CHAPTER 1 - INTRODUCTION OF AUDIT
1.1 INTRODUCTION
Economic decisions in every society must be based upon the information available at the time the decision is i s made. For example, the decision of a bank to make a loan to a business is based upon previous financial relationships with that business, the financial condition of the company as reflected by its financial statements and other factors. If decisions are to be consistent with the intention of the decision makers, the information used in the decision process must be reliable. Unreliable information can cause inefficient use of resources to the detriment of the society and to the decision makers themselves. In the lending decision example, assume that the barfly makes the loan on the basis of misleading financial statements and the borrower Company is ultimately unable to repay. As a result the bank has lost both the principal and the interest. In addition, another company that could have used the funds effectively was deprived of the money. As society become more complex, there is an increased likelihood that unreliable information will be provided to decision makers. There are several reasons for this: remoteness of information, voluminous data and the existence of complex exchange transactions As a means of overcoming the problem of unreliable information, the decisionmaker must develop a method of assuring him that the information is sufficiently reliable for these decisions. In doing this he must weigh the cost of obtaining more reliable information against the expected benefits. A common way to obtain such reliable information is to have some type of verification (audit) performed by independent persons. The audited information is then used in the decision making process on the assumption that it is reasonably complete, accurate and unbiased.
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1.2 MEANING OF AUDITING
The word audit is derived from the Latin word audire which means to hear. It is an important tool of management. It is concerned with making an analytical and critical analysis of the books of accounts, checking and verification of evidence in support of entries appearing in the books of accounts, and ascertaining the authenticity of the financial statements. It is also concerned with the examination of accounting data to determine the extent of an audit examination is too made on the basis of evidential document such as invoice, money receipts and other records by the authorized representative of the client. Auditor has used to send for the accountants and hear whatever they had to say in connection with the accounts. The auditor has to look into the facts behind figures and he must certify their accuracy. Auditing is to ascertain the balance sheet and profit and loss account that they show a true and fair view of the financial state of affairs of a concern. The Institute of Charted Accountants of India has issued a number of statements of standard auditing practices and accounting standards for guidance of Auditor of India 1.3 ORIGIN AND EVOLUTION
The term audit is derived from the Latin term 'audire,' which means to hear. In early days an auditor used to listen to the accounts read over by an accountant in order to check them Auditing is as old as accounting. It was in use in all ancient countries such as Mesopotamia, Greece, Egypt. Rome, U.K. and India. The Vedas contain reference to accounts and auditing. Arthasashthra by Kautilya detailed rules for accounting and auditing of public finances. The original objective of auditing was to detect and prevent errors and frauds Auditing evolved and grew rapidly after the industrial revolution in the 18
th
century With the growth of the joint stock companies the ownership and management became separate. The shareholders who were the owners needed a report from an independent expert on the accounts of the company managed by the board of directors
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1.2 MEANING OF AUDITING
The word audit is derived from the Latin word audire which means to hear. It is an important tool of management. It is concerned with making an analytical and critical analysis of the books of accounts, checking and verification of evidence in support of entries appearing in the books of accounts, and ascertaining the authenticity of the financial statements. It is also concerned with the examination of accounting data to determine the extent of an audit examination is too made on the basis of evidential document such as invoice, money receipts and other records by the authorized representative of the client. Auditor has used to send for the accountants and hear whatever they had to say in connection with the accounts. The auditor has to look into the facts behind figures and he must certify their accuracy. Auditing is to ascertain the balance sheet and profit and loss account that they show a true and fair view of the financial state of affairs of a concern. The Institute of Charted Accountants of India has issued a number of statements of standard auditing practices and accounting standards for guidance of Auditor of India 1.3 ORIGIN AND EVOLUTION
The term audit is derived from the Latin term 'audire,' which means to hear. In early days an auditor used to listen to the accounts read over by an accountant in order to check them Auditing is as old as accounting. It was in use in all ancient countries such as Mesopotamia, Greece, Egypt. Rome, U.K. and India. The Vedas contain reference to accounts and auditing. Arthasashthra by Kautilya detailed rules for accounting and auditing of public finances. The original objective of auditing was to detect and prevent errors and frauds Auditing evolved and grew rapidly after the industrial revolution in the 18
th
century With the growth of the joint stock companies the ownership and management became separate. The shareholders who were the owners needed a report from an independent expert on the accounts of the company managed by the board of directors
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who were the employees. The objective of audit shifted and audit was expected to ascertain whether the accounts were true and fair rather than detection of errors and frauds. In India the companies Act 1913 made audit of company accounts compulsory With the increase in the size of the companies and the volume of transactions the main objective of audit shifted to ascertaining whether the accounts were true and fair rather than true and correct. Hence the emphasis was not on arithmetical accuracy but on a fair representation of the financial efforts The companies Act. 1913 also prescribed for the first time the qualification of auditors The International Accounting Standards Committee and the Accounting Standard board of the Institute of Chartered Accountants of India have developed standard accounting and auditing practices to guide the. accountants and auditors in the day to day work The later developments in auditing pertain to the use of computers in accounting and auditing. In conclusion it can be said that auditing has come a long way from hearing of accounts to taking the help of computers to examine computerised accounts 1.4 DEFINITION
The term auditing has been defined by different authorities. 1. Spicer and Pegler: "Auditing is such an examination of books of accounts and vouchers of business, as will enable the auditors to satisfy himself that the balance sheet is properly drawn up, so as to give a true and fair view of the state of affairs of the business and that the profit and loss account gives true and fair view of the profit/loss for the financial period, according to the best of information and explanation given to him and as shown by the books; and if not, in what respect he is not satisfied." 3
2. Prof. L.R.Dicksee. "Auditing is an examination of accounting records undertaken with a view to establish whether they correctly and completely reflect the transactions to which they relate. 3. The book "an introduction to Indian Government accounts and audit" "issued by the Comptroller and Auditor General of India, defines audit "an instrument of financial control. It acts as a safeguard on behalf of the proprietor (whether an individual or group of persons) against extravagance, carelessness or fraud on the part of the proprietor's agents or servants in the realization and utilization of the money or other assets and it ensures on the proprietor's behalf that the accounts maintained truly represent facts and that the expenditure has been incurred with due regularity and propriety. The agency employed for this purpose is called an auditor."
