25 Nov 2014

Auditing Definition






Chapter 2 - Types of Auditing


* Kinds of Auditing

* Final Audit

* Advantages of Final Audit

* Disadvantages of Final Audit

* Continuous Audit

* Advantages of Continuous Audit

* Disadvantages of Continuous Audit
Kinds of Auditing

Continuous Auditor Running Audit
Continuous auditor also known as running audit or detailed audit. In large-scale business it is not possible for the auditor to get the true and fair view about the business in a short time period. So for the purpose of finding the correct information the continuous audit is conducted. Continuous audit is the audit that is conducted throughout the year with the fixed or non-fixed period.

Interim Audit
In normal word Interim means half yearly. It is conducted usually between two annual general meetings and only one time, not in intervals.

Final Audits or Complete Audit or Balance Sheet Audit
Final audit is also called as the Balance sheet audit or the Periodical Audit. Final audit is started when the books of accounts closed at the end of the year. It is the most satisfactory form of audit from the point of view of an auditor. In this audit there is cent percent checking of the accounts. In case if the business has an effective and proper internal control system. Then the audit sampling is possible.


Kinds of Auditing

Continuous Auditor Running Audit
Continuous auditor also known as running audit or detailed audit. In large-scale business it is not possible for the auditor to get the true and fair view about the business in a short time period. So for the purpose of finding the correct information the continuous audit is conducted. Continuous audit is the audit that is conducted throughout the year with the fixed or non-fixed period.

Interim Audit
In normal word Interim means half yearly. It is conducted usually between two annual general meetings and only one time, not in intervals.

Final Audits or Complete Audit or Balance Sheet Audit
Final audit is also called as the Balance sheet audit or the Periodical Audit. Final audit is started when the books of accounts closed at the end of the year. It is the most satisfactory form of audit from the point of view of an auditor. In this audit there is cent percent checking of the accounts. In case if the business has an effective and proper internal control system. Then the audit sampling is possible.
Final Audit

Final audit is also called as the "Balance sheet audit" or the "Periodical audit". Final audit is started when the books of accounts closed at the end of the year. It is the most satisfactory form of audit from the point of view of an auditor. In this audit there is cent percent checking of the accounts. In case if the business has an effective and proper internal control system. Then the audit sampling is possible.


Characteristics

The following are the main essentials or features or characteristics of the final audit. 
  • In one session an auditor make only one visit.
  • This type of audit can be conducted on both the large and small type of business.
  • It is conducted when the accounting period ended.
  • In this audit the auditor can do test checking.
  • Auditor report is a prerequisite.
  • It is conducted to report to shareholders.
  • The audit is completed on a short period.
Advantages of Final Audit
1. Alteration Chances Limited 
In the other types of audit the alteration is possible in the audit. But in the final audit the alteration of any type is not possible after the audit. 

2. Checking of Complete Record 
In the final audit there is complete checking of the books of accounting. He can decide either to check cent percent or by sampling. 

3. Advantage for the Shareholders 
Final audit serves the shareholders by giving them the most reliable financial information for the investment purpose. 

4. Advantage for the Owner 
Sometimes the business is so large that even one owner doesn't know the real position about the business. So final audit throws light on the business position and provides him satisfaction. 

5. Convenient or Suitable 
Final audit is very suitable for the auditor and client staff. It saves both the parties from continuous disturbance. 

6. Saving of Time 
In the continuous audit the work of audit is continuous through out the year. It takes a lot of time. But as compare to it final audit takes a very short time. So, in the final audit the time is saved. 

7. Legal Demand 
Final audit is also helpful in checking either the management has fulfilled the legal requirements or not. The management is bound to fulfill the legal requirement. 

8. Economical 
Final audit is beneficial for the client. It is not a regular burden on him, because it is conducted only once in a year at the end of the accounting period. So, it gives the maximum benefit with minimum cost. 

9. Improves the Efficiency 
In this audit the performance of the staff improves due to finding out the weak points of the employees by the auditor by overcome these weakness the staff can improve his efficiency. 

10. Submission of Report 
About the fairness and correctness of accounts final report is very important for the good will of the company. 

11. Staff Duties 
In final audit there is no clash of duties between the audit and accounting staff. They performed their work accordingly. The accounting staff remains busy throughout the year in his work and the audit staff his work when the accounting staff ends his work. 

12. Convenient for Management 
The benefit of final audit is that it is convenient for management as well as for audit staff. The auditor can start and complete the audit at one session. The queries can be cleared on the same day. 

13. Minimum Time Period 
The time required for final audit is less as compared to continuous audit. The auditors can start and complete many audits. They can raise their income by means of new audit work. 
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14. Planned Work 
The final audit has minimum time. So, the work of audit is completed under planning. An audit programme is maintained which provides the schedule of the working of the audit staff and the principal auditor can control the audit work. 

15. Work Continuity 
In the final audit the work of audit go through without any break and same way the auditor can be satisfied for the doubt, which raise from his work on the same time. 

16. Small Business 
The final audit is useful for small-scale business units. The fee charged by auditor is less as compared to continuous work. The small income of business can afford small audit fee. 

17. No Relations 
The merit of final audit is that it provides no chance to audit staff to develop friendly relation with accounting staff. The accounting staff is not in a position to get undue benefit from audit staff. 

18. Full Information 
The final audit is useful as it provides full information about business matters. The auditor can take decision on the spot for completion of audit work and submission of audit report. 

19. Income of Auditor 
This type of audit is also helpful for the auditor. Because this audit saves the time of the auditor and he can conduct many other audit of other business. 

20. Information of Client 
Final audit serves the shareholder by giving them the most reliable financial information for the investment purpose. 

21. Technical Knowledge 
According to the law all the companies are bound that a qualified and experienced person who must be a chartered accountant can conduct the audit. He is a qualified person and there are no chances of fraud or errors. 

22. Element of Friendship 
In final audit there is a short time for the auditor staff. So, in the auditor staff or accountant staff no friendship or soft corners created because their understanding is up to some limits. So there are no chances of fraud created by the both staffs. 

23. Beneficial for Client's Staff 
As final audit is conducted at the close of the books of Accounts. The client's staff is not distributed as in continuous audit. They can easily complete their work and the records are provided at the proper place. 

24. Protection 
In any business the directors can change the figures according to their interest but the final audit protect the rights of the shareholders by providing them correct information. 

25. Guidance 
The auditor not only provides the true and fair information but also guide the management how can they improve their accounting systems. 

26. Thread of Work 
In the final audit there is no interval in the work of auditor and it is carried on till its completion. So the audit staff cannot loose the thread of the work, which is performed by them. 

