibility. While each business have a
separate problems. So audit program cannot be laid down for
each
type
of
business.
3.
No
Initiative
It kills the initiative of capable persons. The assistant cannot
suggest
any
improvement
in
the
plan.
4.
Too
Mechanical
Such audit program is too mechanical that it ignores many
other
aspects
like
internal
control.
5.

Large

Concerns

Not

Suitable

for

Small

Concerns

Audit programme is helpful in large business concerns. It has

been proved that audit program is not suitable for small
business
concerns.
6.
New
Problems
Over
Looked
In the audit programme there is no chances to accept the
changes with the passage of time new problems arise that
may
be
over
looked.
7.
Changes
The drawback of audit programme is that changes in it are not
acceptable. The nature of activities of concern may change.
There is a need to adjust the changes in the programme. A
master
programme
cannot
be
drafted.
8.
Revision
The demerit of audit programme is that there is no revision in
it. The business changes from year to year. The working may
expand or contract. The audit programme requires adjusting
itself
to
the
changing
circumstances.
9.
Types
The demerit of audit programme is that is not suitable for all
types of business concerns. A small business may have few
books of accounts. It is not necessary to prepare audit
programming
for
small
concerns.
10.
Staff
The accounting staff can know the working of audit. The
auditor applies various methods for checking the accounting
books. Having knowledge of auditing the accounting staff can
devise means to record the transaction. In this way they can
avoid
their
responsibility.
11.
Negligence
The demerit of audit programme is that it provides protection
to inefficient audit assistant. The junior auditors can protect
themselves due to weakness of audit programme. The clerks

feel responsibility for the duties stated in the programme.

12.
Errors
The drawback of audit programme is that it may fail to located
error. The errors of principles cannot be detected, as the
double entry is complete in such case. No doubt the location of
errors and fraud is the responsibility of management. But
owner depends upon auditors to protect their rights.

24 Audit Standards
25 Chapter

Audit

International

Principles

Audit

Auditing

Standards
Auditing
of

Standards

Standards

and

Auditing

Audit

Standards
Auditing
Procedures
Techniques

* Functions of Audit
Audit

Standards

A standard is quality of work, which can be used to measure the

performance of auditors. The audit staff can follow the stated
principle and practice in the conduct of an audit. The business
world is ever changing. In order to meet the business needs the
professional accountants are busy in improving the rule of
business audit. The audit standard applied in the early period is
not acceptable at present. The introduction of computer in
accounting separation of management from ownership, the
establishment of big companies has increased the responsibilities
of auditors. The association of professional accountants has
framed rules for the guidance of their members. The International
Federation
of
Accountants
issues
international
auditing
guidelines. The Chartered Accountants have also framed rules at
national level. Anyhow with the passage of time further
improvements will be made to meet the new challenges of
auditing work.

26 International

Auditing

Standards

(ISA)

1. Objectives and Scope of the Audit of Financial Statement

This standard state that objective of audit is to express an
opinion. The management is responsible is responsible for
preparing financial statement. The scope of audit is
determined by an audit in according with the requirements of
legislation regulation or relevant professional bodies.
2.
Audit
Engagement
Letters
This standard relates to audit engagement letter, which is

written by an auditor to his client for acceptance of the

appointment. This letter confirms the objectives and scope of
audit. This standard also states the possible contents of audit
engagement letter. An example of audit engagement letter is
also
given
at
the
end
of
it.
3.
Basic
Principle
Governing
An
Audit
This standard describes the basic principle, which govern
auditor's responsibilities. The auditor is bound to follow their
principle during audit work. These principles include integrity,
objectivity,
independence,
confidentiality
skills
and
competence, work performed by others, documentation
planning, audit evidence, accounting system and internal
control,
audit
conclusion
reporting.
4.
Planning
This standard deals with the planning of audit work. Work
auditor planning must be helpful to complete an audit work in
an efficiency and timely manner. The plans should include
accounting system, policies and internal control procedure,
degree of reliance on internal control, the nature timing and
extent of audit procedures to be performed and coordination of
audit
work.
5.
Using
the
Work
of
an
Other
Auditor
This standard states procedures for using the work of other
independent auditors with respect to the financial statements
of one or more divisions, branches, subsidiaries or associated
companies included in financial statements of one or more
divisions, branches, subsidiaries or associated companies
included in financial statements of an entity. This guideline
also applies where the principle auditor report on other
financial
information.
6.
Studies
and
Evaluation
of
Accounting
System
The standard deals with accounting system and internal
control. The management is responsible for proper accounting
system and related internal control. The auditor require