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CHAPTER 2 - IMPORTANCE, ADVANTAGES, DISADVANTAGES AND LIMITATIONS OF AUDIT
2.1 IMPORTANCE OF AUDITING For Business 1. Errors are Located
Auditing is helpful for business. The error can be located through it. The location and correction of error is possible through auditing. The true and fair information about business is available. 2. Frauds are Discovered
Auditing is helpful for business. The discovery of fraud is possible through it. The guilty persons can be held responsible. The auditing accounts show fair about business. 3. Loans Become Easy
Auditing is useful for business. Lenders for granting loans accept the auditor‘s accounts. The reputation of borrowers increases due to auditing. Thus auditing accounts help the businessman to expand his activities. 4. Advise about Weakness
Auditing is useful for business. The people can seek advise from auditors. The auditors are professional and they know their work very well. They can spotlight the grey area. It is the duty of the business man to act upon the advise of the auditors. 5. High Moral Values
Auditing is essential for business. There is moral check on the management and other staff. Auditing puts the pressure on the staff of work honestly. There is no pending work so there is less chance of errors and frauds.
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6. Tax Payments
Auditing is useful for business, tax authority accept audited accounts for assessment of taxes. There is no further inquiry or investigation from department. The audited accounts lessen the worries of business people. For Owners 7. Efficiency Improves
Auditing is beneficial for business. The auditing determines the efficiency of employees. The training and qualifies management is an asset for any business. Such management can play dynamic role in framing and implementing the policies. 8. Dispute is Settled
Auditing is essential for business. The audited accounts are helpful to settle the disputes. The audited accounts become the basis of making decisions. The dispute may relate to infringement of patents or trademarks. 9. Planning Becomes Possible
Auditing is helpful for business. The audits accounts present true and fair view of business activities. The facts and figures can be used to prepare budge and estimates for the next years. The projected cash receipts and payments, income statement and balance sheet can be prepared. 10. Improvement of Internal Control
Auditing is helpful for business. The auditor can point out the weakness of internal control system. The business management can take steps to remove these weaknesses. The effective control systems are essential for large-scale business enterprises. 11. Fluctuation in Profits
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Auditing is helpful for business. The auditor can make the detailed study to find of fluctuation in profits. There are various reasons for changes in profits. The auditor can determine the true cause of such changes.
12. High Credit Rating
The auditing is beneficial for business. The auditing accounts increase the credit standing of any business house. The lenders can rely on audited accounts for granting credit facility. In fact auditing is a screening test of business entity. 13. Listing at Stock Exchange
The auditing is beneficial for business. The listing of securities at stock exchange is optional. The public limited companies can get registration at stock exchange. Stock exchange management for registration purpose accepts the audited accounts. 14. Shareholders Protection
Auditing is beneficial for owners. The shareholders feel that their rights are protected through auditing. They can know the performance of management. Audited accounts help to determine the value of shares. 15. Partner Satisfaction
Auditing is helpful for partners. The sleeping partner feels satisfaction when there are audited. The managing partners can use business property for their personal benefit. There is moral check on managing partners. 16. Proprietors
Auditing is useful for proprietors. The audited accounts help the sole traders that their business is going on properly. The error and fraud are pointed out auditors. The owners can determine the efficiency of their employees or assistants. 17. Beneficiary
Auditing is valuable for beneficiaries. The auditor of a trust can nominate any person as trustee to look after the property of a trust. Auditing can safeguard the
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right of beneficiaries. There is a moral check on the trustee to follow the by – laws of trust.
18. Deceased Estate
The auditing is helpful for dependents of decreased person. The audited accounts presents true and fair view of financial statements. The family can rely on audited accounts for distributing the estate of deceased person. 19. Insolvency
The auditing is beneficial for creditors. The audited accounts show true and fair view of state of affairs of sole proprietorship or partnership. The creditor can get their money first and then owners can get refund of capital. The audited accounts help to settle the cases at an early date. For Government 20. Better Performance of Tax Department
Auditing is beneficial for government. Tax officers accept the audited accounts. The assessment order can be issued without further clarification. There is saving of money and time due to audited accounts. The performance of tax officers is improved. 21. Exact Revenue Amount
Auditing is beneficial for government. The collection of revenue is possible at an early date. The people are allowed to deposit various kinds of taxes. The recovery of income is made at the start of the year. The government can start welfare project on the basis of total revenue collected. 22. Progress of Economy
Auditing is essential for government policies. The true fair view is stated in audited accounts. The stage of economic progress can be determined. The government can take measures to raise the rate of economic growth.
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23. Purchase of Private Business
Auditing is helpful for government. The private business houses may not work in favour of general public. The government can take over such business units. The purchase price is decided on the basis of auditing of accounts.
