What is Auditing – Auditing Definition,

Introduction and Meaning

The primary purpose of the audit is to confirm the authenticity of
books of accounts prepared by an accountant. In this post, we will
cover Auditing introduction, definitions, and functions.

It is well known saying that “where the function of accountant ends,

audit begins to determine the true and fair picture of such
accounts.”

Auditing Introduction
The audit is an intelligent and critical examination of the books of
accounts of the business.

Auditing is done by the independent person or body of persons

qualified for the job with the help of statements, papers, information
and comments received from the authorities so that the examiner
can confirm the authenticity of financial accounts prepared for a
fixed term and report that:

● The balance sheet exhibits an accurate and fair view of the state
of affairs of concern;
● The profit and loss accounts reveal the right and balanced view
of the profit and loss for the financial period;
● The accounts have been prepared in conformity with the law.
Thus, it will be seen that the duty of an auditor is much more than a
mere comparison of the balance sheet and accounts with the
books.
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But, apart from doing this, he has to satisfy himself according to his
information and the explanations given to him.

Meaning of Auditing
The term audit is derived from a Latin word “audire” which means to
hear authenticity of accounts is assured with the help of the
independent review.

Audit is performed to ascertain the validity and reliability of

information. Examination of books and accounts with supporting
vouchers and documents to detect and prevent error, fraud is the
primary function of auditing.

Auditor has to check the effectiveness of internal control systems

for determining the extent of checking out the audit.

Initially its meaning and use were confined merely to cash audit, and the auditor has
to ascertain whether the persons are responsible for the maintenance of accounts
had adequately accounted for all the cash receipts and the payment on behalf of
this principle.

But the word audit has an extensive usage, and it now means a thorough scrutiny of
the books of accounts and its ultimate aim is to verify the financial position
disclosed by the balance sheet and profit and loss accounts of a company.

In short, an audit implies an investigation and a report. The process of checking and
vouching continues until the study is completed and the auditor enables himself to
report under the terms of his appointment.

Definition of Auditing
“An audit is an examination of accounting records undertaken with a view of
establishing whether they correctly and completely reflect the transactions to which
the purport to relate.” –Lawrence R. Dickey
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“Audit is defined as an investigation of some statements of figures involving
examination of certain evidence, so as to enable an auditor to make a report on the
statement.” –Taylor and Perry
An audit denotes the examination of balance sheet and profit and loss accounts
prepared by others together with the books of accounts and vouchers relating
thereto such in such a manner that the auditor may be able to satisfy himself and
honestly report that in his opinion such balance sheet is properly drawn up so as to
exhibit a true and correct view of the state of affairs of a particular concern
according to the information and explanations given to him and as shown by the
books.” -F.R.M De Paula
“Auditing is a systematic examination of the books of records of business or other
organization in order to ascertain or to verify and to report upon the facts regarding
its financial operations and the result thereof.” –Prof. Montgomery
Audit such an examination of the books of accounts and vouchers of a business as
will enable the auditor to satisfy himself that the balance sheet is properly drawn up
so as to give a fair and true view of the state of affairs of the business and the
whether the profit and loss of accounts gives a true and fair view of profit and loss
for the financial period according to the best of his information and explanations
given to him and as shown by the books and if not in what respect he is not
satisfied.” –Spicer & Pegler
“Audit may be said to be verification of the accuracy and correctness of the books
of accounts by an independent person qualified for the job and not in any way
connected with the preparation of such accounts.” -J.B. Bose
“Audit is not an inquisition and its mission is not one of fault finding. Its purpose is to
bring to the notice of the administration lacunae in his rules, regulations and lapses,
and to suggest possible ways and means for the execution of plans and projects
with greater expedition, efficiency and economy.” –A.K. Chandra

Objectives of an Audit – 2 Main Audit Objectives

The objective of an audit is to express an opinion on financial statements, to give the
opinion about the financial statements, the auditor examines the financial statements to
satisfy himself about the truth and fairness of the financial position and operating
results of the enterprise.

There are certain inherent limitations of audit examination.

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 It would not be possible for any type auditor to discover all errors
and frauds, in the financial statements due to the limitations of his
checking.

Such discovery is not the main objective of the audit.

The objectives of the audit can be categorized into

1. primary objectives, and

2. subsidiary objectives.

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 Primary Objectives of Audit
The main objectives of the audit are known as the primary objectives of the audit. They
are as follows:

1. Examining the system of internal check.

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2. Checking arithmetical accuracy of books of accounts, verifying posting, casting,
balancing, etc.
3. Verifying the authenticity and validity of transactions.
4. Checking the proper distinction between capital and revenue nature of transactions.
5. Confirming the existence and value of assets and liabilities.

Verifying whether all the statutory requirements are fulfilled or not.

Proving true and fairness of operating results presented by income statement and
financial position presented by the balance sheet.

Subsidiary Objectives of Audit

These are such objectives that are set up to help in attaining primary objectives. They
are as follows:

Detection and prevention of errors

Errors are those mistakes that are committed due to carelessness or

negligence or lack of knowledge or without having vested interest.

Errors may be committed without or with any vested interest.

So, they are to be checked carefully. Errors are of various types.

Some of them are:

● Errors of principle.
● Errors of omission.
● Errors of commission.
● Compensating errors.

Detection and prevention of frauds

Frauds are those mistakes that are committed knowingly with some
vested interest in the direction of top-level management.

Management commits frauds to deceive tax, to show the

effectiveness of management, to get more commission, to sell a share
in the market or to maintain the market price of share, etc.
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 Detection of fraud is the main job of an auditor.

Such frauds are as follows:

● Misappropriation of cash.
● Misappropriation of goods.
● Manipulation of accounts or falsification of accounts without any
misappropriation.

Under-or over-valuation of stock

Normally such frauds are committed by the top-level executives of

the business. So, the explanation is given to the auditor also remains
false.

So, an auditor should detect such frauds using skill, knowledge, and
facts.

Other objectives

● To provide information to the income-tax authority.

● To satisfies the provisions of the Companies Act.
● To have a moral effect.

Types of Auditing

An audit can be categorized under various groups on a distinct basis. The classification of auditing on a
different base is as follows:

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On the basis of Organization

In this class, the audit is classified on the basis of the nature of the company for which auditing task is
initiated. It consists of the following types:

Audit Enforced by Law

● Companies ruled by the Companies Act,2013

● Banking organizations ruled by the Banking Regulation Act,1949
● Electricity supply corporations ruled by the Electricity Supply Act,1948
● Co-operative Societies certified beneath the Cooperative Societies Act,1912
● Civic or humanitarian trusts enrolled beneath distinct Religious and Endowment Acts.
● Specified entities beneath distinct sections of the Income Tax Act,1961
● Certified Clubs, associations, etc. enrolled beneath Societies Registration Act, 1960

Audit Under Voluntary Class

● Proprietorship concern
● Partnership organization
● Hindu undivided family
● Federation of individuals
● Non-profit organization

On the basis of Function

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Under this class, the audit is categorized on the basis of practical actions of the auditor. Altogether, this
class od audit is based on the auditor’s work involved in audit. It consists of the following types:

● External Audit
● Internal Audit

On the basis of Practical Approach

The categorization of audit beneath this class includes practical access to the work. It consists of the
following types:

● Continuous Audit
● Interim Audit
● Partial Audit
● Periodical Audit
● Complete Audit
● Balance sheet Audit
● Standard Audit

On the basis of Audit Dimension

In this class, the audit is categorized on the basis of the dimension of the audit. It consists of the
following types:

● Management Audit
● Cost Audit
● Tax Audit
● Human Resource Audit
● System Audit
● Proprietary Audit
● Efficiency Audit
● Environment Audit
● Social Audit
● Cash Transaction Audit
● Government Audit
● Secretarial Audit
● Energy Audit

Audit Planning
Introductions

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An audit is a professional service to a client. The review of accounting, financial and other operations
form a basis of such service. Before commencing audit, an auditor must prepare himself well.
Preparation for an audit relates to audit planning, preliminary preparations by the auditor, audit
programme, audit note book, audit working papers, audit evidence, commencement of a new audit, test
checking, and routine checking.

Meaning of Audit Planning

Planning is required to complete the audit effectively within the specified time. Audit planning is a
process of deciding in advance what is to be done, who is to do it, how it is to be done and when it is to
be done by the auditor in order to have efficient and effective completion of work.

Audit planning can be done only when, the auditor is having knowledge of the business of the client. It
helps in accomplishment of objectives of audit and enables the auditor to cover different aspects of audit
work in a systematic manner within a preset time frame. It enhances the quality of audit work. Audit
plans should cover knowledge about client’s accounting systems and policies, internal control procedures
and coordinating the work to be performed. Plans should be flexible so that they can be developed or
revised as and when required by the auditor.

Benefits (or) Advantages of Audit Planning

An efficient and effective audit plan provides the following benefits:

· Accomplishment of Objectives: Audit plan ensures that it provides right means to accomplish
audit objectives. Further it also ensures that appropriate attention is devoted to important areas of audit.

· Identification of Problems: A well drawn and established audit plan helps in identifying
potential problems.

· Timely Completion of Work: It ensures that work is completed properly within the specified
time and no important area is left out. It also ensures that all important areas of management receive
attention.

· Facilitates Coordination: It facilitates coordination of the audit work done by auditors and other
experts.

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· Better Audit Work: It helps in improving the quality of audit work and provides promptness and
perfection in audit performance.

Factors Affecting Audit Planning

The following factors should receive due consideration while planning:

· Size of the company and nature of its operations.

· Accounting system, internal control and adherence to standard.

· Environment in which the company operates.

· Previous experience with the client; and

· Knowledge of client’s business.

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 Internal Control
Definition: Internal Control can be defined as a system designed, introduced and maintained by the
company’s management and top-level executives, to provide a substantial degree of assurance in
achieving business objective, while complying with the policies and laws, safeguarding the assets,
maintaining efficiency and effectiveness in regular operations and reliability of financial statements.

Objectives of Internal Control System

▪ To ensure that the business transactions take place as per the general and specific authorisation of
the management.
▪ To make sure that there is a sequential and systematic recording of every transaction, with the
accurate amount in their respective account and in the accounting period in which they take place. It
confirms that the financial statement fulfils the relevant statutory requirements.
▪ To provide security to the company’s assets from unauthorised use. For this purpose, physical
security systems are used to provide protection such as security guards, anti-theft devices, surveillance
cameras, etc.
▪ To compare the assets in the record with that of the existing ones at regular intervals and report to
the those charged with governance (TCWG), in case any difference is found.
▪ To evaluate the system of accounting for complete authorisation of the transactions.
▪ To review the working of the organization and the loopholes in the operations and take necessary
steps for its correction.
▪ To ensure there is the optimum utilization of the firm’s resources, i.e. men, material, machine and
money.
▪ To find out whether the financial statements are in alignment with the accounting concepts and
principles.
An ideal internal control system of an organization is one that ensures best possible utilization of the
resources, and that too for the intended use and helps to mitigate the risk involved in it concerning the
wastage of organization’s funds and other resources.