assurance system is reasonable and all accounting information

has been recorded internal control contributes to the
assurance.
7.
Control
of
the
Qualities
of
Audit
Work
The high standard of audit profession requires high quality of
audit work. The guideline states the individual audit and
general quality control. There is relationship between these
two. The general control facilitates control over individual
audit. The delegation of work to assistants is stated. In order to
control quality of work assistance is given to audit firm.
8.
Audit
Evidence
The audit evidence standard deals with information collected
by the auditor. He can form an opinion about financial
statements. The nature and sources of audit evidence are
described. The methods used are stated. He can state whether
it
is
sufficient
and
appropriate.
9.
Documentation
The audit standard deals with documents. Guidance is
provided about the contents and form of working papers. The
example of working is also stated. The auditor can know how
to prepare working papers. The ownership and custody of
working
paper
remains
with
auditor.
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10.
Using
the
Work
of
Internal
Auditor
Business employees who have skill and experience conduct
the internal audit work. The internal auditor can check whether
internal control is proper and effective. The independent
auditor can use the work of internal auditor. The procedure for
assessment of internal auditor work is stated in this standard.
11.
Frauds
and
Error
This standard states the definition of fraud and errors. The
responsibility of fraud and error is linked with management.
The plan of the auditor must be effective to trace frauds and

errors. When the auditor smells fraud and errors the

procedures have been suggested. The condition and events
are stated when risk of fraud and error increases.
12.
Analytical
Review
This standard provides detail of the nature of analytical review
procedure. The purpose, timing and extent of reliance to be
placed is stated in it. The auditor can check the unusual
fluctuations.
13.
Auditor's
Report
on
Financial
Statements
The guideline deals with the form and content of auditor report
relating to independent audit of financial statement of a
business concern. The wording for clean and qualified opinion
is suggested. The examples state the unqualified, qualified,
adverse
and
disclaimer
of
opinion.
14.
Other
Information
in
Documents
The guideline provides guidance as to the auditor's
consideration of other information on which he has no
obligation to report. When an auditor has an obligation to
report specially on other information, his responsibilities are
determined by the nature of his engagement. The other
information may be financial or non-financial. It may include
report of management on operations, financial summaries
employment data. Planned capital expenditure, financial ratios
name
of
officers
and
directors.
15.
Auditing
in
an
EDP
Environment
The guideline deals with the auditing through computers. The
skill and competence needed by the auditor is stated. He is
responsible for delegating the work to assistants. he is not free
from liability where he uses the work of others.
16.
Computer
Assisted
Audit
Techniques
The guidelines provides information to audit for using
computer assisted techniques especially software and test
data. The instances are stated when such techniques are to be

used. The application in small business is also possible.

17.
Related
Parties
The standard deals with audit evidence to be collected from
relating parties. The transactions can take place with debtors
and creditors. The auditors can guidance to see whether
management has properly disclosed the related party relation
ship
and
transactions
with
such
parties.
18.
Using
the
Work
of
an
Expert
The guideline provides guidance to the auditor for using the
work of an expert engaged by the client or auditor. The
examples of cases are stated when an auditor may depend
upon experts. Guidance is also providing relating to expert's
skills, competence and objectivity. The way of evaluation of
work
of
expert
is
stated.
19.
Audit
Sampling
The auditing guideline states the factors when an auditor can
design and select and audit sample. The evaluation of audit
procedures is stated. The statistical and non-statistical
sampling methods are provided. The elementary guidance is
provided about sampling risk, stratification selection methods
and
projection
of
errors.
20.
Date
of
Auditor's
Report
The guidelines states guidance on date of auditor's report. The
events may occur after balance sheet date. The facts may be
discovered after the issue of financial statements. The auditor
can take steps to identify subsequent events. The auditor can
issue revised report about the audited financial statements
after
their
revised
by
management.
21.
Going
Concern
The financial statement are prepare under the accounting
assumption as going concern. When such assumption does not
seem good the entity is unable to realize assets at recorded
costs. The guideline provides example when going concern