24. Sale of Government Business
Auditing is useful for government. The policy can be framed on the basis of audition accounts. The management comes to know the value of business. The government can sell state – owned unit to private sector. The bid price is settled on audited accounts. 25. Inspectors
The auditing is helpful for government. The auditing accounts show the fair value of all assets. The value of assets. The value of assets is the basis of tax. This issue can be settle through audited accounts. The auditors are experts in their field. They know all methods of property valuation. They can issue certified the government agencies for valuation of property. For General Public 26. Insurers can Settle Claims
Auditing is essential for insurers. The settlement of fire or marine insurance claims is easy through audited accounts. The policy holders and insurance company can settle actual loss of property. 27. No Loss to Lenders
Auditing is essential for lenders. The banks and other lenders ask the borrowers to submit audited accounts before granting loans. The audited accounts are helpful to check the trust worthiness of customers. 28. Creditor are Protected
Auditing is essential for creditors. They can know the true performance of their debtors. The creditor can accept this promise only when he feels that debtor is reliable businessman. Auditor accounts provide basic information about reliability. 9
29. Bidders Can Offer High Rate
Auditing is helpful for bidders. Audited accounts provide information about net worth of any business. The people interested in purchasing the business can rely on such information. They know the fair value of business. They can offer reasonable price through open bidding.
2.2 ADVANTAGES OF AUDIT A. Businessman's point of
B. Investor's point of view
C. Other Advantages.
view
1 Detect on of errors and 1 . Protects interest
1. Evaluate financial status
2 Loan from banks
2. Moral
2. Usting
3 Builds reputation
3. Proper valuation of
check
of shares
3. Settlements of claims
investments 4 Proper valuation of assets
4 Good security
4 Evidence in court
5. Government acceptance
5. Settlement of accounts
6. Update accounts
5. FaciStates calculation o Purchase. Consternation.
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Suggestions
for
7 Facilitates taxation
improvement 8. Useful for agency
1.
Audited accounts are readily accepted by Government authorities like Tax authorities and Central banks.
2.
By auditing the accounts Errors and frauds can be detected and recti fied in time.
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3. Audited accounts carry greater authority than the accounts which have not been audited. 4. For accessing finance from financial institutions like Banks, previous years audited accounts are evaluated for determining repayment capability. 5. Regular audit of account create fear among the employees in the accounts department and exercise a great moral influence on clients staff thereby restraining them from commit frauds and errors. 6. Audited accounts facilitate settlement of claims on the retirement/death of a partner. 7. In the event of loss of property by fire or on happening of the event insured against, Audited accounts help in the early settlement of cl aims from the insurance company. 8. In case of Public Company where ownership is separated from management, auditing of accounts reassure the shareholders that accounts have been properly maintained, funds are utilized for the right purpose and the management have not taken any undue advantage of their position. 9. To determine the value of the business in the event of purchase or sales of the business, audited account will be the treated as the base for the evaluation. 10. The audit of accounts by a qualified auditor also help the management to understand the financial position of the business and also it will help the management to take decision on various matters like report in internal control system of the organization or setting up of an internal audit department etc. 11. If the accounts have been audited by an independent person, disputes between the management and labor unions on payment of bonus and higher wages can be settled amicably. 12. In the event of admission of a new partner, audited accounts will facilitate the formation of terms and conditions for joining the new partner. Last 3 years audited accounts will give a general idea about the growth and financial position of the business to the new partner. 2.3 DISADVANTAGES OF AUDIT
It is true that auditing as many advantages, but it as some limitations as such 1. Non-detection of errors/frauds: - Auditor may not be able to detect certain frauds which are committed with malafide intentions.
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2. Dependence on explanation by others :- Auditor has to depend on the explanation and information given by the responsible officers of the company. Audit report is affected adversely if the explanation and information prove to be false. 3. Dependence on opinions of others: - Auditor has to rely on the views or opinions given by different experts viz Lawyers, Solicitors, Engineers, Architects etc. he can not be an expert in all the fields 4. Conflict with others: - Auditor may have differences of opinion with the accountants, management, engineers etc. In such a case personal judgment plays an important role. It differs from person to person. 5. Effect of inflation : - Financial statements may not disclose true picture even after audit due to inflationary trends. 6. Corrupt practices to influence the auditors : - The management may use corrupt practices to influence the auditors and get a favorable report about the state of affairs of the organization. 7. No assurance: - Auditor cannot give any assurance about future profitability and prospects of the company. 8. Inherent limitations of the financial statements : - Financial statements do not reflect current values of the assets and liabilities. Many items are based on personal judgment of the owners. Certain non-monetary facts can not be measured. Audited statements due to these limitations can not exhibit true position. 9. Auditing is a postmortem examination : auditing work begins where accounting ends then the auditor is fully depends upon the accounting transaction provided by the accountant in the throughout the year. So auditing work is not suitable for the current position of the business. But it is useful to the future business situation. 10. Detailed checking not possible : - Auditor cannot check each and every transaction. He may be required to do test checking. 2.4 LIMITATIONS OF AUDITING
1. All transactions cannot be checked – It is not possible for an auditor to check each and every transaction; he has to check them on sample basis. 2. Evidence is not conclusive – Audit evidence is not conclusive in nature the confirmation of debtors is not conclusive evidence that all amount will be collected, the conclusions are persuasive rather than conclusive. 12
3. Not easy to detect some frauds – It‘s not easy for an auditor to detect the deeply laid frauds which involves acts designed to conceal them such as forgery, false explanation, and not recording transaction and so on. 4. Audit cannot assure about profitability or efficiency of management – Even though the accounts are audited it doesn‘t that the user can take granted the future profitability or prospects of concern as audit don‘t comment on efficiency of the management. 5. Rely on experts – The auditor has to rely on experts like lawyers, engineers, valuers etc. for estimation of contingent liability and valuation of fixed assets.
