Professional Documents
Culture Documents
Table of Contents
INTRODUCTION................................................................................................. 2
HISTORY OF AUDIT............................................................................................ 2
QUALIFICATIONS AND DISQUALIFICATIONS OF COMPANY AUDITOR :................4
GENERAL CONSIDERATION IN COMPANY AUDIT................................................6
MATERIALITY AND AUDIT RISK.........................................................................10
OBJECTIVES AND STANDARDS.........................................................................12
SPECIFIC PROVISIONS AS REGARDS ACCOUNTS IN THE COMPANIES ACT, 1956
13
AUDIT OF PAYMENT......................................................................................... 16
CONSIDERATIONS IN INITIAL AUDITS...............................................................22
SPECIAL REQUIREMENTS OF COMPANY AUDIT................................................26
AUDIT OF LIABILITIES...................................................................................... 31
CONCLUSION................................................................................................... 34
1
INTRODUCTION
entity distinct from its shareholders. It cannot be directly managed by its owners, i.e.,
shareholders, because they are very large in number having small holding and also
scattered over a wide area. As such, the management and control of the affairs of the
essential for a company to appoint an independent and qualified person, i.e., an auditor,
to verily and certify the truth and fairness of the financial statements.
HISTORY OF AUDIT
Clinical Audit was introduced by Florence Nightingale (1855) during the Crimea War
(1853 1855) (Bull 1992). Although the Russians were defeated at the battle of the Alma
River (20 September 1854), the Times newspaper criticized the British medical
facilities. Sidney Herbert, the British Secretary for War asked Florence Nightingale a
Nightingale at the end of the war was able to show positive outcomes from quality of
1. Auditors qualifications :
(2) Any firm whose all the partners are serving as chartered accountants in India.
(3) A person holding a certificate under the restricted auditors certificate (part B.
2. Disqualifications of an auditor :
(3) Officer of the company, partner of an employee or any person who is serving
there;
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(4) A person who is indebted to the company for an amount exceeding Rs.1,000 or
who has provided any security in connection with the indebtedness of any third
appointed as an auditor.
above, after his appointment, he shall be deemed to have left his rank (position)
1949.
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GENERAL CONSIDERATION IN COMPANY AUDIT
1. True and fair view : True and fair view in auditing means that the
represent the financial performance and position of the entity - Although the
expression of true and fair view is not strictly defined in the accounting
True suggests that the financial statements are factually correct and have been
they do not contain any material misstatements that may mislead the users.
balances in the financial statements. Fair implies that the financial statements
present the information faithfully without any element of bias and they reflect
the economic substance of transactions rather than just their legal form.
-Preparation of true and fair financial statements has been expressly recognized
of several countries such as in the Companies Act 2006 in the UK. Auditors
must therefore consider whether directors have fulfilled their responsibility for
the preparation of true and fair financial statements when providing an audit
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state in their audit report whether in their opinion the financial statements
present a true and fair view of the financial performance and position of the
entity.
2.Accounting Policies
The specific policies and procedures used by a company to prepare its financial
in that the principles are the rules and the policies are a company's way of
very important. Looking into a specific company's accounting policies can signal
This should be taken into account by investors when reviewing earnings reports.
accounting principles.
3.Internal control
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Internal control is under the Board of Director's responsibility. Internal control's
function is, for example, to ensure the efciency and protability of operations,
An essential part of internal control is the Internal Audit, which operates as a separate
unit under the CEO and reports its observations to the Board of Directors. The
and evaluating the efciency of business operations, risk management and internal
Internal Audit also inspects the processes of business operations and nancial
Directors. The operations of the Internal Audit are guided by being risk-focused and
4.Audit Approach
The Audit Approach is a risk analysis methodology that focuses on the combined
information and financial results, and the effectiveness of the client's internal controls.
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includes the most effective and efficient combination of test responsive to a client's
The Audit Approach enables us to plan our effort to be proportionate to the risk of
material error in specific accounts and transactions. This provides the basis for
planning the minimum effort necessary to limit audit risk in each area to a low level. As
a result, every audit procedure has a specific purpose that is related to the company's
following this approach we can avoid over auditing and under auditing, and we can
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MATERIALITY AND AUDIT RISK
Professional standards require us to consider materiality and audit risk when planning
the nature, timing and extent of our audit procedures, and when evaluating the results
of those procedures. Materiality is determined at two levels during the initial planning
stage :
materiality; and
Audit risk is defined as the risk that an auditor may unknowingly fail to modify his or
her opinion on accounts that are materially misstated. We address materiality and audit
risk at an overall level to help us develop an audit strategy that will provide sufficient
At the account balance or class of transactions level, audit risk is the product of the
risks that :
inherent risk;
2. A material error will not prevented or detected on a timely basis by the system of
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3. The auditor's procedures will fail to detect a material error not detected by the
The Audit Approach provides a methodology for relating these risk concepts to
materiality and correlating them to the nature, timing, and extent of our audit
procedures. This is accomplished through the Specific Risk Analysis and the
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OBJECTIVES AND STANDARDS
standards require that all audits be conducted by persons having adequate technical
training. This includes formal education, field experience, and continuing professional
training.