Types of Internal Control System

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1. Preventive Controls: These controls are introduced in the firm to stop errors and irregularities from
taking place.
2. Detective Controls: These controls are implemented to reveal errors and irregularities, once they take
place.
3. Corrective Controls: These controls are designed to take corrective action for removing errors and
irregularities after they are detected.

The type of internal control system implemented in the organization will be based on the company’s
nature and requirements.

Internal Control System is important for every organization, for efficient management as well as it also
assist in the company’s audit. It includes all the processes and methods to help the company in reaching
its ultimate objective.

Internal Check: Definition, Objectives, Principles, Characteristics

The internal check is an arrangement of the duties of the staff members of the accounting functions in
such a way that another automatically checks the work performed by a person.
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 What is Internal Check?

In the opinion of Spicer and Pegler, “A system of internal check is an arrangement of staff duties,
whereby no one person is allowed to carry through and to record every aspect of a transaction so that
without collusion between two or more persons, fraud is activated and at the same time the possibilities
of errors are reduced to the minimum.”

L.R. Dicksee defines an internal check as “such an arrangement of book-keeping routine that errors and
frauds are likely to be prevented or discovered by the very operation of the book-keeping itself.”

Internal check means practically a continuous internal audit carried on by the staff itself, using which
other members of the staff independently check the work of each individual.

An internal check has been defined by The Institute of Chartered Accountants of England and Wales
(ICAEW) as; “the checks on -a day to day transactions which operate continuously as part of the routine
system, where the work of one person is proved independently or in complementary to the work of
another, the object is the prevention or early detection of errors or frauds.”

An internal check is a continuous process and is part of the day-to-day routine. It relates to all the
transactions that take place every day. An internal check is achieved by a complimentary allocation of
duties and by independent verification of the work of one person by another.

Essential Characteristics of Internal Check System

Certain qualities are needed to make an internal check system more effective and efficient. Such qualities
are known as features of internal check system, which are as follows:

1. Division of Work

No one should be allowed to have the right to perform the work from origin to end.

For example – a transaction of sale may have to be split into a display of article by staff, the preparation
of invoice by another, the receipt of cash against the invoice by a third clerk, the delivery of article
against the proof of receipted invoice by another clerk, checking of outward movement of an article
against delivery order by a clerk and so on.

In big business houses, such specialized tasks increase the speed of work and automatically introduce
internal checks.

2. Provision of Check

An organization should set up such provisions so that work can be checked by another staff. An officer
can check the work of one staff by transferring to the staff and again.

3. Use of Devices
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 In this modem world, various devices can be used to do various functions like the use of time record
machines, wage determination machines, etc. An organization should use machines that help to make
work of internal check easier.

4. Self-balancing System

An organization can use self-balancing ledger accounts, which help to make the work of internal check
easier. Its effectiveness depends on its management.

5. Job Rotation

No individual clerk should be allowed to occupy a particular area of operation for long. Familiarity with
and exclusiveness in a position offer a person greater flexibility to attempt manipulation with the system.

6. Specialization

Every staff may not have such specialized knowledge to maintain accounts properly. So, an organization
should give the training to increase their skills so that internal checks can be made more effective.

7. Control

There is more chance of frauds where there is direct contact between consumers or the public. So, a
manager can keep eyes in those works so that the internal check system can be made more effective.

8. Authority Level

There must be clear cut authority levels according to sanctions to various transactions. Commensurate to
the authority vested, responsibility must be extracted. The existence of authority levels results in a review
of the operations of subordinates.

Objectives of Internal Check

There are several objectives of the internal check. They are given below:

1. To minimize the possibility of error, fraud, and irregularity.

2. To prevent the misappropriation of cash and goods.
3. To allocate duties and responsibilities to every clerk in the organization.
4. To ensure an accurate recording of all business transactions.
5. To enhance the efficiency of the clerk in the organization.
6. To exercise moral influence over the staff member.
7. To prepare a final account with ease and efficiency.

Principles of Internal Check

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 An internal check is based on some specific principles. Without which, an internal check is of no use.
These principles are given below:

a. The process should be allocated among the staff of the business according to the duties, responsibility,
and rights in such a. There is no room for interference.
b. No single person should have independent control over the all-important aspects of the business.
c. The duties among the staff of the business should be changed from time to time so that no staff should be
engaged in a particular job for a long time.
d. Every member of the staff should be encouraged to go on leave at least once in a year .this will help in
detecting concealed fraud.
e. An efficient system of internal check should provide for automatic checking of the work of an assistant
by others.
f. The division of work should not be much expensive.
g. The self-balancing system should be invariably used.
h. The financial and administrative power should be assigned very judiciously to different officers.
i. A person having physical custody of assets must not be permitted to have access to the books of account.

Advantages of Internal Check

The main advantages of an internal check are listed below:

1. Moral Influence on Employees

The system of internal check puts a morale check on members of staff and enables them to learn honesty,
hard work, and straightforwardness.

2. Determination of Employees Liability

The system of the internal check determines the responsibilities of employees. The member of the staff
may be held responsible for any irregularity carried on by him.

3. Less Possibility of Frauds

There is less possibility of fraud under the system of the internal check because errors and frauds can be
detected at an early stage.

4. Increase in Efficiency

The system of internal check ensures greater .efficiency and speed because the arrangement of internal
check is based on a division of labor.

5. Auditing Made Easy

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 The system of internal check facilitates the work of auditors to a great extent by enabling him to relay on
test checking.

6. Final Accounts Can Be Prepared

In an internal check system, the ‘Profit and Loss Account’ and Balance Sheet is prepared without any
loss of time.

7. Correct and Complete Records of all the Transactions

The system of an internal check may also result in correct and complete records of all the transactions on
each balancing of the books of accounts.

8. Detection of Dishonesty or Irregularity

Any dishonesty or irregularity in the concern by the members of staff can be detected before they assume
any complication.

9. Test Checking Possible

Suppose the auditor finds the system of internal check satisfactory. Then by taking into mind, it defects or
weak points he can take the help of test checking.

Disadvantages of Internal Check

The defects or weak points of the system of an internal check are listed below:

1. Expensive

The system of Internal Check is more expensive and time-consuming.

2. Slackness in the Work

This is also a serious defect of the system of internal check. The auditor may show slackness at work. He
may rely on the system of internal check blindfold, which may affect the quality of audit work adversely.

3. Not Suitable for Small Concern

The system of internal check is not suitable for small concern as it may be uneconomical in small
concern.

4. Grouping among Employees

If the employees of the concern join hand, they may keep the employer in the dark and may cause many
irregularities defying any-detection thereof.
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 This groupism amongst the employees may not be healthy.

Internal Audit

Internal Auditing is conceptually similar in many ways to financial auditing by public accounting firms,
quality assurance, and banking compliance activities.

The term internal audit has been defined as the independent appraisal of activity within an
organization for the review of accounting financial and other business practices as a protective and
constructive arm of management.

Professor Walter B. Meigs of America says, “Internal auditing consists of a continuous, critical
review of financial and operating activities by a staff of auditors functioning as full-time salaried
employees.”

As defined by The Institute of Internal Auditors (IIA), “Internal auditing is an independent,

objective assurance and consulting activity designed to add value and improve an organization’s
operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined
approach to evaluate and improve the effectiveness of risk management, control, and governance
processes.

The scope of internal auditing within an organization is broad and may involve topics such as;

● an organization’s governance, risk management, and management control over:

● efficiency and effectiveness of operations (including the safeguarding of assets),
● the reliability of financial and management reporting, and
● compliance with laws and regulations.

Internal auditing may also involve conducting proactive fraud audits to identify potentially fraudulent
acts; participating in fraud investigations under the direction of fraud investigation professionals, and
conducting post investigation fraud audits to identify control breakdowns and establish financial loss.

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 The Internal Auditing profession evolved steadily with the progress of management science after World
War II.

Objectives of Internal Audit

The objectives of the internal audit can be summarized as follows:

1. To verify the correctness, accuracy, and authenticity of the financial accounting and statistical records
presented to the management.
2. To confirm that the liabilities have been incurred by the organization concerning its valid and legitimate
activities.
3. To comment on the effectiveness of the internal control system and the internal check system in
force and to suggest ways and means improve these systems.
4. To facilitate the early detection and prevention of frauds.
5. To examine the protection afforded to the company’s assets and use of them for business purposes.
6. To identify the authorities responsible for purchasing assets and other items as well as disposal of assets.
7. To ensure that the standard accounting practices which have to be followed by the organization are
strictly followed.
8. To undertake a special investigation for the management.
9. To assist management in achieving the most efficient administration of the operation by establishing
procedures by complying with the company’s operating policies.

Advantages of Internal Audit

The advantages of internal audit are as follows:

1. The biggest advantage of internal audit is that it will lead to the discovery of errors and therefore when an
external audit is done those errors which were discovered during internal audit would have been rectified
by then.
2. Since the internal audit is done by the employees of the company there is no additional cost involved
which again is a big advantage for a company that is doing an internal audit.
3. As an internal audit is a constant procedure where records are checked regularly it ensures that the
accounting staff of a company keep the records up to date.
4. The auditor can effectively make use of the work performed by the internal auditor by the planned
co-ordination of his work.
5. Internal audit detects the misuse of resources in time which helps to reduce unnecessary expenses.
6. Internal audit checks the efficiency of staff which helps to increase the efficiency of them.
7. Internal audit increases the morale of honest staff because the evaluation of the performance of any staff
will be made at any time.

Disadvantages of Internal Audit

Side by side with the advantages, there are some disadvantages. They are given as follows:

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1. Internal audits report is not accepted by either the shareholders or tax authorities, it is the external auditor
report which is required to be submitted to these parties.
2. Since the internal audit is done by the employees of the company chances are that it may be biased and
therefore a company cannot depend on such reports.
3. Since an internal audit is not done by the professional auditor chances of the internal auditors not
detecting the errors are high.

Charges and Responsibilities of Internal Audit

An internal auditor is assigned with several charges and responsibilities for . effectively conducting the
internal audit process.