CHAPTER 3 - THE IMPORTANCE OF AN AUDIT SYSTEM TO COMPANIES AND ACCOUNTING STANDARDS
3.1 THE IMPORTANCE OF AN AUDIT SYSTEM TO COMPANIES
Auditing is a means of evaluating the effectiveness of a company's internal controls. Maintaining an effective system of internal controls is vital for achieving a company's business objectives, obtaining reliable financial reporting on its operations, preventing fraud and misappropriation of its assets, and minimizing its cost of capital. Both internal and independent auditors contribute to a company's audit system in different but important ways. Business Objectives
Having an effective audit system is important for a company because it enables it to pursue and attain its various corporate objectives. Business processes need various forms of internal control to facilitate supervision and monitoring, prevent and detect irregular transactions, measure ongoing performance, maintain adequate business records and to promote operational productivity. Internal auditors review the design of the internal controls and informally propose improvements, and document any material irregularities to enable further investigation by management if it is warranted under the circumstances. Risk of Misstatement
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Auditors assess the risk of material misstatement in a company's financial reports. Without a system of internal controls or an audit system, a company would not be able to create reliable financial reports for internal or external purposes. Thus, it would not be able to determine how to allocate its resources and would be unable to know which of its segments or product lines are profitable and which are not. Additionally, it could not manage its affairs, as it would not have the ability to tell the status of its assets and liabilities and would be rendered undependable in the marketplace due to its inability to consistently produce its goods and services in a reliable fashion. Accordingly, an audit system is crucial in preventing debilitating misstatements in a company's records and reports. Fraud Prevention
Internal audit serves an important role for companies in fraud prevention. Recurring analysis of a company's operations and maintaining rigorous systems of internal controls can prevent and detect various forms of fraud and other accounting irregularities. Audit professionals assist in the design and modification of internal control systems the purpose of which includes, among other things, fraud prevention. An important part of prevention can be deterrence, and if a company is known to have an active and diligent audit system in place, by reputation alone it may prevent an employee or vendor from attempting a scheme to defraud the company. Cost of Capital
The cost of capital is important for every company, regardless of its size. Cost of capital is largely comprised of the risk associated with an investment, and if an investment has more risk, an investor will require a higher rate of return to invest. Strong audit systems can reduce various forms of risk in an enterprise, including its information risk (the risk of material misstatement in financial reporting), the risk of fraud and misappropriation of assets, as well the risk of suboptimal management due to insufficient information on its operations. 3.2 ACCOUNTING RECORDS AND FINANCIAL STATEMENT MAINTAINED BY THE COMPANY
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Good record keeping is an important part of monitoring business performance. It also makes it easier for small business owners to meet their taxation obligations. Appropriate and up-to-date financial records provide the necessary information for managing the business efficiently and making sound business decisions. To help you maintain your daily financial records, you should consider:
Setting up either a manual or electronic record keeping system that suits your needs,
Recording your business transactions accurately and promptly, How to keep daily financial records
Preparing a summary account (including income and expenditure) at the end of each month.
Maintaining good financial records starts with a good system and well-organized business records. The system can be a simple one and does not need to be complicated. Disclosure of Accounting Policies
To ensure proper understanding of financial statements, it is necessary that all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed.
Such disclosure should formpart of the financial statements.
It would be helpful to the reader of financial statements if they are all disclosed as such in one place instead of being scattered over several statements, schedules and notes.
Examples of matters in respect of which disclosure of accounting policies adopted will be required are contained in paragraph 14. This list of examples is not, however, intended to be exhaustive.
Any change in an accounting policy which has a material effect should be disclosed. The amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. 15
Where such amount is not ascertainable, wholly or in part, the fact should be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted.
Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item in the accounts.
Main Principles
All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed.
The disclosure of the significant accounting policies as such should form part of the financial statements and the significant accounting policies should normally be disclosed in one place.
Any change in the accounting policies which has a material effecting the current period or which is reasonably expected to have a material effect in later periods should be disclosed. In the case of a change in accounting policies which has a material effect in the current period, the amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated.
If the fundamental accounting assumptions, viz. Going Concern, Consistency and Accrual are followed in financial statements, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact should be disclosed. 3.3 MEANING AND DEFINE OF AUDIT REPORT AND AUDIT CERTIFICATE
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Audit Report
An auditor, under Section 227 (2) of the Companies Act, 1956, is required to make a report to the shareholders of the company whether the books of accounts examined by him exhibit ‗true and fair‘ view of the state of affairs of the business. The auditor submits his report to his client giving clear and concise information of the result of audit performed by him. The fact or information contained in the auditor's report is not available from any other source. The statutory auditor of a company has to express his professional opinion about the truth and fairness of the state of affairs of the company as shown by the Balance Sheet and of the profit or loss as shown by the Profit and Loss Account in addition to other information in his report. Audit Certificate - Definition
The general purpose of an audit certificate is to give to the Commission reasonable assurance that eligible costs (and, if relevant, the receipts) charged under the project are calculated and claimed by the contractors in accordance with the relevant legal and financial provisions of the FP6 legal texts, including contractual provisions. When an auditor certifies a financial statement, it implies that the contents of the statement are reliable as the auditor has vouched for the exactness of the data. The term ‗certificate‘ is, therefore, used to mean confirmation of the truth and correctness of something after a verification of certain exact facts. An auditor may therefore certify the circulating figures of a newspaper or the value of imports and exports of a company. The term ‗certificate‘ should not be confused with the term ‗report'. While a certificate affirms the truth and correctness of a fact, figure or a statement, a report is generally a statement of facts or an expression of opinion regarding the truth and fairness of the facts, figures and statements. Difference between Audit Report & Audit Certificate
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1. A report means simply an expression of opinions Whereas a Certificate means that the person issuing or signing the certificate vouchsafes the truth of the statement made by him 2. The Auditor Report is based on facts, estimates and assumptions whereas Auditor's Certificate is based on actual facts 3. Auditor Report is not a guarantee of the absolute correctness & accuracy of the books of accounts. But the auditor certificate serves as a guarantee of the absolute correctness & accuracy of the books of accounts 4. If the Auditor Report is later on found to be wrong, he cannot be held responsible since he has given merely his opinion on the state of affairs of the company. But if the duly signed certificate is found as wrong, he will be held responsible. 3.4 TYPE OF AUDIT REPORT
An audit report is an appraisal of a small business‘s complete financial status. Completed by an independent accounting professional, this document covers a company‘s assets and liabilities, and presents the auditor‘s educated assessment of the firm‘s financial position and future. Audit reports are required by law if a company is publicly traded or in an industry regulated by the Securities and Exchange Commission (SEC). Companies seeking funding, as well as those looking to improve internal controls, also find this information valuable. There are four types of audit reports. 1. Unqualified Opinion
Often called a clean opinion, an unqualified opinion is an audit report that is issued when an auditor determines that each of the financial records provided by the small business is free of any misrepresentations. In addition, an unqualified opinion indicates that the financial records have been maintained in accordance with the standards known as Generally Accepted Accounting Principles (GAAP). This is the best type of report a business can receive.