27. Moral Check 
In the final audit there is moral check of the person who performed the work. The signatures are specified on that work.
Disadvantages of Final Audit

1. Shortage of Time

The auditor has many clients and their financial year ends on the same date. So it becomes very difficult for the auditor to finish the work in time. It is a disadvantages of final audit.


2. Delay in Report

The decisions of the business are made on the basis of the audit report. But this report is made one or two months late. So there is also delay in the making of important decisions.


3. Complete Checking Not Possible

It is very difficult for the auditor to check the each and every entry made in the books of account. He applies only test to save the time. So many mistakes remain untouched.


4. May Misrepresent

There may be also a chance that audit report may not represent the correctness of accounts because each and every transaction is not checked.


5. No Moral Influence

In this audit there is less pressure on the accounting staff. The audit staff comes once in the year. So the employees are not altering in their work.


6. Late Corrections

In this audit the errors are locate at the end of the accounting period. Some way, the corrections of errors are also late. And the entire producer takes more time.


7. Audit Report

The demerit of final audit is that report is not presented in time. It may be submitted one or two months late. The decisions are to be made on the basis of audited accounts.


8. Planned Frauds

In this type of audit, the management has a whole year to think and decide how to make the frauds. So they commit a planned fraud, which is very difficult to find by the auditor.


9. Previous Year Data

Past data is provided to the auditor for audit in this type of business. The errors and frauds are also previous they have no concern with present or future.


10. Thorough Checking

In the final audit there may not be thorough checking. The auditor may select the sampling. In this way the errors and frauds are not located and the purpose of audit dies.


11. Planning for Future

In the final audit the future planning is not prepared in time because audit work start when the accounting work ends. The audit work is completed late and the projected financial statements are also completed late.


12. Delay in Accounting

For the accounting staff it is not possible to prepare the financial accounts just at the end of the year. Due to audit there is delay in finalizing the accounting matters.


13. Monthly Report

If in a business monthly or quarterly report are required. In this type of business the final audit cannot be conducted.


14. Proper Attention

The auditor cannot pay the proper attention towards the audit because he is bound by the fixed time.


15. Proper Decision

As he is bound by the time period he cannot judge the weakness of the business properly and cannot give the proper decisions to workers.


16. Interim Dividend

The business, which conducts the final audit, it is very difficult for him to declare the interim dividend.
Continuous Audit

The audit that remains continue throughout the financial year is called continuous audit.


Characteristics of Continuous Audit

* The auditor visits the business regularly. 

* It is conducted in the large business concern. 

* It is conducted through the year. 

* Throughout checking is possible. 

* It is an expensive audit. 

* Audit report is not prerequisite. 

* It is used to cover the deficiencies of the business. 

* Surprise visits are also possible by the auditor. 

* The manager can fix the time. 















Advantages of Continuous Audit

1. Early Location of Errors and Frauds

In the Continuous Audit, the audit visit the clients after a short period. So, he is in a position to check the information completely in detail. It is helpful in checking the errors and frauds easily. If the audit is conducted after the year ended. It is not possible to find the errors or frauds easily.


2. Check on Frauds

In the Continuous Audit the errors are located earlier. So it is also helpful in the early correction of errors and frauds because it is located at the time when it can be corrected earlier.


3. Quick Rectification

Due to Continuous Audit errors are located easily and rectified at an early stage.


4. Special Attention

Before the finalization of accounts an auditor has a sufficient time to pay proper attention to the checking of account and detection of frauds and errors.


5. Guidance to Client

The auditor remains in touch with the business details, so he also indicates about the mistakes and gives valuable suggestions to the client to keep the accounts in proper manner.


6. Useful for Declaration of Dividend

The continuous audit is also helpful for the declaration of the dividend. As the accounts are checked throughout the year, so the audit accounts are ready for the declaration of dividend.


7. Upto Date Accounts

Accounts of the business are kept up to date by the staff because they know that auditor may visit and check the accounts at any time.


8. Chance of Over Looking Reduces

Auditor has a close contact with the details of the accounts and he has also sufficient time to check the records. So the chances of over looking are reduced in this type of audit.


9. Quick Presentation of Accounts

Continuous audit is very useful because accounts are maintained regularly. So as the financial years end final audited accounts are presented before the shareholders.


10. Accounts Completion

Another audit benefit is the early completion of the accounts checking. The results of audit can be found out just at the end of the accounting period.


11. Moral Check

In the continuous audit the auditor make the surprise visit in the business. The clerks are not aware about the visit. So they are alert and efficient in their work. There is less chances of frauds in this type of business.


12. Convenient for Auditors

In this audit, the several visits paid by the auditor to the client's office in enable his work to proceed easily and smoothly. It also increases his confidence in his capacity to do his work efficiently and effectively.


13. Regular Staff

The regular visits performed by the auditor, make the clerks alert to maintain the accounts up to date and accurate for fear that the auditor may land up in the office any time.


14. Sufficient Time

Continuous audit provides sufficient time to the audit staff. The important and ambiguous matters may require more time to draw conclusion. There is ample time for such matters.


15. No Missing Entries

Continuous audit is also helpful in keeping the full record. In the record there is no missing entries.


16. Early Correction of Errors

The continuous audit is helpful for early correction of errors. The auditor can point out


17. Prompt Filing of Returns

The continuous audit is also helpful for the prompt filing of returns. The management can submit audited account to the registrar as soon as the end of the year.


18. Early Meetings

This audit is helpful for the early meeting of the shareholders. The accounts are presented for the distribution of profit.


19. Surprise Visits

The continuous audit provided chances of surprise visit to audit staff. The accounting staff becomes alert due to surprise visit. It is essential for eliminating the chances of error and frauds.


20. Upto Date Record

The continuous audit is useful for keeping the up to date record. Such record is needed by management for borrowing funds, settlement of tax and dealing with labour union.


21. Even Work Load

Due to even workload, the audit staff feels the satisfaction. The books of accounts are maintained as the routine matters. And there is less chances of errors and frauds.


22. Auditor Advice

In the continuous audit the auditor can find the weakness of the business during the year and he can make the suggestion for the improvement of the business.


23. Close and Extensive Check

As the auditor visits the client's office after a month or so, but at regular intervals, a detailed close and exhaustive cheek can be possible. If the audit is to be under taken after the end of the year, such detailed checking will be difficult.


24. Technical Detail

In a continuous audit, the auditor is more in touch with the technical details and business affairs. So, the auditor can help his clients by giving him the valuable suggestions to improve business.