assumption should be questioned. The collection of audit

evidence, following audit procedure and reporting about going
concern
is
stated.
22.
Materiality
and
Audit
Risk
The auditing guideline states the concept of materiality and
risk and their relationship. The auditor can use these concepts
in planning and conducting audit and evaluating the result of
his procedures. The definition of materiality and audit risk is
given. The components of audit risk are explained. The
interrelationship
is
also
stated.
23.
Special
Purpose
Reports
The guideline state the issue of report other then issued in
routing matters. The report may be issued on compulsive basis
other than accepted standards, specified accounts or any item
of financial statements, compliance with agreement and
summarized financial statements. The examples are given at
the
end
of
it.
24.
Audit
of
Accounting
Estimates
The auditing guideline provides guidance to auditors on the
audit procedures that should be performed in order to obtain
reasonable assurance as to the appropriateness of the
accounting estimates contained in financial information. An
accounting estimate is an approximation of the amount of an
item in the absence of a precise means of management.
27 Principles

of

Auditing

1.
Integrity
Integrity is a principle of auditing. The auditor is
straightforward, honest and sincere in his approach. He must
be fair towards his work. The auditors are known for their
discretion and tactfulness. The loyalty toward his work and
profession
must
be
beyond
doubt.
2.
Objectivity
Objectivity is a principle of auditing. The auditor maintains an

impartial attitude. He cannot allow prejudice or bias to avoid

the purpose of audit. He can protect the right of shareholders
through
this
principle.
3.
Independence
Independence is a principle of audit. The auditor maintains an
impartial attitude. He should be an appear to be free of any
interest. No doubt he receive fee from his client even then
independence is essential. His personal views must not be
included
in
his
report.
4.
Confidentiality
Confidentiality is a principle of auditing. The auditors can
maintain secrecy of information acquired in the course of his
work. He can not disclosed any information to a third party
without specific authority. He can provide facts and figures to
other
under
legal
or
professional
duty.
5.
Skill
Skill is a principle of auditing. The auditors must acquire skill of
doing audit work. He must get training from his principle. The
experience of all audit steps must be obtained. It is a stage of
learning by doing. This skill will help him when becomes
independent
auditor.
6.
Competence
Competence is a principle of auditing. There is a need of best
training in the field of audit. The competent person has the
right to sign the report. The practical knowledge and training
with expert firm of auditors can make the trainee as
competent.
7.
Work
Performed
By
Others
Work performed by other is a principle of auditing. The auditor
can rely on the work of other auditors. The sole duty lies on
the head of principle auditor who is depending upon of others.
The information is available for reliance on others.

8.
Planning
Planning is a principle of auditing. The auditing should plan his
work in an efficient manner. The audit planning includes
accounting system, internal control procedure and degree of
reliance on internal control. The nature timing and extent of
audit procedures to be performed are part of planning.
9.
Documentation
Documentation is principles of auditing. The auditor can
document matters, which are important in providing evidence
that the audit was carried out in according with the basis
principles. The working papers are prepared at the time of
audit. The auditor as proof of audit work can keep these
papers.
10.
Audit
Evidence
Audit evidence is a principle of auditing. The auditor can
collect audit evidence through working papers. He can frame
an opinion based on the audit evidence. The principle states
the nature and sources of audit evidence. The methods to be
used
are
also
stated.
11.
Accounting
System
According system is a principle of auditing. It is a series of
tasks in an entity by which transaction are processed for
maintaining financial record. This system should recognize,
calculate, clarify, post summarized and report transactions.
12.
Internal
Control
Internal control is a principle of auditing. Internal control
means all measures used with in an organization to assure
management that the organization is operating in accordance
with
planes
and
policies
of
management.
13.
Audit
Conclusion
A conclusion is a principle of auditing. The auditing can draw
conclusion based on the evidence obtained from the books and
records. He can note that accounting policies have been