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Typically, an unqualified report consists of a title that includes the word ―independent.‖ This is done to illustrate that it was prepared by an unbiased third party. The title is followed by the main body. Made up of three paragraphs, the main body highlights the responsibilities of the auditor, the purpose of the audit and the auditor‘s findings. The auditor signs and dates the document, including his address. 2. Qualified Opinion
In situations when a company‘s financial records have not been maintained in accordance with GAAP but no misrepresentations are identified, an auditor will issue a qualified opinion. The writing of a qualified opinion is extremely similar to that of an unqualified opinion. A qualified opinion, however, will include an additional paragraph that highlights the reason why the audit report is not unqualified.
3. Adverse Opinion
The worst type of financial report that can be issued to a business is an adverse opinion. This indicates that the firm‘s financial records do not conform to GAAP. In addition, the financial records provided by the business have been grossly misrepresented. Although this may occur b y error, it is often an indication of fraud. When this type of report is issued, a company must correct its financial statement and have it re-audited, as investors, lenders and other requesting parties will generally not accept it. 4. Disclaimer of Opinion
On some occasions, an auditor is unable to complete an accurate audit report. This may occur for a variety of reasons, such as an absence of appropriate financial records. When this happens, the auditor issues a disclaimer of opinion, stating that an opinion of the firm‘s financial status could not be determined. 3.5 ESSENTIALS OF GOOD AUDIT REPORT
The essentials of good audit report are as follows: 19
1. Title
An auditor report must have appropriate title, such as ―Auditor‘s Report‖. It is helpful for the reader to identify the auditor‘s report. It is easy to distinguish it from other reports. The management can issue any report about the business performance. The title o the report is essential. 2. Addressee
The addressee may be shareholder or board of director of a company. The auditor can audit financial statements of any business unit as per agreement. The report should be appropriately addressed as required by engagement letter and legal requirements. The report is usually addresses to the shareholders or the board of directors.
3. Identification
The audit report should identify the financial statement that have audited. The financial statement may include trading profit and loss accounts, balance sheet and statement of changes in financial position and sources and application of frauds statement. The report should include the name of the entity. Moreover the data and period covered by the financial statement are also stated in it. 4. Reference to Auditing Standards
The audit report should indicate the auditing standard or practice followed in conducting the audit. The international auditing guidelines need assurance that the audit has been conducted as per set standards. 5. Opinion
The auditor‘s report should clearly state the auditor‘s opinion on the presentation in the financial statement of the entity‘s financial position and the result of its operations. The statement give a true and fair view is an auditor‘s opinion. This opinion is usually based on national standard or international accounting standards. 6. Signature 20
The audit report should be signed in the name of the audit firm, the personal name of the auditor or both as appropriate. 7. Auditor’s Address
The address of auditor is stated in the audit report. The name of city is stated in the report for information of the readers. 8. Date of Report
The report should be dated. It informs the reader that the auditor considered the effect on the financial statements and in his report of events or transactions about which he become aware the occurred up to that date.
Qualified audit reports It is necessary to firstly identify the circumstances which can give rise to a qualification. These are as follows: Uncertainty arising from either a limitation upon the scope of the auditors work or an inability to obtain any evidence regarding doubts which exist in relation to an unresolved matter. Disagreements arising from factual discrepancies, unsuitable accounting policies, inadequate or misleading disclosures given in the financial statements or failure to comply with an accounting standard or legislation. Some of these types of disagreement should be resolved fairly easily with the client so that a qualification can be avoided, for example a factual disagreement should lead to the financial statements being amended to reflect the correct view. Other types of disagreement which are perhaps more subjective will be much more difficult to resolve such as those relating to the suitability of an accounting policy. Secondly, it is necessary to decide upon the effect of the circumstances discussed above. 21
These are classified as:
Those having a material but not fundamental effect upon the financial statements
Those having a fundamental effect upon the financial statements.
Fundamental means that the matter is such as to seriously distort or undermine the view which is given by the financial statements to the extent that they could mislead user groups. An except for qualification will be given when the matter is a material but not fundamental uncertainty or disagreement. An example of an uncertai nty could be the destruction of a part of the clients accounting records leading to a limitation of scope being imposed upon the auditors work because audit evidence is then unavailable. An example of a disagreement under this heading could be a failure by a client to apply a reasonable depreciation policy to a particular class of fixed assets, however in both of these examples the effect is not pervasive to the view which the financial statements give as a whole. 3.6 GENERALLY ACCEPTED AUDITING STANDARDS
The generally accepted auditing standards (GAAS) are the standards you use for auditing private companies. GAAS come in three categories: general standards, standards of fieldwork, and standards of reporting. Keep in mind that the GAAS are the minimum standards you use for auditing private companies. Additionally, the Public Company Accounting Oversight Board (PCAOB) has adopted these standards for public (traded on the open market) companies. Each audit engagement you work on may require you to perform audit work beyond what‘s specified in the GAAS in order to appropriately issue an opinion that a set of financial statements is fairly presented. You need to use professional judgment and exercise due care in following all standards. General standards: The first three GAAS are general standards t hat address your
qualifications to be an auditor and the minimum standards for your work product:
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As an auditor, you must have both adequate training and proficiency.