25. Distribution of Work

Continuous audit is also helpful in distribution of load of work on the staff. The work of audit continues the whole year. The audit staff can easily make the audit programme according the time required. 
Disadvantages of Continuous Audit

1. Alteration of Figures

The records and figures in the books of accounts, which have already been checked by the auditor, may be altered after the audit is over. A dishonest clerk can do it do defraud the accounts.


2. Expensive

Continuous audit is more expensive as compared to other kinds of audit, because the auditor has to devote more time to this audit.


3. Inconvenience

In this audit, the auditor visits the client's office at regular intervals to check the accounts and records these frequent visits made by the auditor may dislocate the work of his client and cause convenient to him.


4. Mechanical Work

The work of audit becomes too mechanical because it remains continue throughout the year.


5. Queries Problem

If the auditor's two visits interval is long then so many queries remains outstanding.


6. Small Business

Continuous audit is not fit for small business concerns. A small business has few transactions so there is no need of audit for whole one year. The owner as manager can know facts behind books as details audit is burden.


7. Client Work

The demerit of continuous audit is that the work of the client suffers due to clash of duties and the client staff remaining busy for the whole years. When the audit work is started work of accounting staff as books are not spare.


8. Staff Initimacy

The accounting staff and audit staff work side by side for the whole year. Friendship among the employees and auditors may lead to error and frauds. The sympathetic view of audit staff may fail to show true and fair view.


9. Missing Link

In the audit the auditor has to come at regular interval to check the accounts and hence the link between the past and present work cannot be maintained. Consequently the thread of work is very likely to be lost.


10. Low Income

The continuous audit keeps the staff busy for one year. They are not able to start and complete many audits at the same time. The given to one business is much higher as compared to final audit. So it is not suitable for audit staff from financial point of view.


11. Spoon Feeding

Frequent visits by the auditor may induce the client's staff to depend upon him even for minor things.


12. Expensive

A continuous audit is an expensive form of audit in that the more frequent visits by the auditor means the higher fees of auditor.


13. Wastage of Time

This type of audit is not helpful for the auditor because in this time period they cannot conduct any other audit. So this is low-income audit for the auditor.


14. Words of Client

Another disadvantage of the audit is that the works of the client staff suffer due to the work of both positive. The books of the accounts are not free for the other party to do.


15. Type of Business Concern

This is not fir for the small type of business concern. In the small business concern, there are only few transactions. So there is no need for this concern.


16. Mechanical Work

In this type of audit, the auditor has to repeat all the products as bookkeeper does where as audit work by nature should not be under thinking and boring.


17. Extensive Notes Taking

In this type of audit possible alteration after audit can be avoided by taking note on diary regarding audit of internal control. So the continuous audit requires the compilation of bundle of notes.


18. Chances of Collusion

Frequent visits of auditor may establish some unhealthy relationship between the client's staff and auditor's staff. Thus there are chances of moral check. Upon them and there may be collusion between them.
Chapter 3 - Internal Control


* Internal Audit 

* Internal Control 

* Internal Check 

* Various Types of Internal Control 

* Principles of Internal Control 

* Objects of Internal Control 

* Limitations of Internal Control 

* Principles of Internal Check

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 accouting, financial and other business practices as a 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 a full time salaried employees. 










Internal Control
The concept of internal control has evolved gradually over the years, with the greatest development occurring at the beginning of 1940. Not only the complexities of modern business techniques but also the increased size of business units have encouraged the adoption of methods which, while increasing the efficiency of the business, also act as a safeguards against errors and frauds. Furthermore, the regulation of business activities under an efficient system of internal control may obviate the necessity of protracted detailed work by an independent auditor with beneficial results to all parties concerned. Thus the inpetus for development of internal control has come from both management and auditor. The effect on auditing has been to reduce the need of routine mechanical verification of book-keeping, accuracy, permitting substitution of a less time-consuming approach that involves reasoning and judgment and stress on such activities as review, analysis, evaluation and statistical sampling.
Internal Check

Internal check is an arrangement of duties allocated in such a way that the work of one employee is automatically checked by another. These are no separate staff engaged to carry out the system of internal check. It, in fact, represents only the arrangements of duties of the staff in a way. The system of internal check is devised in such a way that the possibilities of errors, frauds and irregularities are minimized.
Following matters are included in the internal check 


  • Matters relating to allocation of power.
  • Division of work.
  • Methods of recording transactions
Internal Check

Internal check is an arrangement of duties allocated in such a way that the work of one employee is automatically checked by another. These are no separate staff engaged to carry out the system of internal check. It, in fact, represents only the arrangements of duties of the staff in a way. The system of internal check is devised in such a way that the possibilities of errors, frauds and irregularities are minimized.
Following matters are included in the internal check 
  • Matters relating to allocation of power.
  • Division of work.
  • Methods of recording transactions

Types of Internal Control
1. Organization
Organization is concerned with placement of workers on their jobs. Authority and responsibility go together. The workers are responsible for their activities. The head of department is responsible for looking after the worker of his own department.

2. Segregation of Duties
The segregation of duties is necessary. There are many employees. All aspects of a transaction are not complete by one person. The recording of transaction by many persons can reduce the risk of errors and frauds. The division of duties can improve the working of workers.

3. Physical
The physical internal control is desirable to safeguard assets. The access to assets must be limited. The authorized persons can be allowed to examine the assets. The persons may visit the warehouse or they may release the assets through requisition slips. The assets require lockers, iron safe possession of keys and use of passes of warehouse.

4. Approval
All transaction in any business requires proper approval of responsible person. The limit for approval may be fixed. The creditor recovery officer can approve credit sales. The foreman can approve overtime wages. Purchase officer can approve the purchase of goods.

5. Accounting
The accounting control is concerned with approval of transactions, accurately processing and correctly recording. The control of total, preparation of trail balance reconciliation's and control accounts is necessary. There is examination of vouchers that every aspect is not over looked so far this type of control is concerned.

6. Management
The top-level management can apply certain controls beyond the routine working of business. The management control, include internal audit review of management accounts comparing actual result with budgets, supervisory control and many other review procedure of business functions.

Principles of Internal Control

1. Simple Record and Books 
The principal of the internal control is also the simple records such as the record of employees, plant register list of shareholders etc are kept in usual simple manner books should be kept up to date and at regular internals these should be balanced. He different persons should make handling of cash transactions. For instance the cashier should not be allowed to record the cash in the accounts book. He should have no concern with written ledgers. 