12
SPECIFIC PROVISIONS AS REGARDS ACCOUNTS IN THE
COMPANIES
ACT, 1956
maintain are contained in section 209 of the Companies Act, 1956. They are briefly
summarised below:
(1) Every company shall maintain at its registered office proper books of account
with regard to :
(a) all sums of money received and expended by the company and the matters in
N.B. - It is permissible, however, for all or any of the books of account may be kept at
such place in India as the Board of directors may decide but, when a decision in this
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regard is taken, the company shall file with the Registrar of Companies a notice giving
(2) When a company has a branch office, whether in or outside India, to comply
with the aforementioned provisions, the company must maintain proper books of
account relating to transactions effected at the branch office, also arrange to obtain
from the branch proper summarised returns, at intervals of not more than three
months, for being kept at the registered office or the other place.
(3) For the purposes of sub-sections (1) and (2), proper books of account shall not be
(a) if there are not kept such books as are necessary to give a true and fair view of the
state of affairs of the company or branch office, as the case may be, and to explain
(b) if such books are not kept on accrual basis and according to the double entry
system of accounting.
(4) The books of account and other books and papers shall be open to inspection by
4A) The books of account together with vouchers relevant to any entry made therein for
a period of not less than eight years immediately preceding the current year shall be
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(5) If any of the persons referred to in sub-section (6), fails to take reasonable steps to
causes any default by the company, he shall be punishable for each offence with
imprisonment for a term which may extend to six months or a fine which may extend to
` 10000 or with both. But he may be relieved from such a liability if he can show that he
has reasonable ground to believe that a competent and responsible person was charged
with the duty of seeing that these requirements were complied with and he was in a
(6) Where the company has a managing director or manager, such managing director
or
manager and all officers and other employees of the company; and where the company
has neither a managing director nor manager, every director of the company.
(7) If a person, not being a person referred to in the foregoing paragraph, who has
been
charged with the duty of seeing that requirements of law in regard to the books
of account is complied with, makes a default in doing so, he shall, in respect of each offence,
15
AUDIT OF PAYMENT
Managerial Remuneration
The term remuneration covers the following types of expenditure incurred by the
Insurance on the life of, or to provide any pension, annuity or gratuity for, any of
But the definition is inclusive one. It covers every amount that the company pays or
spends for or for the benefit of a Director, in whatever form and by whatever name.
Applicability:
Section 198 and 309 deals with the provisions relating to managerial remuneration.
The term managerial remuneration mentioned in section 198 and 309 covers the
remuneration of all Directors and also its manager. It is applicable to all public
the above mentioned section are not applicable on government companies (within the
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Section 198(1) lays down 11% of net profits of the company computed in the manner as
laid down in section 349 and 350 as the overall ceiling on the total remuneration of the
company. While computing the net profits the remuneration of the Directors shall not
be deducted from the gross profits. The above mentioned limit shall be exclusive of
vouched with the receipts issued by the suppliers and the credit to their accounts on the
basis of invoices entered in the Purchases Day book. There must be also evidence of the
goods having been received through an entry in the Goods Inward Books or stock
ledger. It is necessary, however, to make a distinction between a payment for goods and
advance recoverable in cash or in kind or for value to be received. Since the amount
shown as an advance paid against goods may be only a camouflage for assistance to a
party, it is necessary for the auditor to confirm that the advance was paid pursuant to a
normal trade practice and supplies were, subsequently, received with a reasonable
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The following points must be considered while vouching the directors remuneration in
company-
(i) Examine the Entitlement: The directors are not automatically entitled to
(ii) Examine Adherence to Legal Provisions: The auditor should examine adherence
Section 309(3) and (4) which deals with manner of payment of managerial
remuneration.
Section 198 which has prescribed the overall limit to managerial remuneration.