You are independent in both fact and appearance.
You exercise due professional care in performing your auditing tasks.
Standards of fieldwork : The next three GAAS govern how you actually do your job:
Your work is adequately planned, and all assistants are properly supervised.
You gain an understanding of the client and its environment, including internal controls, to assess the risk of material misstatement in the financial statements and to plan your audit.
The evidence you gather during the audit is appropriate and sufficient to evaluate management‘s assertions on the financial statements.
Standards of reporting: The last four GAAS concern information you must consider
prior to issuing your audit report:
You have to state whether the financial statements are prepared using generally accepted accounting principles (GAAP).
Just as important is to report whether GAAP are consistently applied for all financial accounting. Should this not be the case, you have to report any departures.
You also have to make sure that disclosures — any additional information needed to explain the numbers on the financial statements — are provided.
Lastly, you have to include your opinion as to whether the financial statements present fairly in all material respects the financial position of the company under audit. 3.7 ACCOUNTING STANDARDS (CURRENTLY APPLICABLE AND USED IN COMPANY OR NOT) Accounting Standards
Y/N
AS 1 Disclosure of Accounting Policies
Y
AS 2 Valuation of Inventories
Y
AS 4 Contingencies and Events Occurring After the Balance Sheet Date
Y
23
AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in
Y
Accounting Policies AS 6 Depreciation Accounting
Y
AS 9 Revenue Recognition
Y
AS 10 Accounting for Fixed Assets
Y
AS 13 Accounting for Investments
Y
AS 14 Accounting for Amalgamations
Y
AS 15 Employee Benefits
Y
AS 16 Borrowing Costs
Y
AS 18 Related Party Disclosures
Y
AS 20 Earnings Per Share
Y
AS 22 Accounting for Taxes on Income
Y
AS 26 Intangible Assets
Y
AS-1 — DISCLOSURE OF ACCOUNTING POLICIES
Any change and financial impact of such change should be disclosed.
If fundamental assumptions (going concern, consistency and accrual) are not followed, the fact to be disclosed. Going concern assumption is assessed for a foreseeable period of one year
Accounting Policies adopted by the enterprise should represent true and fair view of the state of affairs of the financial statements
Major considerations governing selection and application of accounting policies are: i) Prudence, ii) Substance over form and iii) Materiality.
AS-2 — VALUATION OF INVENTORIES
The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. 24
Inventories are valued at lower of cost or net realisable value. Specific identification method is required when goods are not ordinarily interchangeable. AS-4 — CONTINGENCIES AND EVENTS OCCURRING AFTER THE BALANCE SHEET DATE
The amount of a contingent loss should be provided for by a charge in the statement of profit and loss if it is probable that future events will confirm that, after taking into account any related probable recovery, an asset has been impaired or a liability has been incurred as at the balance sheet date, and a reasonable estimate of the amount of the resulting loss can be made. Assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date or that indicate that the fundamental accounting assumption of going concern (i.e., the continuance of existence or substratum of the enterprise) is not appropriate. AS-6 — DEPRECIATION ACCOUNTING
Allocate depreciable amount of a depreciable assets on s ystematic basis to each accounting year over useful life of asset, useful life may be reviewed periodically. Basis must be consistently followed and disclosed. Any change to be quantified and disclosed. Rates of depreciation should be disclosed. A change in method followed be made onl y if required by the statute, compliance to Accounting Standard, appropriate preparation or presentation of the financial statement. In cases of extension, revaluation or exchange fluctuation, depreciation to be provided on adjusted figure prospectively over the residual useful life of the asset. AS-10 — ACCOUNTING FOR FIXED ASSETS
25
The cost of a fixed asset should comprise its purchase price and any attributable cost of bringing the asset to its working condition for its intended use.
Self-constructed asset shall be accounted at cost.
In case of exchange of asset, fair value of asset acquired or the net book value of asset given up whichever is more clearly evident shall be considered. Revaluation is permitted provided it is done for the entire class of assets. The basis of revaluation should be disclosed. Increase in value on revaluation shall be credited to Revaluation Reserve while the decrease should be charged to Profit and Loss Account.
CHAPTER 4 – COMPANY PROFILE OF TIRTHAROOP ELECTRICALS PRIVATE LIMITED
TIRTHAROOP ELECTRICALS PRIVATE LIMITED 4.1 ABOUT THE COMPANY
Tirtharoop Electricals Private Limited, founded in 1987 promoted by Mr. Subhas Gokhale, at 7,Yashodeep Apt,1356 B, Shivaji Road, Panvel , Navi Mumbai ,Maharashtra 410206. The Company is primarily engaged in providing Electrical project designing with automation & related instrumentation. It undertakes Testing, Installation & Commissioning of electrical fittings, erection, industrial fabrication, Supply of H.T. & L.T. switchgear, upgrade systems for both HT & LV loads for various valued customers. It is pioneer in providing Turnkey Solution for installation of all electrical equipments right from the stage of Designing to Implementation electrical equipment. All the necessary approvals for commencement of this business are in place. 4.2 COMPANY INFORMATION
26
Corporate Identification Number
U31400MH1987PTC042128
Name
TIRTHAROOP ELECTRICALS PVT LTD
RoC
RoC-Mumbai
Registration Number
42128
Company Category
Company limited by shares
Company Sub Category
Indian Non-Government Company
Class of Company
Private Company
Authorised Capital (in Rs.)
500,000
Paid up capital (in Rs.)