2. Independent Checking 
Another person should independently and automatically check work performed by one person. 

3. Principle Relating to Staff 
It is also the part of the internal control. The employees are placed on the business according to their ability. The employees are bound for the duties for which they are assigned. Duties of each staff member should be clear and there should be no confusion and doubt in this regard. In case of any staff member absence duties arrangements should be made in advance. 

4. Changing 
It is also an important principle that no one should handle the transaction from beginning to end, because in this situation there is a chance of fraud. Generally most of the frauds are committed due to this reason. 

5. Proper Supervision 
It is also a principal of the internal control. All the senior officers have a right to supervise the activities of their juniors. It is necessary for the benefit of the business. 

6. Clear Rules 
All those rules relating to cash stock receipts and issuance of goods should be very clear and well defined. It should be also checked that the employees should follow their rules properly. 

7. Instructions in Writing 
All the instructions should be in written form according to the best internal control system. 

8. Qualified and Competent Staff 
For the better internal control system the qualified staff is necessary. And it should also necessary that the stuff is placed at a proper place. 

9. Double System of Accounting 
For the internal control the double accounting system is very helpful. No doubt, it is an expensive system but it helps a lot for the internal control. 

10. Incentive for Honest Worker 
Honest and hardworking person must be encouraged. He should be given some reward in the shape of promotion and cash. This principle is also very effective in improving the internal control. 

11. Use of Machines 
It is also the principal of the internal control how to use the machines. He has to check either the proper machines have been installed and if it does so the work can be completed in time. 

12. Performance of Duties Record 
For the best internal control it is necessary that the performance of all the employees must be recorded. 
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13. Record of Goods and Assets 
All the companies assets and property record should be maintained properly. There should be also the security measures for the property. 

14. Surety Bonds 
To protect the company from fraud and to make the internal control more effective surety bonds can be taken from the employees. 

15. Division of Duties 
Division of duties is a part of internal control. The employees can be placed on jobs according to their abilities. The duties are assigned to which they are accountable. 

16. Rotation of Duties 
Rotation of duties is a principle of internal control. An employee must be from one seat another. It is necessary for increasing the efficiency and avoiding the chances of errors and fraud. 

17. Division of Work 
Division of work is a principle of internal control. The total amount of work is determined. It is divided among the department's branches and sections. It has become possible due to specialization and division of labour. 

18. Subsidiary Record 
Subsidiary record is a principle of internal control. The detail every account is maintained. Stock of goods may consist of many items. As a whole it is called stock account or stock control account and every group of items can be stated in subsidiary record. 

19. Confirmation From Outsiders 
The confirmation from outsiders from outsiders is a principle of internal control. The letters may be written to debtors to confirm their accounts balances. There may be positive or negative approach in collecting information from sundry debtors. 

20. Checking Physical Existence 
The auditor can check the physical existence. He can see the asset in the possession of a responsible officer. He can touch, court and check the items at business premise. 

21. Dependent Work 
Dependent work is a principle of internal control. One person cannot be allowed to do every aspects of a transaction. The work depends upon many persons. Every person is dependent upon others to perform his duties. 

22. Supervision 
Supervision is a principle of internal control. The officer, foreman or supervision has the right to look after activities of junior workers. The supervisory control is essential to make the business effective. 

23. Internal Audit 
Internal audit is a part of internal control. The management can ask expert employees to examine the accounts of the business. It helps the concern to check and frauds. The progress of the entity is disclosed through it. 

24. Fidelity Bond 

It is an agreement between the issuance of company and the employee. In case of loss the insurance company can pay compensation for loss of cash or goods. The cashier can get insurance from the insurance company. 

25. Control Accounts 
Control accounts are proposed to check the accuracy of the accounting books and other record. The total debtors accounts and total creditors accounts or sales ledger adjustments and purchase ledger adjustments accounts are prepared
Objects of Internal Control in Detail

1. Assets Protection 
The assets are the backbone of any business. These assets are in the custody of some specific officers of the business. The internal control system checks the valuation and protect the assets of the business. 

2. Accurate Record 
The main object of the internal control is to maintain all records and transactions of the business according to the generally accepted accounting principal. 

3. Follow Policies 
The purpose of internal control is follow policies of management. The policies are guidelines for obtaining the business objectives. All employees try their best to follow the rules of the game. 

4. Prevention of Error 
The purpose of internal control is to prevent errors. There may be unintentional mistake due to overwork or carelessness. There is normal load work with every person. Others check the work of one person. 

5. Prevention of Frauds 
The purpose of internal control is to prevent fraud. It is an intentional misrepresentation of financial information by one or more individuals among management, employees or their parties. 

6. Best Use of Resources 
The purpose of internal control is the best use of resources. There is a need of optimum combination of resources for maximizing profits. Internal control can point out weakness, which can be removed. 

7. Nature of Audit Test 
The purpose of internal control is to determine nature and extent of audit test. When there is effective internal control there will be few audit test other wise there is need of through checking. 

8. Reliable Record 
The purpose of audit is to maintain reliable accounting record. The equal distribution of work among the employees provides complete and reliable record, as it is free from error and fraud. 

9. Reduces Work Load 
The purpose of internal control is the reduction of workload. The effective internal control can be useful for auditors. They can check few items and remaining items will be treated as checking by the auditor. 

10. Location of Errors 
The purpose of internal control is the location of errors. There are many types of error, which may be found in the accounting record. The internal control procedures are useful to locate the error in accounting. 

11. Detection of Fraud 
Detection of fraud is the purpose of internal control. The compliance procedure and substantive procedures can be applied to detect the fraud. Basically it is a management responsibility. 

12. Record of Business 
Internal control system is also required for the maintainers of the reliable accounting record. Due to the internal control the records are without the errors and frauds. 

13. Record of Expenditures 
Same way the internal control system keeps the records of all the expenditure of the business and there are fewer chances of errors and frauds. 

14. Recording of Transaction 
Due to the internal control system all the transactions are recorded properly in the correct account in the proper period. 

15. Actual Comparison 
The assets and the other records, which are recorded, can be easily compared with the actual existed information. 

16. Preparation of Statement 
Another object of the internal control is to ensure about the preparation of the financial statement at the proper time as the balance sheet or profit and loss. 

17. Management Objectives 
The objectives of the system of internal control are to ensure the achieving of the other important management control
Limitations of Internal Control

1. Cost

The management thinks that cost of a control procedures must not be in excess of potential loss due to error or frauds.


2. Transactions

The internal control tends to be directed a anticipated types of transactions and not at unusual transactions.


3. Error

There is possibility of human error due to carelessness distraction, mistake of judgement or the misunderstanding of instructions.