Schedule XIII to the Act that has laid down conditions for payment of
remuneration
for companies having profits those having no profits or inadequate profits and
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2) S.227(1A): ensure and enquire that personal expenses are not camouflaged in any
reimbursement
DIRECTOR COMMISION
1)A/A: see the article of association of company and note the rules regarding the
payment of commission
2) Agreement : examine the terms and condition of the agreement to find out the rate of
commission payable
3) Compliance: check section 198 and 309 also see calculation as per section 349,350
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DIVIDENDS :-
The return on investment in share is called dividend. It is the part of the profit earned by
the company.
1. Rules Of Company :-
The auditor should check the rules of a company. He should examine that articles of
association and companies ordinance allow the management to propose dividends out of
revenue profits.
2. Rate Of Dividend :-
The auditor should check that rate of dividend must not be above the rate of profit. It
3. Reasonable Profit :-
The auditor should check that amount of revenue profits is reasonable. If it is not
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4. Account :-
Dividend amount is payable with in the days. The auditor should check that dividend
account is opened in the bank or not. The amount equal to dividend must be deposited .
5. Tax :-
It is also the duty of the auditor that he should check the tax payable or dividend is paid to
6. Not Collected :-
Sometimes shareholders fail to collect the amount from the banks. The auditor should
The profit and loss appropriation account must be checked by the auditor. He should note
8. Account Statement :-
The auditor examines that amount of dividend paid and due prepares reconciliation
9. Warrant :-
To register the shareholder management issues dividend warrants. Such amount can be
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claimed by the shareholders from the bank. The auditor should check these warrants has
The auditor should undertake the following activities before starting an initial audit:
a. Perform procedures regarding the acceptance of the client relationship and the
b. Communicate with the predecessor auditor in situations in which there has been
c. . The purpose and objective of planning the audit are the same for an initial
audit or a recurring audit engagement. However, for an initial audit, the auditor
appropriate audit strategy and audit plan, including determining the audit
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The Central Government hereby directs vide General Circular No:
shall not apply in relation to subsidiaries of those companies which fulfil the following
conditions:-
(i) The Board of Directors of the Company has by resolution given consent for not
(ii) The company shall present in the annual report, the consolidated financial
statements of holding company and all subsidiaries duly audited by its statutory
auditors;
(iii) The consolidated financial statement shall be prepared in strict compliance with
(iv) The company shall disclose in the consolidated balance sheet the following
(a) capital (b)reserves (c) total assets (d) total liabilities (e) details of investment
(except in case of investment in the subsidiaries) (f) turnover (g) profit before
taxation (h) provision for taxation (i) profit after taxation (j) proposed dividend;
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(v) The holding company shall undertake in its annual report that annual accounts of
the subsidiary companies and the related detailed information shall be made available
any point of time. The annual accounts of the subsidiary companies shall also be
kept for inspection by any shareholders in the head office of the holding company
and of the subsidiary companies concerned and a note to the above effect will be
included in the annual report of the holding company. The holding company shall
demand;
(vi) The holding as well as subsidiary companies in question shall regularly file such
them;
(vii) The company shall give Indian rupee equivalent of the figures given in foreign
currency appearing in the accounts of the subsidiary companies along with exchange
(Note: Students may note that as per section 227 of the Act, the duty of the auditor
extends to expressing an opinion on balance sheet and profit and loss account and all
other documents annexed thereto. Since section 212 requires that particulars of
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subsidiary company are required to be attached to balance sheet of holding company,
the same shall not be covered by auditors report. Also refer to section 222 which deals
Profit and loss account to be annexed and auditors report to be attached to balance
sheet - The profit and loss account shall be annexed to the balance sheet and the
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SPECIAL REQUIREMENTS OF COMPANY AUDIT
(i) Verification of the constitution and powers - A company can function within the
limits prescribed by the documents on the basis of which it has been registered. It raises
its capital from the public on certain conditions, specified in the Prospectus. Before
underwritten on this account, it is essential that the auditor, prior to starting the audit
(c) Contracts entered into with vendors and other persons relating to purchase of
A company cannot enter into a contract before it has been registered. What is more, a
business has been granted to it by the Registrar of Companies. It is, therefore, the duty
of the auditor to take into account, while examining the transaction entered into by the
company, the dates when these were entered into for confirming the validity.