451,200
Number of Members(Applicable only in case of company without Share Capital)
-
Date of Incorporation
07 January 1987
Address 1
7, YASHODEEP APARTMENT, 1356-B, SHIVAJI ROAD,
Address 2
PANVEL, DIST - RAIGAD
City
PANVEL
State
Maharashtra
Country
INDIA
Pin
410206
Whether listed or not
Unlisted
Company Status (for eFiling)
Active
4.3 BACKGROUND OF KEY MANAGEMENT PERSONNEL
Being the Second Generation entrepreneur; Mr. Sachin Subhash Gokh ale (Director) son of Mr. Subhas Gokhale, aged 33 years holds a bachelor degree of Commerce and Diploma in Electrical Engineering from DIESE, Pune. He is qualified Engineer with more than 10 years of qualitative experience. He has proven track record of undertaking valued engineering initiatives, establishing new set-ups, streamlining operations, evolving cost reduction mechanism, producing engineering techniques and creating a team work environment to enhance productivity with new initiatives and innovations within the organizations. He is a dynamic young and enterprising youth
27
with effective communication skills with great presentation skills. He has the ability to convert adverse business environment to a favorable business affair. Mr. Vinay Dattatraya Bhave designated as (Head – Sales) aged 49 years, residing at Flat 201, Kanak Residency, Plot No. 54, MCHS, Near Purohit Hospital, Old Panvel, Dist. Raigad, Maharashtra-410206. He is a BTech.(Elec.) and holds Diploma in Electrical Engineering from C.W.I.T., Pune . He is a qualified Engineer with more than 25 years of qualitative experience in industries like Orkay Polyester, Hikal etc. Expert at planning and effecting preventive maintenance schedules of various machineries to increase machine up time and equipment reliability. He is related to various Social service organizations and is a Founder committee member of Friends of children organization, a NGO working for poor students. A Member of Managing Committee of Pen taluka Maternity & Children Welfare Center, a Charitable Hospital providing Medical Assistance to Poor & Needy people. He is one of the Founder Managing committee Member of ―Sobatee‖ a NGO working f or Betterment, Awareness, Education, Environment, Medical Assistance etc for more than 6 years. He is highly influential with regards to his contacts relating social welfare cause. Mr. Vinit Vinayak Joshi designated as (Head - Admin & Logistic) aged 33 years is a resident of At & Post – Palaspe, Tal. – Panvel, Dist. – Raigad Maharashtra410206. He holds a Master of Commerce degree and is Finance Management graduate. He is a well known academician with more than 10 years of qualitative experience of in guiding and training finance & accounts students. An expert team builder and player, has an experience in different areas such as Accounts, Administration and Customer relations. He is a visiting faculty for MBA at various colleges such as, Mumbai School of Business, S. P. More College, Pillais College etc. 4.4 KEY DELIVERABLES BY THE COMPANY
Overseeing breakdown and preventive maintenance of Spinning, Polyester, Test Rising, Knitting, Utility Plants and Diesel Generating Sets.
Executing Fault fining and rectification of faults in control circuits, power circuits or in any type of electrical breakdown in various types of equipments, 28
like Extruders, (D.C.), Agitators, Chillers, Compressors, Pumps, Heaters, Lifts etc.
Responsible for: - Erection of Machine Tools. - Process re-engineering. - Material Management. - Cost reduction.
Monitoring switchyard, H.T. (22 KV) and L.T. substation.
Responsible for implementing preventive maintenance of switchyard, H.T. and L.T. breakers, transformers, PCCs, MCCs, lead acid batteries, etc.
Overhauling motors in electrical workshop.
CHAPTER 5 - PROFIT AND LOSS A/C AND BALANCE SHEET AND AUDIT REPORT TIRTHAROOP ELECTRICALS PVT. LTD. Balance Sheet as at 31-Mar-2014
Particulars I.
EQUITY AND LIABILITIES
1
Shareholders' Funds
2
Note No,
`
(Rupees)
as at 31 -Mar-2014
as at 31-Mar-2013
147311162
1090900.23
(a) Share Capital
2
451200.00
451200.00
(b) Reserves and Surplus
3
1021915.62
639700.28
138343100
138343100
1399435.00
1389435.00
1767787.96
2002349.33
Non-Current Liabilities
(a) Long-Term Borrowings 3
In
4
Current Liabilities
(a) Short Term Borrowings
5
728830.32
344654.32
(b) Trade Payables
6
374422.72
1121234.72
(c) Other Current Liabilities
7
660689.45
339997.82
(d) Short Term Provision
8
3795.47
196462.47
4630338.53
4482684.61
Total
29
II. ASSETS 1
Non-Current Assets
647022.00
69325100
322970.00
369203.00
(i) Tangible Assets
310936.00
353709.00
(ii) Intangible Assets
12034.00
15494.00
324052.00
324052.00
3983316.53
3783429.61
(a) Fixed Assets
9
(b)Long-Term Loans and Advances 2
10
Current Assets
(a) Current Investments
11
175393.04
175393.04
(b) Inventories
12
275980.00
235098.00
(c) Trade receivables
13
3240920.47
3030252.50
(d) Cash and Cash Equivalents
14
220627 07
278290.07
(8) Short Term Loan & Advances
15
40080.00
40080.00
(f) Other Current Assets
16
30316.00
30316.00
463033813
4482684.61
Total
TIRTHAROOP ELECTRICALS PVT. LTD. 7,Yashcipeep Apt, 135S B.Shivaji Road Panvel. Statement of Profit and Loss for the year ended 31 -Mar-2014 Particulars
I
Revenue from Operations
II
Other Income
III
TOTAL REVENUE (I + II)
IV
EXPENSES
In (Rupees) `
Note
1-Apr-2013 to
1-Apr-2012 to
No.