The charges and responsibilities are as follows:

1. Develop an audit plan to evaluate the institution’s financial, operational and EDP (Electronic Data
Processing) controls.
2. Assess the economic and efficient use of resources.
3. Determine the level of compliance with established laws, rules, policies and procedures.
4. Recommend the adoption of desirable policies or changes to existing policies.
5. Follow-up on the adequacy of corrective actions.
6. Conduct special projects at the request of the Board.
7. Investigate cases of misappropriation, misconduct, fraud.
8. Establish and maintain a professional rapport with external auditors and management.
9. Keep Audit Committee and Board fully informed on a timely basis of the activities of the Internal
Auditing Department.
10. Follow the Standards of the Professional Practice of Internal Auditing and Code of Ethics as promulgated
by the Institute of Internal Auditors.

Essentials for Effective Internal Auditing

To be effective, internal auditing has to satisfy some essential features. These features are described
below:

1. Independence

The internal auditor should have independence in terms of organizational status and personal objectivity
which permits the proper performance of his duties.

2. Staffing and Training

The internal audit unit should be appropriately staffed in terms of numbers, grades, qualifications, and
experience, having regard to its responsibilities and objectives. The internal auditor should be properly
trained to fulfill all his responsibilities.

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3. Relationships

The internal auditor should seek to foster a constructive working relationship and mutual understanding
with management, with external auditors, with any other review agencies and, where one exists, the audit
committee.

4. Due Care

The internal auditor should exercise due care in fulfilling his responsibilities.

5. Planning, Controlling, and Recording

The internal auditor should adequately plan, control and record his work.

6. Evaluation of the Internal Control System

The internal auditor should identify and evaluate the organization’s internal control system as a basis for
reporting upon its adequacy and effectiveness.

7. Evidence

The internal auditor should obtain sufficient, relevant and reliable evidence on which to base reasonable
conclusions and recommendations.

8. Reporting and Follow-up

The internal auditor should ensure that findings, conclusions, and recommendations arising from each
internal audit assignment are communicated promptly to the appropriate level of management and he
should actively seek a response.

He should ensure that arrangements are made to follow up audit recommendations to monitor what action
has been taken on them.

Audit Procedures

Overview

Audit procedures are the methods that auditors use for obtaining audit evidence to form a basis for their
opinion on financial statements. Likewise, audit procedures are performed in order to test various audit
assertions related to different class of transactions and account balances.

Auditors need to perform different types of audit procedures in order to obtain sufficient
appropriate audit evidence. In this case, the procedures that auditors perform usually depend on the
associated risks that auditors face.

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Auditors will need to use their professional judgment to design suitable audit procedures to properly
respond to the assessed risks. Also, different types of audit procedures are usually based on the different
types of audit evidence that auditors seek to obtain.

8 Types of Audit Procedures and Examples

Eight types of audit procedures include:

● inquiry
● confirmation
● inspection of records or documents
● inspection of tangible assets
● observation
● recalculation
● re-performance
● analytical procedures
Inquiry

Inquiry is the process of asking the clients for an explanation of the process or transactions related to
financial statements. This type of audit procedure usually involves collecting verbal evidence. Likewise,
auditors use inquiry procedure for a wide range in the audit process.

For example, auditors may inquire clients to understand the business and control environment; or they
may inquire about transactions or balances of financial statement line items.

Evidence gathered by formal or informal inquiry generally cannot stand alone as convincing. Hence,
auditors usually perform other procedures together with the inquiry such as inspecting the supporting
documents to ensure that the explanation provided by clients can be relied upon.
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Confirmation

Confirmation is similar to the inquiry as it is also the procedure of asking for the information. However,
confirmation is usually done by asking the third party, instead of the client, to confirm transactions and
balances.

This type of audit procedures is usually done through formal written letters. Auditors usually perform the
confirmation procedure for testing account balances such as accounts receivable, accounts payable, and
bank balances, etc.

For example, auditors usually perform confirmation on the client’s bank balances in order to obtain
evidence about its existence as well as rights and obligations assertion.

Inspection of records or documents

Inspection of records or documents is the process of gathering evidence by examining the records or
documents. This type of audit procedures may be done by vouching the transaction records to the
supporting documents or tracing the supporting documents to transaction records.

For example, auditor may use the inspection procedure to test the occurrence assertion of expense
transactions by vouching them to receiving reports, supplier’s invoice and purchase orders.

Audit assertions such as occurrence, accuracy, and cut-off are usually tested by inspecting the documents
to support the accounting transactions in the company’s records (vouching). And completeness assertion
is usually tested by selecting documents and trace them back to the company’s records (tracing).

Inspection of tangible assets

Inspection of tangible assets is the process of physical examination of the company’s tangible assets such
as property, plant and equipment. This type of audit procedures can provide the evidence of tangible
assets’ existence.

For example, auditors may test the existence assertion of fixed assets by performing physical inspection
of assets that are recorded in the fixed assets register.

Also, it is useful to note that the inspection alone will not provide evidence about the rights and
obligations. For this audit assertion, auditors may need to inspect the legal documents of the assets.

Observation

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Observation is the process that the auditors perform by looking at the procedures being performed by the
client. This type of audit procedures provides evidence that the client’s procedures actually take place at
the time the auditors perform the observation.

Observation is different from physical examination of assets as the physical examination of assets is
actually the same as counting assets while observation focuses only on the client’s activities.

For example, the auditor may perform an observation procedure by witnessing the counting of
inventories by the client. This observation procedure is to test the existence of the client’s inventories
counting procedures, not the accuracy of the client’s inventory.

Recalculation

Recalculation is the process of re-compute the work that the client has already done to see if there are
different results between auditor’s work and the client’s work. This type of audit procedures is usually
used to test the valuation and allocation assertion of the financial statements.

For example, auditors may perform recalculation on the depreciation of fixed assets to test their valuation
assertion.

Re-performance

Re-performance is the process that auditors independently perform the control procedures that were
originally done as part of the internal control system by the client. This type of audit procedures is used
to test the client’s control procedures.
For example, auditors may use a re-performance audit procedure in the test of controls on the bank
reconciliation procedure that the client already has done.

Analytical procedures

Analytical procedures are the processes of evaluating financial information through analysis of trend,
ratio or relationship between data including both financial and non-financial data. Auditors usually
perform this type of audit procedures by building their expectations about typical transactions or account
balances and comparing them to the client’s record.

If auditors find that the client’s record is inconsistent with their expectations, they will investigate further
on the variance that exists. The investigation might involve performing more substantive tests.

For example, auditor may perform the analytical procedure on interest expense account by multiplying
the average interest rate with the average outstanding balance of the borrowings. Then, the auditor will
use the result to compare with the amount recorded by the client. Any significant difference will be
investigated further.
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 VOUCHI
NG

Vouching is the examination of transactions of a business together with documentary and

other evidence of sufficient validity to satisfy an auditor that such transactions are in order, have
been properly authorized and are correctly recorded in books.

Objects of Vouching
1. Authentication of accuracy and truth of book keeping entries.
2. Satisfaction of entries of business transactions.
3. Knowing the transactions unrelated with business.
4. Authentication of transactions.
5. Essence of auditing.

The auditor must take care of following while vouching.

1. Proper filing of vouchers in serial order.
2. Adoption of test check methodology for examining vouchers.
3. Comparison of evidences with accounting entries.
4. Voucher must be in name of the person or business whose account is audited.
5. It must be related with business transactions.
6. Voucher should relate to period under audit.
7. It must be in printed form.
8. The amount and calculations in voucher must be checked.
9. Voucher must be signed, authenticated and duly stamped.

Vouching of Cash Book

Cash Receipts :
(i) Internal check should be examined.
(ii) Issue of receipts and use of receipt books should be checked.
(iii) System of depositing the receipts into bank should be checked.
(iv) Auditor must obtain the list of all memorandum books like cash diary, Kuchi Rokar Bahi,
Pucci Rokar Bahi, etc.
(v) Vouchers must be serially numbered and the name, amount date in vouchers must tally
with the accounting records.
(vi) Accounting records unsupported by vouchers must be probed.
(vii) Soiled, unissued or cancelled receipts should not be torn but checked along with
counterfoils.

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Important points while vouching Cash Payments.
1. Actuality of payment.
2. Payment relates to audit year.
3. Payment for business
4. Payment to right person
5. Right amount to be paid.
6. Payment must be due with regard to date.
7. Authorization of payment.
8. No payment for ultravires acts
9. Legitimacy of payment
10. Correct accounting.

Vouching Sales Book

1. On the basis of copies of sales invoices.

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 2. Help from other books like orders received book, goods outward book, correspondence, etc.
3. Intensive examination of goods sold of the end of the year and beginning of new year.
4. Recording of only actual sales.
5. Help from statements of accounts of debtors.
6. Audit of totals and postings of sales book.

Vouching of Sales Returns Book

1. Vouching the records on the basis of copies of credit notes.
2. Checking of goods inward book and correspondence.
3. Examination of the records at the commencement of the next year.
4. Totals and ledger posting of sales returns to be carefully examined.

Vouching Purchases
1. Examination of purchase book on the basis of invoices.
2. Record of lost vouchers.
3. Help from goods inward book, challan form and packing notes.
4. Checking of totals & postings on the basis of invoices goods inward books, purchase order,
challan form, goods receipt notes.

Vouching of Purchases Returns Book

1. Checking entries of purchases returns book on the basis of credit notes.
2. Tallying with goods outward book.
3. Checking the totals and postings in ledger.

Vouching of Journal
1. Opening entries shall be vouched with the balance sheet of previous year.
2. Closing entries to be vouched by checking the ledger postings.
3. Rectification entries must be checked thoroughly and must be countersigned.
4. Adjustment entries relating to outstanding and prepaid expenses, unearned income and
accrued income must be vouched on the basis of relevant documents.
5. Transfer entries must be backed by proper authority.
6. Bad debts must be vouched on the basis of authorization and relevant correspondence
with the debtors.
7. Consignment transactions must be checked by the account sale received from the agent.

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Vouching Ledger Postings
1. Methodology of vouching, i.e., checking the ledger postings on the basis of entries in books
of original entries.
2. Persons vouching the accounts.
3. Recording the errors.
4. Vouching the balances of accounts
5. Test checking of ledger postings.
6. Vouching of different ledgers – purchase ledger, sales ledger, etc.

Vouching of various receipts

1. Cash Sales & Credit Sales : Voucher, date, serial no., account head, sales invoices, charging
of sales tax and excise duty, copy of delivery order, sales order, rates, quantity and
authorization by sales/ marketing manager.
2. Receipt from debtor : Cash/Bank receipt voucher, date, serial no., account head, copy of
invoice, sales order, rates quantity party ledger, bank statement, sales register.