followed, financial information relates to legal requirements,

the financial statement show the affairs of business, the
disclosure
has
been
made
as
required.
14.
Reporting
Reporting is a principle of auditing. The auditing can report on
the matters relating to business functions. A report may be
short or detailed. It may be conditional or unconditional. There
may be disclaimer or adverse opinion relating to business
activities.
15.
Disclosure
Disclosure is a principle of auditing. The facts and figures are
disclosed for general information. The auditor can note that
financial information has been presented in full all disclosure
formalities are complete. The auditor must provide full
information
to
the
shareholders.
16.
Capitals
Or
Revenue
The capital or revenue is a principle of auditing. According to
the nature of business the accounting staff can record the item
as capital or revenue. The wrong allocation cannot provide
true information. The auditor must know the real position of
each
item
in
order
to
report
the
matter.
17.
Compliance
with
Legal
Formalities
The follow up of legal formalities is an auditing principle. The
rules and regulation must be applied in order to protect the
rights of interested parties. The business activities can run on
lines
through
compliance
with
law.
18.
Consistency
The consistency is an auditing principle. The accountant has
the right to select the rate of depreciation, provision for bad
debts and valuation of stock. He must follow these rates for
the year to come. The changes are not acceptable at all.
Auditing

Standards

and

Auditing

Procedures

Auditing

Standards

An auditing standard is a measurement of performance set up by

professional authority and consent. A standard is a measuring
device of applied procedures resulting in general acceptability of
the
result
of
the
performance.
Audit

Procedures

Auditing procedures are acts to be performed during the course

of an examination. By applying perfect technique, procedure lead
to proof of accuracy of the accounts and financial statements.
Audit procedures constitute the course of acting 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.
28

Audit

Techniques

1.
Inspection
Inspection is concerned with review or examination of
records, documents or tangible assets. The auditors can
check many documents in order to examine the business
transactions. Vouchers support every entry. Inspection of
record is made note recording, authority and validity of
data. The auditors commonly use this technique.
2.
Observation
Observation means looking at an operation or procedure
being performed by others in order to determine the
manner of its performance. The auditor can observe the
physical stock taking by management. He can that
accounting principles are applied in preparing accounting
recorded. The audit staff commonly uses observation.
3.
Inquiry
Inquiry means obtaining relevant information either
written or oral from resource persons within or outside
the enterprise through formal or informal manner. The
auditor can collect data from management through
representation letter. He can inquire from debtors,

creditors, bankers and other experts in the field to form

an
opinion.
4.
Confirmation
Confirmation is a reasonable to an inquiry to prove certain
data recorded in the books of business concern. The
auditor can ask the management to inform the debtors for
confirmation of their accounts balance. The auditor can
collect information from debtors to ensure the accuracy of
data. He can write letters to bank for supply of account
balance
kept
by
the
bank.
5.
Computation
Computation is concerned with checking the arithmetical
accuracy of accounting records or doing independent
calculations. An auditor may follow the accounting
procedure to check the accuracy of data. The journal
entry, position and balancing accounts can be compared
with the vouchers to test the reliability of data.
6.
Sampling
Sampling is concerned with selecting few items from
whole accounting information. Audit sampling is the
application of a compliance or substantive procedure to
less than 100 percent of the items within an account
balance or class of transactions to enable the auditor to
obtain and evaluate evidence of some characteristics of
the balance or class and to from or assist informing a
conclusion
concerning
that
characteristics.
7.
Compliance
Test
Compliance tests are designed to obtain reasonable
assurance that those internal controls on which audit
reliance is being placed are in affect. In obtaining audit
evidence auditor is concerned with existence of internal
control, effectiveness and continuity of internal control.
8.

Substantive

Test

Substantive test are designed to obtain evidence as to the

completeness accuracy and validity of the data procedure
by accounting system. They are of two types

test of details of transaction and balance

analysis of significant ratio and trends including the resulting investing of unusual
fluctuation and items.