With a view to carrying out the audit effectively, it is necessary that the auditor should
know the authority structure of the company. Under Section 291 of the Act, the Board
of Directors of a company are entitled to exercise all such powers, and to do all such
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company is authorised to do. However, the Board shall not exercise any power or do
any act or thing which is directed or required by any legislation (including the
Section 292 specifies six types of decisions that can be taken by the Board of Directors
The transaction barring the first three can be delegated to any of the following:
(c) manager,
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Apart from the above, a number of other functions are also carried out by the Board. A
(a) Adopting of accounts before the same submitted to the auditor for their report-
Section 215.
(b) Appointment of the first auditors and filling of casual vacancy - Section 224.
(c) Investment in shares of companies within the limits specified in Section 372A.
(d) Entering into contracts with persons who are directors of the company or related to
or associated with the directors as are specified in Section 297 of the Act.
Some of the matters which only the shareholders can sanction at a general meeting :
substantial part
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Loans to directors by a company other than a banking or a finance company (Section
295).
For verifying the foregoing transactions and others authorised by the directors or
shareholders, the auditor should refer to the minutes of the meeting at which these have
been considered. Further, for judging the validity or otherwise of section accorded, the
relevant provision of law must be referred to. A few such instances are given below :
(e) Powers which the Board must exercise only at a meeting (Section 292).
(f) Restriction on powers of the Board regarding disposal of the undertaking or part
(h) Power of Board and other persons to make contributions to the National Defence
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(j) Restriction on a Director or his relative, a firm in which a director or relative is a
partner; or any other partner of the firm or a private company of which such a director
is a member or director to enter into a contract of sale or purchase of goods except with
(Section 301)
(p) Restraint on payment of compensation for loss of office to a director (Sections 318
to 321).
(q) Restriction on loans, etc., to companies under the same management (Section 370).
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AUDIT OF LIABILITIES
the agreement made with a debtor in financial difficulty or rules of the court. There are
1. To confirm whether the date of liabilities reorganization is accurately defined. The fair
market price of assets varies from date to date, the amount of liabilities payable with
interest also varies from each other. Consequently, the profits and losses of liabilities
reorganization and the relevant records of assets and liabilities recognized in different
dates vary from each other. In addition, the date of liabilities reorganization is also the
basis for defining the accounting period. No matter when the assets transactions were
conducted, the reorganization date should be the accounting cut-off date. Auditors, in
carrying out auditing, shall obtain the asset reorganization agreement files in the first
place to identify the date of reorganization. They should then review the accounting
information to check whether the valuation of the assets and liabilities are based on the
reorganization date and the accounting information prepared are within the
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2. To check whether the accounting of the liabilities reorganization is proper. Major tool of
reorganization. These vouchers are verified against relevant agreement to make sure (1)
relevant assets, liabilities and capital items are consistent with the agreement,- (2)
proper accounting items have been applied and (3) accurate amounts have been
recorded. Special attention shall be paid to see if the capital received and the capital
reserve have been classified accurately, if the bad debt provision of the creditor has
been written off and if contingent expenditures have been given due consideration?
3. To check whether the calculation and recognition of the profits and losses of liabilities
of the calculation of the profits and losses of liabilities reorganization is done through
value of debtor's liabilities, book value of assets, fair value of assets, fair value of
shareholder's equity, future payables, the creditor's net credit value, future receivables.
The calculation of the profits and losses of the enterprise is then reviewed to make sure
data has been applied correctly and correct calculation has been conducted. Special
attention shall be paid to see if the fair market value of assets, shareholder's equity and
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the amount of contingent liabilities have been accurately defined on proper basis and,
financial statements at the end of an accounting period, explaining the contents and
impact of the reorganization. Such disclosure aims to make the user of financial
statements better informed of the financial condition of the enterprise. The user of the
financial statements will not be able to understand the full impact of the
reorganization on the assets and liabilities, profits and losses of the enterprise, nor can
they study the value for money of the enterprise correctly if the disclosure is not
been made by the enterprise through examining the disclosure of the process of
liabilities reorganization.
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34
CONCLUSION
Every Company registered under Companies Act 1956, need to do its audit every year,
which is known as statutory audit..During the company audit, the auditor discusses his
observations with those charged with governance, such as the audit committee of the
company, before finalising the report. The auditor should be firm in his opinion, and
exercise his independence at this level. This part of the audit is critical, and calls for
resilience on the part of the auditor. An audit report, being a public document, should
be drafted skilfully. The code of conduct prohibits an auditor from divulging any
information received by him in the course of his professional assignment, unless legally
required so to do. Therefore, the auditor shouldn't hesitate to take the help of a legal
expert on whether to include certain comments in his report. And atlast he submit the
reports with adverse , modified or with qualified opnion.
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