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 3. Other Income (Interest dividend, etc) : Bank receipt voucher, date, serial no., account head
copy of dividend warrant, interest warrant. TDS certificate, rates paid up value, investment
register, bank book, bank statement.
4. Loan received : Receipt voucher, date, serial no., account head, (secured/unsecured) loan
agreement, hypothecation or pledge deed, rates of interest, principal amount, resolution of
board of directors, bank statement, ledger.
5. Rent Received : Cash/Bank receipt voucher, date, serial no., account head, rent agreement,
rent receipt, TDS certificate, prepaid or outstanding rent, bank statement, ledger.
6. Sale of Investment : Voucher, account head, broker’s note, copy of demat account, rate,
quantity, bank statement, investment ledger.
7. Bills Receivable Discounted : Voucher date, account head, discounting charges, copy of B/R,
bank advice, noting charges, bank statement/book, BR register.
8. Sale of Fixed Assets : Receipts voucher, sale agreement, sale value and wdv, authorization by
BOD, fixed assets register, bank statement.
9. Royalty Received : Receipt voucher, account head, copy of agreement, TDS certificate, rates
and quantity explored, produced or sold, royalty register, ban statement.
10. Insurance Claim : Receipt voucher, account head, copy of intimation of claim copy of
sanction, loss assessors report, verify the amount of claim, insurance claim register, bank
statement.
11. Recovery of Bad Debts : Voucher, account head, debtors control account, commission to
factor, bank book, statement or list of bad debts written off in previous years.
12. Miscellaneous receipts (subscriptions amount received from, agents etc) : Voucher, counter
fails of receipts, bank pass book, membership register, statements of agents, etc.

Vouching of Payments :
1. Purchase of Goods : Payment voucher, purchase order, builty, material received note,
inspection report, bank statement, rates, quantity and terms of purchases, stores ledger,
goods inward register, authorization, cash purchase register.
2. Payment to Creditors : Receipt by customer, statement of account, invoice copy,
discount and allowances, and other deeds.
3. Salaries & Wages : Payment voucher, attendance register, salary sheet, wage roll, time
keeping record, bank statement, PF, ESIC, overtime sheets, cash book or bank book,
ledger,
4. Payment for Acquisition of Assets : Payment voucher, account head, sale/purchase
agreement, title deed, bank statement, transfer deed, valuer certificate, stamp duty,
broker’s statement, auctioneer’s note, fixed asset register, cash/bank book, authorization
by BOD, Articles of association, etc.
5. Payment of Taxes (Income Tax, Sales Tax) : Computation of tax, copy of challan of
advance tax, TDS certificates, challan of self assessment tax, return, etc.
6. Travelling Expenses : Voucher tour program, schedule, TADA rules, expense voucher,
receipts,etc.
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 7. Preliminary Expenses : Memorandum & Articles of association, registry, Cheque no.,
bills & receipts, rate of stamps, vouchers, etc.

Verification of Assets & Liabilities

Verification is the process of substantiation involved in proving that a statement account or
item is accurate and stated properly. It is an enquiry into the value, ownership & title, existence and
possession, and presence of any charge on the assets as stated in the balance sheet.

Objects of Verification
1. Picture of true position.
2. Correct valuation.
3. Not exceeding the actual.
4. Not less than actual.

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 5. Existence and possession.
6. Ownership and title.
7. Without fraud or irregularity.
8. Arithmetical correctness.
9. Correct presentation in the balance sheet.

Position of Auditor as regards valuation of assets

An auditor is not a valuer or a technical expert. So he has to rely upon the valuation made by
directors, partners, technical experts, surveyors, etc. However he must ensure that the valuation is
fair and reasonable and based upon some accepted principles.

Verification of fixed assets

(i) Goodwill
(a) Existence : Whether purchased or acquired. Self generated goodwill is not said to be
in existence.
(b) Records : Check the fixed asset register.
(c) Right of Ownership : Check purchase agreement, purchase consideration and MOU
between the parties.
(d) Valuation and proper amortization as per AS-14, i.e. 5 years.
(e) Proper presentation and disclosure.
(ii) Freehold Properly :Which is in the name and title of owner.
(a) Ownership:Check the sale deed.
(b) Mortgage: Check the mortgage deed.
(c) Change in asset due to sale, purchase or construction work should be enquired
and duly recorded.
(d) Revenue expenses regarding repairs and maintenance should be written off in P
& L Account.
(e) The auditor must enquire into the existence, valuation and presentation in
balance sheet.
(iii) Leasehold Property : It has two owners and both have qualified rights over it. The following
points to be considered :
(a) Ownership : Lease deed should be examined.
(b) Mortgage : Relevant deed should be perused.
(c) Revenue expenses : To be charged to P & L.
(d) Existence, valuation and presentation B/S to be checked.
(iv) Plant & Machinery
(a) Existence : Physical verification to be conducted, additions and deductions to be
checked.
(b) Records : Check the fixed asset register.

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 (c) Ownership : Invoice receipt and purchase order to be checked.
(d) Revenue and capital expenditure should be properly accounted for.
(e) Proper presentation and disclosure under the schedule of fixed assets.
(v) Furniture, fixture and fittings
The auditor has to verify the existence, records, changes ,ownership, valuation, presentation
and disclosure in the balance sheet, along with depreciation.
(vi) Motor Vehicles
The auditor has to verify the existence, fixed asset register, log books, invoices, registration
book, incidental charges like insurance and road tax, depreciation, licences etc.
(vii) Copyrights, patents, trademarks, loose tools
Check the existence ownership, valuation, presentation in balance sheet, respective registers,
write off etc.
(viii) Investments

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 Ownership: name of client, pledge or lien of investments, Classification: trade or
non trade, long term, short term, stock in trade.
Physical verification: obtain relevant certificates, etc.
Changes: broker’s purchase note or sale note should be checked.
Valuation and disclosure :Current investments should be valued at lower of cost or
fair market value. Long term investments should be valued at historical cost of
acquisition.
(ix) Inventory
Classification of inventory : Stores and spare parts, loose tools, raw materials,
material in process, finished goods, waste or by products.
Existence and records in the stock register to be verified.
Right of ownership : Invoices, documentary evidence to be checked.
Valuation : According to AS-2, valuation is done on cost or NRV whichever is
lower.Method is FIFO or weighted average and method is not changed, unless required.
Presentation and disclosure in
Balance Sheet. (x)Debtors,
Loans and Advances
List of debtors to
be obtained.
Correspondence
with debtors.
Inquiry into discount and bad debts, provision
for bad debts. Securities.
Presentation and disclosure in Balance Sheet.
Classification of debtors according to age, security and reliability, bad and
doubtful.
Loans and Advances.
Names &
Amounts
involved. Terms
and Conditions
of loan.
Regularity of
repayment.
Steps for recovery/repayment of overdues.

Verification of Liabilities
Steps for verification
1. Examination of records .
2. Direct confirmation procedure.
3. Examination of disclosure.
4. Analytical review procedure.

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 5. Obtaining Management Representations.

The nature, timing and extent of substantive procedures to be performed is a matter of

professional judgement of the auditor which is based on the auditor’s evaluation of the
effectiveness of the related internal controls

Vouching of Cash Transactions

All transactions whether it is cash receipts or payments should be accounted in the cash book.
It is an important financial book of a business concern. While vouching, the auditor should
verify and satisfy himself that vouchers in the form of receipts, bills, invoices, cash memos
etc., correspond with the entries in the cash book. Further, he must go behind the books and
establish accuracy and correctness of the entries after thoroughly examining all the original
documentary evidences. Therefore, the auditor should ensure that all receipts have been
recorded in cash book and no fictitious payments appear on the payment side of cash book.

Auditors Duty in Vouching Cash Transactions

The procedures in regard to vouching the transactions of various items which appear in the
debit side of the cash book are discussed below:

1. Auditor should see that all the vouchers are properly filed, serially numbered and
arranged date wise. He should also obtain duplicates of lost or missing vouchers.

2. He should pay attention to the dates, which must correspond with the cash book, name
of the party to whom the voucher is issued, the name of the party issuing the voucher and the
amount, etc.

3. The transactions must be in conformity with the nature of the client’s business. All
unusual transactions must be carefully enquired into.

4. Missing vouchers should be carefully noted and brought to the knowledge of the
owner of the business.

5. All vouchers must be checked and passed for payment by some responsible official.
Similarly any alteration in the vouchers must also be supported by a responsible official.

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6. All the receipts of the day should be deposited in the bank at the end of the day or the
next morning.

7. Bank reconciliation statement should be prepared frequently by the cashier to verify the
bank balance with cash book and pass book. He should also examine the reasons for the
difference between the bank balance as per pass book and that in the cash book.

8. All payments as far as possible, except for petty cash, should be made by cheques or
online. If large amounts appear to have been paid in cash, contrary to the usual practice of the
business, auditor must ascertain the circumstances in which it was considered necessary.

9. Auditor should ascertain that the vouchers have been correctly posted to the
appropriate accounts and distinction has thoroughly been observed between capital and
revenue expenditure.

10. Auditor should ascertain that the cashier do not sanction any payments of
special nature without proper approval from the directors.

Vouching of Cash Transaction

In a business concern, cash book is maintained to account for receipts and payments of cash.
It is an important financial book for a business concern. Errors and frauds arise mostly in
connection with receipts and payments of cash by making misappropriations wherever
possible. Hence the auditor should see whether all receipts have been recorded in cash book
and no fictitious payment appears on the payment side of cash book.
General Points to be Considered while Vouching Cash Transactions
The auditor should consider the following general points while vouching the cash
transactions:

1. Internal Check System

Before starting the vouching of cash book, the auditor should enquire about the internal check
system in operation. If there is no well organized internal check system, there are lot of
chances of misappropriation of cash. He should study carefully the internal check systems
regarding cash sales and other receipts. The internal control needs to be revised periodically
and suitable modification is done to make it more effective.

2. The auditor should verify and test the system of accounting

The system of accounting should be tested for its accuracy of recording cash transactions. By
suppressing the receipt of cash and overstatement of payments, fraud can be committed.

3. Examination of Test Checking

As far as possible, all cash transactions are to be checked elaborately. However, if the auditor
is satisfied that there is an efficient internal check system, he can resort to test checking. In

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such a case, he may check a few items at random and if he finds that they are all in order
and free from irregularities, he has reason to assume that the remaining transactions will be
correct.

4. Comparison of rough Cash Book with the Cash Book

Usually, cash receipts are entered first in the rough cash book before they are entered in the
cash book. The auditor should examine the entries in the rough cash book and main cash
book and then compare them to detect whether there is any error or irregularity.