29
9.
Analytical
Review
The analytical review consists of studying significant ratios and
trends and investigation unusual fluctuations and items. The
application of analytical review procedures is based on the
expectation that relationship among data exists and continues
in the absence of known conditions to the contrary.
10.
Computer
Assisted
Audit
Computer assisted audit techniques include audit software test
packs embedded audit facilities, system software data
analysis, application programme, examination, teaching, flow
charting and mapping. These techniques show how the
computer
has
various
uses
in
accounting.
11.
Reliance
on
Auditors
Reliance on auditors is an audit technique. The independent
auditor can rely on internal auditors or other auditors for
completing
the
work
of
his
own
audit.
12.
Reliance
on
Experts
Reliance on experts is an audit technique. The auditor is no
expert in every field. Basically he knows accounting and audit
work. He is not an engineer, architect, lawyer and valuers. He
has relied on auditors for seeking their expert opinion about
business matters
30 Functions

of

Audit

1.
Accounting
System
The function of audit is to study accounting system. It can be

stated as a series of tacks in an entity by which transaction

ahere processed as a means of maintaining financial records.
Such a system should recognize, calculate, clarify post
summarize and report transactions. The auditor should
understand the accounting system in operation in order to
determine the nature timing and extent of other audit
procedures.
2.
Internal
Control
Internal control is a function of auditing. Internal control is a
process, which determine that management policies are
carried out and accounting principles are followed. This
functions helps to safeguards assets, location and prevention
of errors and frauds. Moreover the management is able to
prepare reliable financial statements in time. When the auditor
notes that he can rely on internal control, the audit procedure
may be less extensive. The effectiveness of internal control is
to
be
determined
by
an
auditor.
3.
Vouching
Vouching is the function of auditing. An auditor can inspect the
document, which support and prove the business transactions.
The data amount and other details are checked. All entries in
books of accounts are made on the basis of relevant vouchers.
This function is essential to determine the accuracy of
accounting
records.
4.
Arithmetical
Accuracy
I is a function of auditing to check the arithmetic accuracy of
account books and books and other papers. The audit staff
verifies the figures. The errors and fraud are discovered. The
management can take steps to rectify the mistakes. The
responsibility of fraud can be fixed. This function helps the
auditors to show true and fair view of accounting statements.
5.
Capitals
and
Revenue
It is a function of auditing to make different between capital
and revenue items. The revenue items are compared to

determine income. The capital items are compared to note the

financial position of any business. The income and expense
relating to many years can be divided into current and coming
years.
6.
Verification
As
Assets
The verification of assets is a function of auditing. Verification
is concerned with determination of value, ownership,
possession and any charge on the assets of any business. The
auditor can check the existence of asset. The documents and
books can show the purchase price. If any loan is taken on
security of an asset, such information can be collected. It is
duty
of
an
auditor
to
verify
these
assets.
7.
Verification
of
Liabilities
The verification of liabilities is a function of auditing. The
auditor can verify the liabilities from the books of accounts.
The auditors must receive a certificate from management that
all liabilities are included in the balance sheet. The auditors
can write letters to creditors for verification of liabilities.
8.
Valuation
of
Assets
The valuation of assets is a function of auditing. The auditors
can apply accounting conventions and principles to examine
and test the values of assets. The management calculates the
value to assets. The auditor must critically check the assigned
values. He can get help from technical personnel.
9.
Valuation
of
Liabilities
The valuation of liabilities is a function of auditing. The value
of liabilities is stated in the balance sheet. The management
can examine the value on the basis of dealing made. The
auditor can examine the value of liabilities from books of
accounts and other papers. The auditor can confirm the value
from outside sources. Independent experts should determine
the
value
of
contingent.
10.

Legal

Requirements

The functions of auditing are to follow the legal requirements.

There are various laws like companies ordinance 1984. Income
tax ordinance 1979 and stock exchange rules 1971. It is the
duty of auditor to check that financial statement are prepared
under the legal requirements. The auditor can note this point
in the report that management has followed the legal
formalities.
11.
Reporting
The reporting is a function of auditing. It is the duty of auditor
to submit his opinion in writing. The report may be clean or
conditional. An auditor is an independent person. If he is
satisfied about true and fair view, he can present clean report
in case of some weakness he can give qualified report.
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