4. Circumstances

There may be collusion with parties outside the entity employees of the entity. Due to such collusion there is possibility of circumvention of control.


5. Responsibility

There is chance that a person responsible for exercising control could abuse that responsibility, for example, a member of management overriding a control.


6. Conditions

There is possibility that procedure may become inadequate due to changes in conditional and compliance with procedure may deteriorate.













Principles of Internal Check

1. Sufficient Staff

The principle of internal check is sufficient staff. The employees can be appointed according to the workload. The management can determine the amount of work, which is distributes among the departments. The persons are hired to perform their duties. The overloading can creates trouble for management.


2. Division of Work

Division of work is a principle of internal check. The management can determine the total amount of work. The whole work is divided among departments. The heads of such department are responsible for completion of work according to timetable.


3. Co-Ordination

Coordination is a principle of internal check. All departmental managers are bound to coordinates with other in order to achieve organization objectives. When there is fault in one department, the work of other department suffers. The objectives cannot be achieved. Internal check determines the degree of coordination among the managers.


4. Rotation of Duties

Rotation of duties is a principle of internal check. The workers feel bore by doing the same work from year to year. There is a need of rotation of duties. It is in the interest of concern as well as employees. The efficiency is improved due to changes is duties.


5. Recreation Leave

The recreation leave is a principle of internal check. The employee can check recreation leave. It is necessary for mental health. He can commit fraud as the new employee in his place can disclosed teh matter. The internal check system can work in the interest of business. The weakness is of one person is disclosed due to leave.


6. Responsibility

The responsibility is a principle of internal check. The employee can enjoy recreation leave. It is necessary for mental health. He can enjoy recreation leave. It is necessary for mental health. He cannot commit fraud as the new employee in his place can disclose the matter. There internal check system can work in the interest of business. The weakness in of one person is disclosed due to leave.


7. Automatic Machines

The principles of internal check is that machines must be used to do accounting work if permissible. The machines can do a lot work without delay. The changes of fraud and error are reduced to a minimum. The working of machines improves efficiency of accounting staff.


8. Checking

The principle of internal check is to check the work of other employees. Many persons perform the work. The officers can put his signatures to verify the work done by his subordinate. In this way one work passes many hands. The changes of error and fraud are minimized due to checking and counter checking.


9. Simple

The principle of internal check is simples in working the employees can understand the working of internal check system. A person can work under the supervision of other employees. The line of authority moves from top to bottom level. All workers can understand their duties in the organization.


10. Documents Classification

The classification of documents is the principles of internal check. The business documents are prepared, collected, recorded and placed in proper files. The index is prepared to compile the data. The filing system is useful to place the latter. In case of need the documents are traced at once.


11. Dependent Work

Dependent work is a principle of internal check. The work of one employee is dependent upon others. One work passes in the hand of two or three persons till it is complete. Another person checks the passes done by one person. No person is all in all to start and complete the transactions.


12. Harmony

The principles of internal check are harmony among the employees and departments. The understanding is essential for business goals. The management is to achieve other social and national objectives. The harmony is basis for successful internal check.
Chapter 4 - Vouching

* Vouching

* Principles of Vouching

* Techniques of Vouching

* Objectives of Vouching

* Procedures of Vouching

Introduction

It means to test the truth of items appearing in the books of original entry. It is an important part of an auditor's duty to certify as correct the transactions recorded in the looks of accounts. The Accountant of a business is responsible for passing entries in the books of prime entry. The question arises how and on what basis such entries have been passed. The auditor's primary duty is to check these entries and only then certify the accounts as correct and free from any error or fraud.


Definition

A careful examination of all original evidence such as invoice receipt of correspondence minutes, contracts etc.

Vouching is very useful in proving the accuracy of the entries in the books of accounts. It also indicates about that transaction, which is omitted from the books of account.


Importance

Vouching is called the essence of auditing. So audit is not possible without vouching. The object of vouching is to find out the accuracy of the entries appearing in the books of accounts and detect that no entry has been omitted from the books of account.















Principles of Vouching

1. Arranged Voucher

In the books of accounts the vouchers are based an entry. A voucher is helpful to support any transaction, which may be cash memo fill, voucher, ticket or others.


2. Checking of Date

The voucher date can also be checked; it must be related to the current year. The date of the last or future year must not be adopted.


3. Checking of Authority

The vouchers are considers correct only when the proper authority signs on them. For the approval of the dealing the owner or the management must put the signatures for the approval of dealing if the vouchers are without the signatures of the proper authority. They are not considers the true.


4. Cutting or Change

There should be no changes in the vouchers. Any person for making the fraud can change the time, date, amount and name of concern. So, these changes cannot be acceptable till the approval authority has made the signature.


5. Compare the Words and Figures

The auditor should satisfy himself amount written on the vouchers, it figures and words are same or not.


6. Transaction Must Relate to Business

For the correctness of the vouchers it is necessary that it relate with the business. Concern, the vouchers must be in the name of the business and also the manager. If it does not the vouchers are not acceptable and doubtful.


7. Case of Personal Vouchers

The auditor should not accept the voucher in personal name. There is a chance than an officer of the company has purchased any item in his personal capacity.


8. Checking of Account Head

Auditor must be satisfied about the head of account in which cash is deposited and drawn. He should examine the documentary evidence in these regards.


9. Revenue Stamps

For the stamps, the stamps act 1899 is applicable while fixing the revenue stamps. The stamps are required according to the valuation of the amount or cash memo. There is no need of vouchers if amount is less than twenty rupees.


10. Case of Cancelled Voucher

The auditor should not accept the cancelled vouchers because it has already served the purpose of payment. There will be a danger of double payments, if it is accepted.


11. Important Notes

For finding the correct decision, the auditor can also take help from the working papers of the previous year and others paper or note related to business and available with the management.


12. Minutes Book

When the meeting of shareholders is held. All the resolutions and decisions of the directors and shareholders are recorded in the minute's book. This minutes book must be examine by the auditor. He has to check that these decisions have been implemented in the books of accounts or not.


13. By Laws

In case of company the article of association and memorandum are basically the rules and regulations. But on the other hand in the societies and clubs the by laws are used to determine the powers of management. The auditor goes through these rules and regulations to find the true and fair view.


14. Agreements

The auditor must examine all the related papers of the business such as the agreement, correspondence and others. The basic information can be received to the auditor by such papers.


15. Deed of Mortgage

Some times, you are the sale or purchase of any assets, the management can enter into the agreement is prepare in this case. If the agreement is prepare in this case. If the agreement is made for a loan against the immovable property then the mortgage deed is signed. It is compulsory for the auditor to study the content of the deed.