5. Examine the Method of Depositing Cash Receipts Daily

The auditor should examine the method adopted for depositing daily cash receipts in bank.
The pay in slip should invariably be used for this purpose. Accounting of receipts should not
be delayed. Adjusting customer’s account with allowances and rebates are not actually
allowed. Misappropriation of cash is possible to the extent of adjustment.

6. Preparing of Bank Reconciliation Statement

The auditor should prepare a Bank Reconciliation Statement verifying the bank balance with
cash book and pass book and find out the reasons for the difference between the bank balance
as per Pass Book and that of in the Cash Book.

7. Verification of Cash in Hand

The auditor should verify the cash in hand by actually counting it and see whether it agrees
with cash book balance.

8. Ensuring Proper Control of Receipts Book

The auditor should see whether receipt books are kept under proper control. While doing so,
he should enquire as to whether all receipts are in printed forms, whether counterfoil receipts
are used or a system of carbon copy is used, and all receipt books and all receipts are
separately and consecutively numbered.

Vouching of trading transaction

Vouching of Purchase Book

The major purpose behind the vouching of purchase book is to confirm that every purchase
bill is entered in purchase book and the invoices entered in purchase book are against the
actually received goods and payment is made for those actual purchases.
We will further discuss the main duties of an Auditor concerning the vouching of credit
purchases.

Internal Control for Purchase

The Auditor has to study the adequacy of internal control system in an organization. Normal
internal control system for purchases is given below −

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 ● Department which requires material or store department will send purchase
requisition to the purchase department after getting it signed by the head of the
department. Quality and quantity of the required material should be clearly
mentioned on the requisition.
● After getting authorized requisition from the store or other department, the purchase
department will invite quotations from different suppliers; the purchase department
will then choose the best price quotation with the best quality products.
● A purchase order will be issued to the supplier of goods who is ready to supply the
goods on most favorable terms and conditions. One copy of the purchase order will
be sent to the supplier of goods, the second one to the store department, the third one
to the accounts department and the fourth one to goods receiving department, and
one copy will be retained by the purchase department itself.
● On receiving the goods, the Material Receipt Note (MRN) will be issued by the
goods receiving department after the checking and verification of quantity, price and
quality of material of goods with purchase order. The material along with the
Material Receipt Note will be sent to the store department, one copy each of MRN
will be sent to the accounts department and the purchase department.
● After the verification of the purchase invoice and the MRN, the accounts department
will pass the bill for payment and the payment will be done by the accounts
department according to the payment terms.
The Auditor has to verify the complete internal control system as stated above.

Duties of Auditor

The Auditor has to check and verify the following −

● Record of all purchase orders.
● Verification of quantity, price and payment terms of purchase invoice with purchase
orders.
● Verification about whether goods actually received.
● Verification about proper recording of purchase bill in purchase book.
● Goods purchase should be for business purpose only, not for any personal use of any
partner, director or officer of the company.
● The Auditor should verify the statements of accounts of suppliers.

Vouching of Purchase Return Book

There are times when due to the quality of purchase goods or due to excess supply of
ordered goods or any other reasons, goods are returned back to supplier. The Auditor needs
to verify the following points −

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 ● A debit note or purchase return invoice should be prepared mentioning the original
purchase invoice number, quantity, price, applicable taxes, etc. These should be
according to the original purchase invoice against which material was purchased.
● A corresponding credit note should be received from the supplier.
● Separate goods return book should be maintained.
● Adjustment of the amount of goods return invoice should be done while making
payments to the supplier.

Vouching of Goods sent on Consignment Basis

UNIT II

Auditor

April 17, 2020 by Prachi M Leave a Comment

Definition: An auditor is a body who organizes an audit process. He is the one who creates
an audit report after due examination of accounting records and accounting statements of the
company forming his impression/assumption regarding financial statements fairness and
reliability

Content: Auditor

1. Qualification of an Auditor
2. Qualities of an Auditor
3. Responsibilities of an Auditor
4. Duties of an Auditor
5. Conclusion

Qualification of an Auditor

According to law, no specific qualification is recommended for the auditor in case of the
proprietary concern, but in the case of the companies, the following qualification is must:

1. According to the Companies Act, 2013, a chartered accountant having a certificate of

practice from the Institute of Chartered Accountants of India can be a qualified auditor
of a company.
2. As per “Part B” of the State Law Act, 1953 a person holding a certificate stating that
he is designated to act as an auditor.

Qualities of an Auditor

Some relevant qualities that an auditor should possess are as follows:

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 ● Sovereignty: The auditor should not make his decisions to the will of his clients or any
other person and should keep himself free from any sympathy allegedly and prepare
financial statement of the management in an impartial way.
● Honesty: The auditor should always maintain sincerity while operating his duties.
● Conversation Skills: In the course of managing a process of audit, the auditor has to
collaborate with numerous officers and parties; thus, he should have excellent
conversation skill.
● Maintain Confidentiality: The auditor should maintain the privacy of the books of
accounts unless authorized by the client or enforced by the law.
● Expertise: The auditor must have an awareness about the client’s business and the
current economic conditions, and a consciousness about the laws such as taxation laws,
companies act and partnership act.
● Sensitivity: The auditor has to deal with different persons while performing his duties;
he has to handle his sub-ordinates as well as various clients; thus, he should have the
intelligence to handle them in any situations.
● Coherent Skills: The auditor must have the ability to analyze and illustrate the
problems so that he can appropriately handle them when faced.

Responsibilities of an Auditor

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Following are the responsibilities of an auditor:

● Examination: Cross-examination of the company’s accounting system and internal

control system is necessary to safeguard the record’s appropriateness.
● Checking of Books: The books of accounts should be checked thoroughly by an
auditor to ensure its arithmetical accuracy.
● Documentation: Proper documentation of the records should be maintained by the
auditor after investigating documentary pieces of evidence. It helps him in gathering
the appropriate information about the transactions of the business.
● Full Incorporation: An auditor should properly analyze whether all entries have been
recorded in the books of accounts or not while preparing the financial statement.
● Conventionality: Examining that the books of accounts or financial statement should
not contain any fraudulent or faulty entry.
● Authentication of Assets and Liabilities: Verification of assets and liabilities for
checking their existence, valuation, completeness and disclosure in financial
statements.
● Statutory Consent: In case of audit of general insurance companies and banks, the
auditor secures the compliance of financial statements with the compatible decree.
● Disclosure: Auditor examines whether the data in the financial statement
acknowledged adequately or not. He discloses his point of view by way of the audit
report after the completion of the audit process.
● Facts and Integrity: Auditor ensures financial statement as a whole and serves an
accurate and fair view of profit/loss, assets and liabilities of a company in the
appropriate forms.

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Duties of an Auditor

Along with the responsibilities the auditor has to perform certain duties; they are as follows:

1. Duty to Produce an Audit Report

● Description to members: An auditor must generate a statement to the members, yet he

is not enforced to send a report to every member.
● Review of the auditor’s report: The report prepared by the auditor intends to read in
the general meeting of the company. The report shall be open to any member for
inspection.
● Capacity of audit report: The audit report should reveal the accounts maintained by
the auditor, i.e. profit and loss statement, balance sheet of the company and the
chronicles annexed with these accounts.

2. Duty to Produce Competent Disclosures in an Audit Report

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 ● Report on Appropriate and Impartial View: The auditor shall state whether in his
impression and to best of his knowledge and bestow to the description given to him,
the balance sheet and profit and loss account give:

● The instruction prescribed by the law; and

● An authentic and fair view of the state of affairs of the company.
● Report on Principal Allegation: The audit report should state:
● Whether he has gathered all the material and justification.
● Whether from his point of view, appropriate books of accounts have been
conserved.
● Whether in his view, all accounting standards have assembled.
● Whether any director who has disqualified from being appointed as a director.
● Report on CARO: The auditor has to address all the elements specified in CARO.
● Report on Precise Inquisition: This report describes:
● Whether loans and advances built by the company in support of security have
been perfectly captured, and the circumstances on which they have been formed
are not biased to the concern of the company or the members of the company.
● It states whether the book of entries is unfavourable to the interests of the
company.
● Report on specific inquiries should state whether the retail price of the shares,
debentures, and other guarantees held by the company is below its purchase
price.

3. Duty to Give a Sense for Accomplishment

● The aspect in which competence is made in the auditor’s report should be as such that
no allowance for doubt in the public minds. A qualification should deliver the full
description and not simply create grounds for the impression of enquiry.
● The auditor should appraise, wherever possible, the enact of the financial statement’s
capabilities, if the same is material.
● It states whether it is not achievable to accurately quantify the consequence of the
qualifications he may use the authority estimates or indicate the sense for not
appraising the requirement’s effect.

4. Duty to Endorse the Audit Report

The audit report or any other chronicle mandatory to be signed or validated by the auditor
may be endorsed by:

● A person selected as an auditor of the company.

● A firm selected as an auditor or by a partner of the firm exercising in India.

Conclusion

An individual who regulates an audit process is known as an auditor. He is the one who takes
the responsibility of analyzing the books of records of the firm or the company, whether they
are showing accurate and generous values or not. Based on these records, he prepares the
audit report signed by him stating that the business activities are investigated and verified by
him.

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A company is an entity formed for carrying out any lawful purpose and for the same,
incorporated under the Companies Act, 2013. It is essential for every company to work
efficiently and transparently in the interest of public and its stakeholders. In order to monitor
the affairs of a company and to keep a check on its activities, an auditor is appointed.

What is an Audit

An audit is an objective examination and evaluation of the financial statements of an

organization to make sure that the records are a fair and accurate representation of the
transactions they claim to represent.[i]

Who is an Auditor?

The term “Auditor” refers to a person who is responsible for the audit works of the company.
In other words, the primary role of an Auditor is to carefully and critically inspect the
accounts of the company. In order to successfully qualify to be appointed as an Auditor in a
company, a person has to mandatorily fulfill certain conditions prescribed under the
Chartered Accountants Act, 1949 and the person should also possess a valid certificate of
practice as-

● An individual, or
● In a partnership firm, or
● In a limited liability partnership

Appointment of Auditors

Every company at its very first Annual General Meeting (AGM) , carries the responsibility to
appoint a person or an independent body such as a firm as an auditor. The person or the firm,

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as the case may be, will be eligible to hold office from the conclusion of the first AGM to the
conclusion of its sixth AGM and afterwards till the conclusion of every sixth AGM.[ii] The
manner and procedure of selection of auditors by the members of the company has to be
according to what may be prescribed. The company has to place the matter relating to the
appointment for acceptance or ratification by the members of the company on every annual
general meeting. It is necessary that written consent of the said auditor needs to be taken
before he is appointed as an auditor.
A certificate has also to be taken from him that his appointment is in accordance with the
prescribed rules. The certificate also needs to indicate as to whether the auditor satisfies the
criteria provided in Section 141 which mentions about the qualifications and disqualifications
of auditors. The company has to inform the individual or the firm, as the case may be, of the
said appointment. The notice of such appointment also needs to be sent to the Registrar of
Companies within 15 days of the meeting in the prescribed manner.