31-Mar-2014
31 -Mar-2013
17
4934998.49
10242318.52
-
32018.00
4934998.49
10274336.52
Purchases of Stock-in-Trade
18
2331601.74
6473439.95
Changes in Inventories
19
-40832.000
30362.00
Employee Benefit Expenses
20
345348.00
231729.30
Finance Costs
21
40010.00
69750.00
Depreciation and Amortization Expenses
9
46233.00
43053.32
Other Expenses
22
1980472.41
3066345.06
TOTAL EXPENSES
4602733.15
9919299.63
V
Profit before Exceptional and Extraordinary Items and Tax (IIII-IV)
332215.34
355036.89
VI
Exceptional Items
-
30
VII
Profit before Extraordinary Items and Tax
332215.34
355036.89
-
-
332215.34
355036.89
Current Tax
-
-
Deferred Tax
-
-
332215.34
355036.89
-
-
XIII Tax Expense of Discontinuing Operations
-
-
XIV Profit/(LosaJfrom Discontinuing Operations (after taxHXII-Xlll)
-
-
332215.34
355036.89
-Basic
-
-
-Diluted
-
-
VIII Extraordinary Items IX
Profit Before Tax
X
Tax Expense
XI
Profit/(LosaJ for the period from Continuing Operations(IX-X)
XII
Profit/(Loss) from Discontinuing Operations
XV
Profitless) for the Period(Xl+XIV)
XVI Earnings per Equity Share
5.3 ACCOUNT SCRUTINIZED FROM BALANCE SHEET AND PROFIT AND LOSS ACCOUNT
Scrutiny: Scrutinizing the accounts generally and, in particular, examining the composition of final balances; and ascertaining the extent of clearance of the balances brought forward from the previous year particularly those relating to receivables and payables, sale or disposal of fixed assets and of inventories. In (Rupees.)
13. Trade receivables
Particulars
`
as at 31 -Mar-2014
as at 31 -Mar-2013
31
595076.00
2633349.50
Unsecured, considered doubtful
595076.00
2633349.50
Outstanding for more than € months from the due
2645344.47
396903.00
Unsecured, considered doubtful
2&45S44.47
336903.00
Total
3240920.47
3030252.50
Outstanding for lass than 6 months from the due date
date
• Debtor ledger: -
These ledger accounts of customers are opened to whom trader has sold the goods, so its other name is also sale account ledger. Because all credit sale's amount can be checked from the amount due from debtors in this ledger. It is also one place where we can find each debtor's closing balance. The objectives of studying audit of debtors ledger is 1.
To know about ledger (debtors).
2.
To verify that there are no errors and frauds in this ledger.
3.
To confirm that company has prepared debtors ledger without any errors and
frauds and it is doubt free ledger. 20 . Employee Benefit Expenses
Particulars
In (Rusees) `
as at 31 -Mar-2014
as at 31 -Mar-2013
Salaries and Wages
300906.00
156591.00
Staff Welfare Expenses
44442.00
75136.30
Total
345348.00
231729.30
32
It is broad in its applicability as it covers all short-term and long term employee benefits. For example, annual paid leave (though not en cashable), long-term service rewards, subsidised goods or services, etc. are also covered.
5.4 DRAFT OF AN AUDIT REPORT INDEPENDENT AUDITOR’S REPORT
To, The Members M/s. Tirtharoop Electricals Pvt. Ltd. 33
Maharashtra – 410 206 Report on Financial Statements:
1. We have audited the accompanying Financial Statements of M/s. Tirtharoop Electricals Private Limited (―the Company‖) which comprise the Balance Sheet as
at 31st March 2013 and Statement of Profit and Loss for the year ended on that date, and a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Financial Statements :
2. Management is responsible for the preparation of these Financial Statements that give true and fair view of the financial position and financial performance of the Company in accordance with the Accounting Standards referred to in sub section (3C) of section 211 of the Companies Act, 1956 (―the Act‖). This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility:
3. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. 4. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The Procedures selected depend on the auditors‘ judgement, including the assessment of the risks of material misstatement of the financial statement, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company‘s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of the 34
accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 5. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our Audit opinion. Opinion:
6. In our opinion, and to the best of our information and according to the explanations given to us, the financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India: (a) in the case of the Balance Sheet, of the state of affairs of the company as at 31st March, 2014; and (b) in the case of Statement of Profit and Loss, of the Profit for the year ended on that date. Report on Other Legal and Regulatory Requirements:
7. As required by section 227(3) of the Act, we report that: a. We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of the audit. b. In our opinion, proper books of account as required by law have been kept by the company so far as appears from our examination of those books. c. The Balance Sheet and Statement of Profit and Loss dealt with by this report are in agreement with the books of account; d. In our opinion, the Balance Sheet and Statement of Profit and Loss comply with the Accounting Standards referred to in sub section (3C) of section 211 of the Companies Act, 1956; e. On the basis of written representations received from the directors as on 31st March, 2013 and taken on record by the Board of Directors, none of the directors is disqualified as on 31st March, 2014 from being appointed as a director in terms of clause (g) of sub-section (1) of Section 274 of the Companies Act, 1956; 35
f. Since the Central Government has not issued any notification as to the rate at which the cess is to be paid under section 441A of the Companies Act, 1956 nor has it issued any Rules under the said section, prescribing the manner in which such cess is to be paid, no cess is due and payable by the Company.
For XXX CHARTERED ACCOUNTANTS
Place : Mumbai
MR. A
Date : 31/08/2014
(Proprietor) Membership No. 132564
CONCLUSION
The project concluded that, given the complexity and development of Company, the overall level of compliances with the standards and codes is of high order. This project gives the correct ideas about how the major areas can be found b y way of effective auditing system i.e. errors, frauds, manipulation s etc. form this auditor get the clear idea show to recommend on the position. Project also contain that how to conduct of audit of the company, what are the various procedure through 36
which audit of company should be done. Form auditing point of view, there is proper follow up of work done in every organization there no misconduct of transactions is taken places for that purpose the auditing is very important aspect in today‘s scenario form company and point of view.
TYBCom Accountancy Auditing-II
Advanced Auditing Mcom Part-II 37