Techniques of Vouching

1. Correct Accounts

The auditor can check the accounts debited and credited are correct in all respects. The rules of debit and credit can be followed for dividing the transactions into accounts.


2. Agreements

The auditor must examine the agreements, correspondence and other papers relating to business activities. Such agreement provides basic information to the auditor. He can vouch the transactions based on such agreements.


3. By-Laws

The memorandum and articles of association are rules and regulations in case to company. The by-laws of societies and clubs and used to determine management power. The auditor has the right to go through these rules and regulation.


4. Mortgage Deeds

The management may enter into agreement with any party for the purpose and sale of assets. The deed or agreement is prepared. In case of loan against immoavable property mortgage deed is signed. The content of deed must be situated.


5. Minutes Book

The auditor should examine the minute's book. The resolution and decision of directors and shareholder are recorded there. He can see that such decision have been implemented in the books of accounts. 















Objectives of Vouching

1. Proper Evidence

The purpose vouching is to note that proper evidence is available for every entry. The signatures, initials and rubber stamp are evidence that document has been authorized and checked.


2. Proper Authority

The purpose of vouching is to note that there is proper authority behind every transaction. In the absence of any signature of manager the transaction are not acceptable at all.


3. Right Period

The purpose of vouching is to check that date of the vouchers relate to accounting period. The adjustments in books are made on the basis of current year record of transactions.


4. Correct Amount

The purpose of vouching is to check that correct amounts have been recorded in the entry. The vouching is useful to record only correct amounts in the books of accounts.


5. Capitals and Revenue Analysis

The purpose of vouching is to examine the analysis of transaction into capital and revenue. The expense relating to one year is treated as revenue other wise it is called capital.


6. Purchase for Business

The purpose of vouching is to check that purchase relate to the nature of business. The private purchase cannot be recorded as business due to vouching.


7. Arithmetical Accuracy

The purpose of vouching is to see the arithmetical accuracy of books of accounts. The auditor to confirm that books are accurate can check the total subtotals, casting and posting.


8. Postings

The postings of total from journal to the ledger can be voucher by the auditor. He can see through vouchers that posting are complete and correct.


9. No Error

The purpose of total vouching is to check that there are no errors in the books of accounts. The errors are the result of carelessness or over work. But audit staff is not over loaded so they can locate error.


10. No Fraud

The purpose of vouching is to examine that no fraudulent payments are made. The fraud can be committed due to matching of minds of employees and customer. The auditor can vouch the entries top disclosed such frauds.


11. Castings

The purpose of vouching is to check castings or loads. The auditor can calculate all total by himself. He can compare the totals with books to maintain accuracy.


12. Cast at Bank

The purpose of vouching is to determine true cash at bank. He can vouch receipt and payments. The result is that he can check whether cashbook is correct or not.


13. Cash Balance

The purpose of vouching is to check that cash in hand figures are facts. The cash can be counted. He can compare it with cashbook. He can apply test checking to determine accuracy.


14. Reporting

The purpose of vouching is to form an opinion for the purpose of reporting. In case of true and fair view there is good report. In the absence of such result there may be qualified report. 












Procedures of Vouching

1. Reading Out

The vouching is a task of the auditor. The junior audit can read out the contents of the vouchers. He can inform the senior auditor about the data name of organization, number of voucher and amount of vouchers.


2. Comparison

The senior can head the contents called out by junior auditor. He tally each and every item stated in the voucher with entries in the books of accounts. Thus comparison is a part of vouching procedure.


3. Ticking

The senior auditor can use various ticks or symbols to clear the items checked. The ticks may be an abbreviation of words. Such ticks or symbols may differ from auditor to auditor because these are code words.


4. Stamping

The senior auditor instead of signature or initials he can use stamps for checking the vouchers can use the rubber stamps. The rubber stamp may have the wording checking and cancelled on it.


5. Signatures

The senior auditor can vouch the entries with the help of vouchers. He can put his signature or initials on every voucher for safety measures. The signed vouchers cannot be presented again for another entry.


6. Query

The voucher may be missing. The entries may be doubtful due to over writing and erasing. The audit staff can make the word "Q" against such entry. This entry is recorded in working papers.


7. Management

The audit staff can be giving sometime to the management for clearing the objections. The doubtful entries are handed over in written form. The management can examine the record in detail.


8. Reply

The management may reply after one or two days about the doubtful entries. The auditor can examine the reply of the managers. The auditor can judge whether the reply is right or wrong.


9. Clearance

The audit staff can clear the query for which proper answer is made available. The auditor may not be satisfied with the answer of objections. He can inform the management about this query.


10. No Satisfactory

The auditor may reject the unsatisfactory reply. He has skill, training and experience. He can use all available means to test the truth. He can note down poor clarification in working papers.


11. Objections

The objection stated in the working papers can be discussed with the management at the end of audit. He can form an opinion on the basis of such objections. He can submit his report either clear or qualifie
* Liabilities of an Auditor 


Liabilities of an Auditor
(A) Civil Liabilities

Civil liabilities arise when there are dispute between two parties for a loss caused to one due to the act of another. In this case, the auditor is called upon to pay damages as decided by the court. These may be of the following types


1. Liability of Negligence

Negligence means acting carelessly or failing to perform a duty enjoyed upon a person. An auditor is expected to perform his duties as an agent of the shareholders by exercising care and diligence in the implementation of statutory requirements for the maintenance and presentation of the financial statement. Auditor must be kept himself up to date with the information if he commits some negligence the purpose of audit is failed.


2. Liability of Liable

In the report the auditor may criticize any person. If it is based on the fact there is no liability of the auditor. On the other hand the auditor is liable in order to avoid this liability the auditor should take care that the report is based on facts and is prepare with good intention.


3. Liability of the Third Party

The auditor is expert in finding out the errors and frauds and is aware how to check the books of accounts. Many third parties as the shareholders, investors, tax authorities, creditors and government rely upon his reports. So if he makes any type of error or fraud, he is liable to pay the damages.


4. Misstatement in Prospectus

According to section 59 The civil liability of an auditor arises due to misstatement in prospectus. Where a prospectus invites person to subscribe for shares or debentures of a company, the auditor shall be liable to pay compensation to every person who subscribe for a purchase any shares or debentures on the faith of the prospectus for any loss or damage be may reason of any untrue statements.