Difference between Companies Act, 1956 and Companies Act, 2013 regarding eligibility of
Auditors

Under the Companies act, 1956 the disqualifications of the auditors were dealt under section
226 having the heading “Qualifications and Disqualifications of auditors.”Under the
Companies act, 2013, the provisions are incorporated under the section 141 of the act with
the heading “Eligibility, Qualifications and Disqualifications of auditors.”

The 2013act lays down under section 141 (1) that a person is eligible for appointment as an
auditor of a company only if he is a chartered accountant and in cases of firms, majority of
partners are qualified for appointment whereas in the 1956 act, all the partners of the firm
were to be qualified for appointment, for the appointment of firm as an auditor. In the 2013
act, an exception has been carved out that in cases of Limited liability Partnership, only the
partners who are chartered accountants can act on behalf of the firm under section 141 (2).

Disqualification of Auditors

Sub section (3) of Section 141 lays down the criteria which disqualifies a person from acting
as an auditor of a company. It has total 9 clauses as compared to its older version which had
only 5 clauses. The disqualifications can be categorized as absolute disqualification of
Auditors, disqualification of Auditor pertaining to relationship and disqualification of Auditor
pertaining to conflict of interest.

Absolute Disqualification of Auditor

● 141(3) (a) – An entity other than an LLP under the LLP act, 2008. Hence only an
individual, a partnership firm or a limited liability partnership firm can act as an
auditor and not a company. In the 1956 act, a body corporate was completely
disqualified. Hence, the effect is that now an LLP can act as an auditor which
previously could not.
● 141(3) (g) – A person who is in full time employment elsewhere or a person or a
partner of a firm holding employment as its auditor, if such person or partner is at
the date of such appointment, holding appointment as auditor of more than 20
companies. This is a new disqualification added in the Companies Act, 2013.

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Illustration: Mr. X is appointed as an auditor for 20th firm on 31/3/2018. Hence, he can’t be
appointed as an auditor of a new firm on 1/4/2018 unless heceases to be an auditor of any of
the existing firms.

● 141(3) (h) – A person who has been convicted by the court of an offence involving
fraud and a period of 10 years has not elapsed from the date of such conviction.
This is a new disqualification added in the Companies Act, 2013.
Illustration: Mr. X, auditor of company “ABC Ltd” is convicted of an offence of fraud on
1/01/2010. He cannot be appointed as an auditor till 1/01/2020.

● 141(3) (i) – Any person who directly or indirectly renders any service referred to
in section 144 to the company or its holding company or its subsidiary
company.[iii] Section 144 deals with services that auditors are specifically barred
from rendering which are in the nature of accounting and book keeping services;
actuarial services management services and others.This is an amended clause by
the 2017 amendment act. Previously, the position was that any entities related to
the potential auditor should not be engaged in rendering services as mentioned
above to the concerned company. Now, the potential auditor must not be engaged
in rendering services to any related companies of the concerned company. This is
rightly because an auditor is very less likely to have any related entities to it.
Illustration: Mr. A provides investment banking services to a company “XYZ Ltd” “XYZ
Ltd” is a holding company of “ABC Ltd.” Therefore, Mr. A cannot be appointed as an auditor
of “ABC Ltd” The original 2013 act didn’t bar Mr. A from being appointed as an auditor in
this case. It only barred Mr. A is any of his related entity is rendering such services to the
company, here “ABC Ltd.”

Disqualification of Auditor pertaining to the relationship

● 141(3) (b) – An officer or employee of the company. This position remains

unchanged in the new act and has been retained as it is.Section 2(59) of the
Companies Act defines officer as “officer” includes any director, manager or key
managerial personnel or any person in accordance with whose directions or
instructions the board of directors or any one or more of the directors is or are
accustomed to act. The term ‘employee’ has not been defined under the act.
Hence, in the layman sense, the terms ‘officer’ and ‘employee’ collectively bar all
persons providing any form of services to the company from being an auditor.
● 141(3) (c) – A person who is a partner or who is in the employment, of an officer
or employee of the company.This position remains unchanged in the new act and
has been retained as it is. The previous disqualification barred an officer and an
employee and this disqualification bars any person related to the officer or
employee as a partner or an employee.
Illustration: Under Section 141 (3) (b), if Mr. A is an employee or officer of company B,
then he can’t be an auditor and under Section 141 (3) (c), if Mr. C is either a partner or
employee of Mr. A, he is again barred by virtue of indirect connection with the company.

● 141(3) (f) – A person whose relative is a director or is in the employment of the

company as a director or any other key managerial post. This is a new
disqualification added in the companies act, 2013.

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The term “relative” is defined under section 2(77) of the companies act and it includes

1) Members of HUF and

2) Husband and Wife. Further, Companies (Specification of Definition Details) Rules 2014
have given another list to include relatives that if they are related to each other as either
father, step father, mother, step mother, son, step son, son’s wife, daughter, daughter’s
husband, Brother, Step Brother, Sister or Step Sister.[iv]

Disqualification of Auditor pertaining to conflict of interest

● 141 (3) (d) – A person who, or his relative or partner:

A) is holding any security or interest in the company or the subsidiary or the holding or its
associate company. But holding of such security or interest is exempted to the extent of Rs. 1
Lakh.

B) is indebted to the company or its subsidiary or its holding or associate Company or

subsidiary of such holding company above Rs. 5 Lakh.

C) Has provided the guarantee or any security in the connection with the indebtedness of any
third person to the company or its subsidiary or its holding or associate company or
subsidiary of such holding company above Rs. 1 Lakh.

The prescribed amounts have been inserted by the Companies (Audit and Auditors) Rules,
2014.[v]

Under the 1956 act, disqualification was with respect to holding security, being indebted or
giving guarantee for indebtedness but only with respect to the company. But the 2013 act has
brought all the entities namely subsidiary, holding and associate companies under this
because dealing with any of the above entities may lead to a conflict of interest with the
concerned company also. This is a new disqualification added in the companies act, 2013. It
is important to note that the limits enshrined here seem to be very low and disqualifies
auditors in toto. But an interest of Rs. 6 Lakh in a Rs. 10,000 Crore company does not seem
to be much. But in the difficulty of laying down formula for a wide range of companies, it has
been suggested that the present position of financial limits is workable.[vi]

● 141 (3) (e) – A person or a firm who directly or indirectly has business
relationship with the company, or its subsidiary, or its holding or associate
company or subsidiary of such holding company or associate company. In the
1956 act, there was no such disqualification regarding having business relationship
with the company. But it laid down that if a person is disqualified to be an auditor
of either the subsidiary or holding company of the concerned company, then he
can’t be the auditor of the concerned company as well. It is worth to be noted that
the term “business relationship” is wide in nature and includes ample number of
instances in its ambit.

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 The term “business relationship” has been defined under the Companies (Audit and Auditors)
Rules, 2014.[vii] It says that a business relationship includes any transaction entered into for
a commercial purpose except
1. Transactions at arm’s length price in the ordinary course of business.

2. in the nature of professional services that an auditor is capable of rendering.

Illustration: If a firm “XYZ” shares a commercial relationship with company “ABC

ltd.” and buys goods from it at a price of Rs. 1000 which are generally sold in the
market at the price of Rs. 2000 then this transaction doesn’t amount to transactions at
arm’s length price in ordinary course and hence, the firm “XYZ” cannot be appointed
as an auditor for the company “ABC ltd.”
Conclusion

We see that the grounds for disqualification of auditors are very elaborate and cover all such
instances wherein the duties of the auditor are likely to be compromised owing to the nature
of relation he shares with the company or financial interest in the company or possibility of
any conflict of interest. This is rightly necessary in the era of corporate governance.

Appointment of auditor

The new regime of Companies Act 2013 has changed the requirement for appointment of the
auditor in Companies. There has been a paradigm shift in the provisions relating to
appointment of Statutory Auditor. This article broadly covers the provisional requirement for
appointment of the auditor under Companies Act, 2013. The responsibility of evaluating the
validity and reliability of financial statements is to the auditors.
It involves an intelligent scrutiny of the books of account of a Company with reference to
documents, vouchers and other relevant records to ensure that the entries made therein giving
a clean and clear picture of the business. Hence, the need to appoint Statutory Auditor arises.
Page Contents
● Appointment of First Auditor of of Company Auditor under Companies Act, 2013
● Appointment of Subsequent Auditor of Company Auditor under Companies Act, 2013
● Tenure of Auditors appointed under Companies Act, 2013
● Whether ADT-1 is required to file or not??

Appointment of First Auditor of of Company Auditor under Companies Act, 2013

As per section 139(6) the first auditor of the company other than a government company shall
be appointed by the Board within 30 days of Incorporation. In case of Board’s failure, an
EGM shall be called within 90 days to appoint the first auditor. The law is silent regarding
from when this time limit of 90 days be reckoned, it is better to take a stricter view and
interpret that the 90 days limit starts from Incorporation rather than expiry of 30 days.

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In case of Government Companies the first auditor shall be appointed by the Comptroller and
Auditor-General of India within sixty days from the date of registration of the company and
in case the Comptroller and Auditor-General of India does not appoint such auditor within the
said period, the Board of Directors of the company shall appoint such auditor within the next
thirty days; and in the case of failure of the Board to appoint such auditor within the next
thirty days, it shall inform the members of the company who shall appoint such auditor within
the sixty days at an extraordinary general meeting
The first auditor shall hold office till the conclusion of 1st Annual General Meeting.

Appointment of Subsequent Auditor of Company Auditor under Companies Act, 2013

Every company shall, at the first annual general meeting, appoint an individual or a firm as an
auditor who shall hold office from the conclusion of that meeting till the conclusion of its
sixth annual general meeting and thereafter till the conclusion of every sixth meeting.

Tenure of Auditors appointed under Companies Act, 2013

The following class of Companies shall not appoint or reappoint:-

(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years:
The class of companies shall mean the following classes of companies excluding one person
companies and small companies:-
(a) all unlisted public companies having paid up share capital of rupees ten crore or more;
(b) all private limited companies having paid up share capital of rupees twenty crore or more;
(c) all companies having paid up share capital of below threshold limit mentioned in (a) and
(b) above, but having public borrowings from financial institutions, banks or public deposits
of rupees fifty crores or more.

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 Whether ADT-1 is required to file or not??
For the appointment of first auditor it is optional for the Company to file Adt-1 with ROC.
The question arise when we will file Aoc-4 what we have to put in SRN of ADT-1. The
answer is we can put Z9999999. So for the appointment of first auditor filing of ADT-1 is
optional.
For appointment of subsequent auditor it is mandatory for the Company to file
ADT-1 within 15 days of appointing the auditor.
Removal of Auditor before term under Companies Act, 2013
● As per the Companies Act, 2013 and related rules and provisions, it is mandatory for every
company to appoint an auditor from incorporation to their going out of business. Auditor is
eligible person, who audits the financial part and working of company. Hence, every
company needs to appoint auditor. Notably there are many times, when management is not
satisfied with the services of auditor, this is when removal of auditor comes into picture.

49
 There are appointed for a fixed term and for maximum five (5) years in a company for one
term. However, sometimes due to any reason management of the Board can decide to remove
the auditor before the end of his term. Let us discuss the same.
Page Contents
● What is term of auditor in a company?
● For how many term/(s) an auditor can be appointed in a company?
● What are provisions governing removal of Auditor before their term?
● What is the procedure to remove the auditor?
● What are forms involved in removal of auditor?
● What are documents required for filing RD-1?
What is term of auditor in a company?
Term here means for how many years auditor is appointed by members of the company in
Annual General Meeting. A company can appoint for a term of five (5) years maximum in
one term. We can further divide this as follows:
1. A listed company and all unlisted public companies having paid up share capital of rupees
ten crore or more and all private limited companies having paid up share capital of rupees
fifty crore or more and all companies having paid up share capital of below threshold limit
mentioned in (a) and (b) above, but having public borrowings from financial institutions,
banks or public deposits of rupees fifty crores or more, will not appoint:-
2. an individual as auditor for more than one term of five consecutive years
3. an audit firm as auditor for more than two terms of five consecutive years:
Again note that once, terms are completed same individual and firm shall not appointed for a
period of three (3) years in same company.
4. Companies other than above specified are free to appoint same auditor for “N” number of
terms once their maximum term of five (5) years is expired.
For how many term/(s) an auditor can be appointed in a company?
As discussed above an auditor can appointed as follows:-
1. A listed company and all unlisted public companies having paid up share capital of rupees
ten crore or more and all private limited companies having paid up share capital of rupees

50
 fifty crore or more and all companies having paid up share capital of below threshold limit
mentioned in (a) and (b) above, but having public borrowings from financial institutions,
banks or public deposits of rupees fifty crores or more, will not appoint:-
2. an individual as auditor for more than one term of five consecutive years
3. an audit firm as auditor for more than two terms of five consecutive years:
4. Companies other than above specified are free to appoint same auditor for “N” number of
terms once their maximum term of five (5) years is expired.
What are provisions governing removal of Auditor before their term?
Section 140(1) of the Companies Act, 2013, The auditor appointed under section 139 may be
removed from his office before the expiry of his term only by a special resolution of the
company, after obtaining the previous approval of the Central Government in that behalf in
the prescribed manner.
As per Rule 7(1) of Companies (Audit and Auditors) Rules, 2014, the application to the
Central Government for removal of auditor shall be made in Form ADT-2 and shall be
accompanied with fees as provided for this purpose under the Companies (Registration
Offices and Fees) Rules, 2014. Also, as per Rule 7(2), the application shall be made to the
Central Government (powers delegated to Regional Director) within thirty days of the
resolution passed by the Board.
What is the procedure to remove the auditor?
If a Company is not satisfied with the services of the statutory auditor the company can start
process for removal of auditor. The following process is required: –
1. Deciding the Board Meeting along with agenda to be discussed in meeting.
2. Auditor has to be given reasonable opportunity of being heard.
3. Drafting of petition to be made to Regional Director (deleted by Central government by
MCA notification dated 21st May, 2014)
4. Holding of Board meeting and considering the petition
5. Filing of petition to Regional Director in ADT-2 as an attachment to e-form RD-1 within
thirty (30) days from the passing of Board resolution.
6. After getting approval from Regional Director fixing the Board meeting for taking the note
of same and approving as well as fixing the Extra-ordinary General Meeting of members/
Annual General Meeting for removal of auditor before their term within sixty (60) days.
7. Holding of Extra-ordinary General Meeting of members/ Annual General Meeting and
passing of special resolution for same.
8. Filling of MGt-14 once, the Special resolution is filled within thirty (30) days from the
Special resolution.
What are forms involved in removal of auditor?
Not many forms are required in removal of auditor before their term, only following forms
are required:-
● MGT-14

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● ADT-2
● RD-1
What are documents required for filing RD-1?
As we already discussed that ADT-2 will be attached with e-form RD-1, following
documents are required to be attached with e-form RD-1:-
● Ground of seeking removal of auditor
● Whether the accounts have been qualified during last three years
● Date of appointment of auditor and SRN of notice of such appointment
● Whether audit fee has been paid or not.
● Any other attachment/information as deem fit by Board of company.
Disclaimer: – The above article is prepared keeping in mind all the important and basic
question while removing an auditor before their term under the Companies Act, 2013. The
author has tried to cover all the important and basic question. Under no circumstance, the
author shall not liable for any direct, indirect, special or incidental damage resulting from,
arising out of or in connection with the use of the information.
Rotation of Statutory Auditors

Article explains Manner of Rotation of Statutory Auditors under Companies (Audit and
Auditors) Rules, 2014 read with Section 139 of Companies Act, 2013.
A. Section 139(2) and Rule 5 of the Companies (Audit and Auditors) Rules
2014– Maximum term for appointment of auditors
1. In case of every listed company;
2. All Unlisted companies having paid up share capital of Rs 10 Crore or more;’
3. All Private companies having paid up share capital of Rs 50 crore of more;
4 All companies having borrowings from financial institutions, banks or public deposit of Rs
50 Crore or more shall appoint or reappoint-
a. an Individual more than one term of 5 Consecutive years;
b. An Audit firm as auditor for more than 2 terms of 5 consecutive years;
B.Recommendation by Audit Committee Rule 6(1)
The name of the Audit Firm or Individual who may be appointed or replace the incumbent
auditor on expiry of the term of such incumbent, shall be recommended by the Audit
Committee to the Board of Directors of the Company.
C.Appointment of auditor in next auditor Rule 6(2)The Audit Committee shall
recommend to the board in case company is required to constitute audit committee otherwise
itself consider the matter for rotation of the auditors and makes its recommendation for
appointment of the next auditor by the member in the AGM.
D.Consideration of term of office in case of rotation of Auditor Rule 6(3)
For this purpose there are following cases;’
a. in case of auditors firm or individual auditor, the period for which the Individual or the
firm held office before the commencement of the of the Act shall be taken into account for
calculating the period of 5 years or 10 years, as the case me.

52
b. The incoming auditor shall not be appointed if he is related with the any outgoing auditors
firm or individual auditors;
E.Explanation for Rotation of Auditor
a. A break in term for continuous 5 years shall be considered as fulfilling the requirement of
rotation of auditors
b. if any audit firm whose partner was incharge or it and he also certify the financial
statements of the company and he retires from the said firm and joins another firm, in such a
case such other fir, shall also not eligible to be appointed for a period of 5 years.
F.Consecutive years
It means all the previous financial years for which the Individual auditor has been the auditor
until there has been a break of 5 years or more.
G.Rotation in case of Joint Auditors
In such a case company may follow the rotation of auditors in such a manner that both or all
the joint auditors, as the case may be do not complete their term in the same year.
Remuneration of Auditors | Who fixes the remuneration?

Who fixes remuneration of various Auditors?

The person or persons who appoint the auditor fix his remuneration –

1. When an auditor is appointed by the Board of Directors, (First auditors and Casual
vacancy), the remuneration is fixed by the board of directors.
2. When an auditor is appointed by the Central Government, the Central government fixes
the remuneration.
3. Shareholders also fix the remuneration of an auditor in the following two circumstances.
▪ When the auditor is appointed in the annual general meeting.
▪ When the auditor is appointed by Comptroller and Auditor General.
(The remuneration may be fixed either at the annual general meeting or at any general
meeting).

4. If a retiring auditor is reappointed, his remuneration continues to became unless it is

decided otherwise in the general meeting.
5. Any sum paid by the company to meet the expenses of the auditors will be included in the
word ‘remuneration’.
6. In addition to remuneration for audit, an auditor may receive separate remuneration for
rendering consultancy services and for attending to cases pertaining to Income-tax. Such
fees do not require the approval of the general meeting.
To prevent undue influence and dependence on an audit client, Companies (Amendment) Act
2003, prescribes a limit for the remuneration of auditor.
As per section 226(3A) of the Act,

the remuneration to an auditor from a company cannot exceed 25% of his total income in
any financial year.
However, the provision does not apply to a small auditor whose income is less than Rs. 15
lakhs per year and to new auditors (who have not completed first 5 years of their practice)

53
The Schedule VI of the Companies Act requires disclosure of the audit fees in the following
format — Amount Received

1. as an Auditor
2. as an Advisor in the matters of taxation, management and company law,
3. other amount as specified.
4. Audit Report
5. Audit report is the final stage of audit process. The results of the audit are
communicated through audit report. Audit report is the written opinion of an auditor
regarding companies financial statements. Audit report is a document prepared by an
auditor to certify the financial position and accounting records of a firm.
6.

7. Meaning of Audit Report

8. Audit report is the statement included in the financial statements. It contains the
opinion of the auditor in financial statements. The auditor reports to the shareholders
who have appointed him. He has to provide his opinion on the truth and fairness of
financial statements. Thus, the auditor protects the interest of shareholders through
audit report.
9.

10. Definition of Audit Report

11. Lancaster has defined a report as “a report is a statement of collected and considered
facts, so drawn up as to give clear and concise information to persons who are not
already in possession of the full facts of subject matter of the report.”
12. According to Cambridge Business English Dictionary, Audit report is defined as a
formal document that states an auditor’s judgment of a company’s accounts.
13. Under Sec. 143(3), auditor of a company must report to its members.
14. (a) The accounts examined by him;
15. (b) Balance Sheet, Profit and Loss Account, and Cash Flow statement, which are laid
in general meeting of a company during his tenure of office; and
16. (c) The document declared to be attached to the Balance Sheet and Profit and Loss
Account.
17.