5. Breach of Contract

If the auditor fails to fulfill the term of the contract the civil liability arises of an audited. In case if he omits the all or some conditions of contract, if he cannot make the secrecy, if fails to provide the true and fair view to the owner, he is liable to pay to the owner if sustain any finacial loss.


(B) Criminal Liabilities

Since for certain purpose of the companies Act, and auditor is deemed to be an officer of the company, he is a liable for such. Act of omission or commission constituting offence under the Act.


6. Misstatement in Prospectus (Sec-63)

Here a prospectus containing any untrue or misstatement is issued with the consent of auditor who shall be punished the with imprisonment which may extend up to two years or with fine which may extend up to Rs. 5,000/- or both.


7. Requirements of Reports (Sec-225)

Here the auditor does not confirm to the requirement of reports as per sec-229 he shall be punished with fine, which may extend up to Rs. 1,000.


8. Assistant to Investigate (Sec-240).

Auditor has statutory duty to assist any investigator appointed by the central Government in collecting any information of the company otherwise he shall be punished with imprisonment which may extend up to six month or with a fine up to Rs. 2,000/- or both for continuous default Rs. 200/- per day may also be charged.


9. Assistance to Prospectus (Sec-242)

On the basis of report of an inspector control Government may prosecute any officer. Auditor is to assist in such prosecution otherwise he is to be punished for contempt of court.


10. Return Books, Papers Property etc. (Sec-477)

At the time of winding up of a company, court may ask the auditor to return any property books or papers of the company otherwise he can be arrested.


11. Public Examination (Sec-478)

On the report of official liquidation, the audition of the companies to the publicly examined. Notes of such examination shall be used as evidence in any civil or criminal proceeding against the auditor.

12. Falsification of Books of Accounts (Sec-539)

Where the auditor is guilty of destruction, multilation, alteration, falsification of any books papers securities, he shall be imprisoned which may extend up to 7 years and shall also be liable to fine.


13. Prosecution of Auditor (Sec-545)

Where auditor is found be guilty of any criminal offence by the liquidator of the company, he shall be prosecuted.


14. False Statement In Any Return

Where the auditor makes any false statements in any material respect in any return report, certification, balance sheet etc, he shall be imprisoned which may extend up to 2 year and shall also be liable to fine.


15. Disqualified Auditor (Sec-254(6))

The company ordinance has clearly stated the persons who are not qualified as auditor, but if an unqualified auditor may act as auditor of the company. He is liable to fine up to Rs. 5,000/- rupees.


16. Non-Compliance (Sec-260)

In case when the auditor makes any report or signed against the legal requirement and the report may be not true the auditor is liable to fine for Rupees 2,000/- if it is willful fault.


17. Auditor Report

If the auditor make the report with the extent to profit himself and the third party for any loss for a material consideration it is a criminal liablity. He may be punished for six months and fine upto 2,000/- rupees.


18. Assist Inspector (Sec-268)

The auditor has to give all the necessary assistance in connection with investigation to the inspector. Some times the auditor may fail to give it. In this case he shall be punishable up to one year and fixed up to ten thousand rupees.


19. Auditor Account (Sec-384(4))

The auditor is liable to submit his report after or within he two months at the end of the period to which account relates. If he fails there is a fine up to rupees 5,000/-


20. False Evidence (Sec-419)

If any person provides false evidence he is punishable up to two years and liable for fine also. The evidence may be affidavit oath or some affirmation etc.


21. Winding (Sec-420)

The criminal liability of company officers including auditor may be composed may year before or during liquidation of company of criminal offences like concealing or removing property, concealing or falsifying document and papers. The liquidation can go to the court of law for proving the breach of duty.


22. False Statement (Sec-492)

Whoever makes a statement false or incorrect or omits any material fact shall be punishable with imprisonment for a term, which may extend to three year and shall be liable to a fine not exceeding twenty thousand rupees.


23. Pakistan Penal Code (Sec-197)

Whoever makes a statement false or incorrect or omits any material fact shall be punishable with imprisonment for a term, which may extend to three year and shall be liable to a fine not exceeding twenty thousand rupees.


24. Professional Misconduct

If the auditor fails to follow the rules of their own profession he is liable for the criminal liability. For this default the council can with draw the certificate of practice. The council can also go to the court of law for prosecuting the concerned auditor. The auditor can suffer the jail or fine or both.


(C) Other Liabilities

25. Honorary Audit

The auditor on the honorary basis may also accept an audit work. After the completion of the audit work he is bound to submit his report.


26. Joint Audit

When the two auditors carried out the work of audit it is called as the joint audit. It is possible by the two independent auditors under the agreement. Sometimes, a business concern may have two or more than two business places in different cities or countries conduct the audit by one auditor. So this audit is conduct the responsibilities lies on the head of every auditor who had done the work of audit. It is also stated in the audit report.

Chapter 6 - Audit Working & Audit Note Book * Definition of Audit Note Book * Advantages of Audit Note Book * Definition of Test Checking * Essentials of Test Checking * Advantages of Test Checking * Disadvantages of Test Checking * Routine Checking * Essentials of Routine Checking * Advantages of Routine Checking * Disadvantages of Routine Checking
Definition of Audit Note Book

Audit notebook is a diary on which auditor scribble down all important inquiries to avoid the possibility of unquestioned material facts.


Importance

Justice William throws light on the importance of audit notebook in the following words,


The audit notebook that contained detailed information proved to be very helpful to the auditor in every critical moment.

For preparing the audit report it is very useful for that auditor.

In case of negligence charge against the auditor, but note book good evidence can be presented. It may be also used for future guidance and reference. It also enables to auditor to know that what work his assistant at each audit has done. 










Advantages of Audit Note Book

1. Audit Report

The audit notebook is helpful to prepare audit report. The auditor can record the weakness of accounting records. The queries not properly answered are started in the audit report when the auditor is satisfied he can submit a clear report.


2. Staff Honesty

The audit notebook is used to determine the integrity and honesty of audit clerks. The moral and ethical value can be examined through audit work. When a person completes his work in time. Time period auditor can appreciate him. If there is pending work after the expiry of time period, he can be held responsible for it. The audit staff must be honest in his work.


3. Helpful For Memory

The audit notebook is help to keep things fresh in memory. The auditor can read the book on daily basis. He can note the weakness on fingertips. The auditor can retain the data in his memory for a longer period of time. He can ask the management to clear the doubtful points before preparing audit report.


4. Reference

The audit notebook is useful for reference. In future it can provide information to the audit staff. The past data gives an insight into business matters. The auditor can note the changes. He can form an opinion about the changes in the nature and size of the business.


5. New Auditor

The audit notebook is useful for new auditor. They can see the weakness of previous years. The old weak points may not be repeated this year.


6. Court Cases

The audit notebook is helpful to defend an auditor in court cases. The people can go to court of law in order to fix liability for negligence of duty. The audit notebook is a written proof of work performed by an auditor.
Definition of Test Checking

According to Professor Meigs,
"Test Checking means to select or examine a representative sample from a large number of similar items."
It is clear that test checking is sample checking. The whole data must cannot be examined. The audit staffs can statistical technique to check the facts and figures. A certain percentage of transaction can be selected for through examination. The remaining transactions are supposed as checked.

Essentials of Test Checking

1. Sample
The sample items selected from whole data must be representative. The selection can be made by any method. The entire data must be presented in the form of sample.

2. Last Month
The last month of the accounting year is most important. The items appearing in the last month must be given maximum importance at the time of selecting the sample.

3. First Month
The first month of accounting year provides essentials information. The transactions recorded in the first month must be assigned high weight age in order to select the sample.

4. Surprise Testing
The auditors include the element of surprise in selection of test. The accounting staff must be unaware of test checking so that he should not make arrangement for test checking.

5. Checking Method
The auditor can change his method of selecting the sample. At one time he can one use alternate method. The selection method must be charged in time to time.

6. Every Type of Transaction
The auditor must select every type of transaction in test checking. There is a need to include each type of dealing in the sample.

7. Every Employee
The auditor can select the work of every employee. The test checking can be used to examine the work of all employees in the organization.

8. Through Out The Year
The test checking can be applied to all items appearing in the books through out the year. The recurring items are most suitable for test checking.

9. Cash Book
The cash book entries must not be used for test checking. There is a need of cent percent checking of all cash items appearing in cashbook. The control over cash is essential for efficient business working.

Advantages of Test Checking

1. Time Saving 
The benefit of test checking is available in the shape of time saving. A simple of items is checked and remaining items are treated as checked. In this way there is saving in time. 

2. Less Labour 
The test checking is useful for saving in labour. A lot of work requires many clerks for completing the audit. But test checking is used to test few items so there is less labour work. 

3. Accurate Books 
The test checking is useful to note the accuracy of accounting books and other record. There is a demand of error free books. The test checking is a step in the right direction to prove accuracy. 

4. Staff Efficiency 
The efficiency of accounting staff improves due to test checking. The weakness of employee is reported to management. The employees try to improve their work by overcoming their deficiencies. 

5. Timely Report 
The benefit of test checking is that timely report can be submitted to the management. The large number of figures can be checked in short period of time so there is no delay. 

6. Many Audits 
Test Checking is useful to complete many audits in one year. It saves sufficient time, which can be used to check the books of new clients. The auditor is able to raise more income. 

7. Special Attention 
The auditor can pay special attention to important matters. Test Checking reduces the labour work on the part of audit staff. There is sufficient time period to settle the important matters.

Disadvantages of Test Checking

1. Errors 
The demerit of test checking is that errors are not disclosed by it. In the presence of error true and fair view is not possible. No doubt the location of errors is the duty of management but it effects the audit work. 

2. Frauds 
The demerit of test checking is that planned frauds may not be disclosed. The fraud discovers is the responsibility of management. The audited accounts cannot show true and fair view when fraud exists in books. 

3. Responsibility 
The demerit of test checking is that auditor cannot shift his responsibility of management. The errors of fraud can be discovered through cent percent checking. So auditor is responsible for test checking. 

4. Report 
The auditor report may fail to disclose true and fair view of business matters. After test the auditor signs checking the auditor report. The auditor is responsible for audit report based on test checking.
Routine Checking

The auditors check the arithmetic accuracy of journals and ledgers. It is called routine checking. The purpose is detected the error and fraud of simples nature. The audit staff can check the balance appearing in journal and ledgers. The sub-total and total are examined. The differences are calculated. These balance are transfered from one page to another. The amounts carries forward should be the same. The checking is useful for determine the accuracy of the books of accounts. The accounting staff cannot chance the figures after routine checking. The ledger posting is also tested by means of routine checking. The errors may be locked and frauds may be disclosed by it. The auditor is able to give his opinion about the fairness of the financial statements. The auditor can fix the responsibility of the accounting staff for negligence of dut

Essentials of Routine Checking

1. Sub-Cast
Sub-Cast is a part of routine checking. Sub-total is possible in accounts matters. The sub-cast must be correct.

2. Casts
Cast is part of routing checking. Total in journal and ledger accounts should be examined for accurate results.

3. Carry Forward
Carry forward is a part of routing checking. The balance of one page can be transfered to the next page.

4. Posting
Posting is a part of routing checking. The entries are posted in to the ledger accounts. Posting must be properly examined.

5. Balancing
Balancing is a part of routing checking. Taking the difference of debit and credit in the accounts is called balancing.

6. Carry Down
The amounts in an account can be transferred to next page. The carry down is a part of routing checking.

7. Transfer
Transfer is part of routing checking. The amount is one accounts can be transferred to another account.
dvantages of Routine Checking

1. Accuracy

The benefit of routine checking is that there is accuracy of accounting books and records. The sub-total, casts and carry forward posting, balancing and transfer are stated as correct.


2. Frauds

Routine checking is useful to checking fraud in the books of accounts. The responsibility lies on the head of management for location of fraud. The management can use this tool to meet its duty.


3. Positive Verification

Routine checking helps to verify positive made in the ledger. The correct posting can provide true and fair view of financial statements. The management can verify posting through it.


4. No Change in Figures

Routine checking is useful to eliminate the alternation of figures. The management can meet its obligation with the help of routine checking. The employees cannot alter figures.


5. Final Checking

The benefit of routine checking is that final checking work is reduced. The final checking become early as major work has already been completed through routine checking.









Disadvantages of Routine Checking

1. No Care

The work of routine checking is given to junior employee. They do not consider it as important matter. Therefore the expected result cannot be produced for audit purpose.


2. Fraud

The demerit of routine checking is that planned frauds are not disclosed. The responsibility of fraud lies on head of management. The audited accounts may fail to provide true and fair view.


3. Error

The demerit of routine checking is that errors of principle are not disclosed. The responsibility or error can be placed on the head of management. The audited accounts may fail to provide true and fair view.


4. Monotony

The work is routine checking is boring and time consuming. The clerks go on checking the totals and sub-totals and balances. It does not improve the performance of employee rather it bring monotary.

Chapter 7 - Verification

* Verification 



* Advantages of Verification

* Objects of Verification

* Techniques of 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, sub-totals, 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.



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