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18. Form of Audit Report

19.
20. 1. Title of the report
21. The title of audit report should help the reader to identify the report. It should disclose
the name of the client. The title distinguishes the audit report from other reports.
22. 2. Name of the Addressee
23. The addressee normally refers to the person who appoints the auditor. If a company
appoints the auditor, the addressee should be shareholders. As per law, the complete

55
 address of the addressee is required. Addressee for the statutory audit shall be
shareholders and in case of Special Audit, it is Central Government.
24. 3. Introductory Paragraph
25. The introductory paragraph should specify that it is the auditor’s opinion on financial
statements audited by him. The period covered by financial statements should be
stated with exact dates.
26. 4. Scope
27. This part should include the matter-of-fact relating to the manner in which audit
examination was made. The audit examination should cover company’s accounts,
Profit and Loss Account, Balance Sheet and Cash Flow Statements. The examination
should be as per the relevant law. The auditor should not curtail or limit any
examination task.
28. 5. Opinion
29. The auditor’s opinion on the books of account and financial statements examined by
him is based on the information and free from bias. The auditor has to give his
opinion as follows:
30. · Whether the financial statements are arithmetically correct and correspond to
the figures recorded in the books of accounts.
31. · In case of unqualified opinion, whether the financial statements represent a
true and fair view of the state of affairs and the results of operations.
32. · In case of qualified opinion, if the Balance Sheet and Profit and Loss account
do not present a true and fair view, the reasons for what and where is wrong.
33. 6. Signature
34. The signature part should include the manual signature of the auditor.The personal
name and signature of the auditor should be given. If the auditor is a firm, the
signature in the personal name and firm name should be given.
35. 7. Place of Signature
36. This should include the location of the auditor or the auditor firm, which is ordinarily
their city.
37. 8. Date of the Report
38. The date of completion of the audit work should be mentioned in this section.
39.

40. Contents of Audit Report

41. As per Sec. 143 of the Companies Act, the auditor’s report shall also state—
42. a. whether he has sought and obtained all the information and explanations which to
the best of his knowledge and belief were necessary for the purpose of his audit and if
not, the details thereof and the effect of such information on the financial statements;
43. b. whether, in his opinion, proper books of account as required by law have been kept
by the company so far as appears from his examination of those books and proper
returns adequate for the purposes of his audit have been received from branches not
visited by him;
44. c. whether the report on the accounts of any branch office of the company audited
under sub-section (8) by a person other than the company’s auditor has been sent to
him and the manner in which he has dealt with it in preparing his report;

56
45. d. whether the company’s Balance Sheet and Profit and Loss account dealt with in the
report are in agreement with the books of account and returns;
46. e. whether, in his opinion, the financial statements comply with the Accounting
Standards;
47. f. the observations or comments of the auditors on financial transactions or matters
which have any adverse effect on the functioning of the company;
48. g. whether any director is disqualified from being appointed as a director under
sub-section (2) of section 164;
49. h. any qualification, reservation or adverse remark relating to the maintenance of
accounts and other matters connected therewith;
50. i. whether the company has adequate internal financial control system in place and the
operating effectiveness of such controls;
51. j. such other matters as may be prescribed.
52.

53. Types of Audit Report

54. The audit report may be of the following types:

55.

56. 1. Clean or Unqualified Report

57. Clean or Unqualified report will be given by the auditor if the auditor is satisfied that
the accounts, Balance Sheet, Profit and Loss Account and Cash Flow statement do
represent a true and fair view and they are prepared in conformity with the accounting
principles and statutory requirements.
58. 2. Qualified Report
59. In qualified report the auditor believes that overall financial statements are not fairly
stated. The reasons for giving Qualified Report are be as follows:
60. i. The books of accounts, Profit and Loss Account and the Balance Sheet do not
represent the true and fair view of the state of affairs and results of the operations, due
to lack of conformity with the accounting principles and statutory requirements,
61. ii. The auditor is not able to verify the value and existence of certain assets,
62. iii. The information requested by the auditor is not furnished,
63. iv. Proper books of account are not maintained as required by law,
64. v. Part of audit examination done by other auditors.
65. 3. Adverse or Negative Report

57
66. When there is sufficient basis for the auditor to form an opinion that the whole
accounts and financial statements, do not present a true and fair view of the financial
condition and results of operation, the adverse or negative opinion will be given. The
adverse or negative report will be given on the following grounds:
67. · When the auditor is not satisfied with the truth and fairness of financial
statements,
68. · Non conformity with the Generally Accepted Accounting Principles,
69. · Mistakes, discrepancies and material misstatement in the financial statements,
70. · Omission of a material disclosure.
71. 4. Disclaimer Report
72. The auditor may disclaim or refuse opinion on the accounts, Profit and Loss Account
and the Balance Sheet, when he does not have sufficient information to base his
opinion. In the scope and opinion paragraph, the auditor should give disclaimer
information. This may happen on the following grounds:
73. · The auditor has not been able to obtain sufficient information to form his
opinion,
74. · The audit examination is not adequate to form an opinion,
75. · There are some material un-determined item in audit examination.
76.

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 77. Differences between Unqualified, Qualified Differences between Unqualified,
Qualified

78.

Liabilities of an Auditor:
A Chartered Accountant is associated with the valuable profession. His primary duty is to
present a report on the accounts and statements submitted by him to members of the
company. He is responsible not only to the members of the company but also to the third
parties of the company, i.e., creditors, bankers etc.

59
Normally the liability of auditor based on the work done by him as professional accountant
and carry out his work due care, caution and diligence. The nature of liabilities of an auditor
is discussed below:

1. Civil Liability:
1. Liability for Negligence:
Negligence means breach of duty. An auditor is an agent of the shareholders. He has to
perform his professional duties. He should take reasonable care and skill in the performance
of his duties. If he fails to do so, liability for negligence arises. An auditor will be held liable
if the client has suffered loss due to his negligence. It should be noted that an auditor will not
be liable to compensate the loss or damage if his negligence is not proved.
2. Liability for Misfeasance:
Misfeasance means breach of trust. If an auditor does something wrongfully in the
performance of his duties resulting in a financial loss to the company, he is guilty of
misfeasance. In such a case, the company can recover damages from the auditor or from any
officer for breach of trust or misfeasance of the company. Misfeasance proceedings can be
initiated against the auditor for any untrue statement in the prospectus or in the event of
winding up of the company.

2. Liabilities under Companies Act

The following are the liabilities of an auditor under the provisions of the Companies Act.
(1) Liability for Misstatements in the Prospectus [Sec.35]:

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An auditor shall be held liable to compensate every person who subscribes for any shares or
debentures of a company on the faith of the prospectus containing an untrue statement made
by him as an expert. The auditor shall be liable to compensate him for any loss or damages
sustained by him by reason of any untrue statement included therein. The auditor may escape
from liability if he proves that:
· The prospectus is issued without his knowledge or consent.
· He withdrew his consent, in writing before delivery of the prospectus for registration.
· He should have withdrawn his consent after issue of prospectus but before allotment
of shares and reasonable public notice has given by him regarding this.
(ii) Criminal Liability of Auditor under Companies Act:

1. Untrue statement in Prospectus [Sec.34]

The auditor is liable when he authorizes a false or untrue prospectus. When a prospectus
includes any untrue statement, every person who authorizes the issue of prospectus shall be

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imprisoned for a period of six months to ten years or with a fine, which may be three times
the amount involved in the fraud or with both.
2. Non compliance by auditor [Sec. 143 and 145]:
If the auditor does not comply regarding making his report or signing or authorization of any
document and makes willful neglect on his part he shall be punishable with imprisonment
upto one year or with fine not less than ₹. 25,000 extendable to ₹. 5,00,000.
3. Failure to assist investigation [Sec.217 (6)]:
WhenCentral Government appoints an Inspector to investigate the affairs of the company, it
is the duty of the auditor to produce all books, documents and to provide assistance to the
inspectors. If the auditor fails to do so he shall be punishable with imprisonment upto one
year and with fine up to ₹.1,00,000.
4. Failure to assist prosecution of guilty officers [Sec.224]:
An auditor is required to assist prosecution when Central Government takes any action
against the report submitted by the Inspector. If he fails to do so, he is found guilty and is
punishable.
5. Failure to return property, books or papers [Sec.299]:
When a company is wound up the auditor is supposed to be present and subject himself to a
private examination by the court and is also liable to return to the court any property, books
or papers relating to the company. If the auditor does not comply, he may be imprisoned.
6. Penalty for falsification of books [Sec.336]:
An auditor when destroys, mutilates, alters or falsifies or secrets any books of account or
document belonging to the company. He shall be punishable with imprisonment and also be
liable to fine.
7. Prosecution of auditor [Sec.342]:
In the course of winding up of a company by the Tribunal, if it appears to the Tribunal that an
auditor of the company has been guilty of an offence, it shall be the duty of the auditor to
give all assistance in connection with the prosecution. If he fails to give assistance he shall be
liable to fine not less than ₹ 25,000 extendable upto ₹.1,00,000.
8. Penalty for deliberate act of commission or omission [Sec.448]: If an auditor
deliberately make a statement in any report, certificate, balance sheet, prospectus, etc which
is false or which contains omission of material facts, he shall be punishable with
imprisonment for a period of six months to ten years and fine not less than amount involved
in fraud extendable to three times of such amount.

3. Criminal Liability under Indian Penal Code

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If any person issues or signs any certificate relating to any fact which such certificate is false,
he is punishable as if he gave false evidence. According to Sec.197 of the Indian Penal Code,
the auditor is similarly liable for falsification of any books, materials, papers that belongs to
the company.

4. Liability under Income Tax Act [Sec.278]

· For tax evasion exceeds ₹.1,00,000, rigorous imprisonment of six months to seven
years.
· A person who induces another person to make and deliver to the Income Tax
authorities a false account, statement or declaration relating to any income chargeable to tax
which he knows to be false, he shall be liable to fine and imprisonment of three months to
three years. An auditor may also be charged in case of wrong certification of account.
· A Chartered Accountant can represent his clients before the Income Tax Authorities.
However, if he is guilty of misconduct he can be disqualified from practicing.
· An auditor can face imprisonment upto two years for furnishing false information.

5. Liability for Professional Misconduct

The Chartered Accountant Act, 1949 mentions number of acts and omissions that comprise
professional misconduct in relation to audit practice. The council of ICAI may remove the
auditor’s name for five years or more, if he finds guilty of professional misconduct.

6. Liability towards Third Parties

There are number of persons who rely upon the financial statements audited by the auditor
and enter into transactions with the company without further enquiry viz. creditors, bankers,
tax authorities, prospective shareholders, etc.
1. Liability for Negligence:
It has been held in the court that auditor is not liable to third parties, as there is no contract
between auditor and third parties. He owes no duty towards them.
2. Liability for Frauds:
The third parties can hold the auditor liable, if there is fraud on the part of auditor even if
there is no contractual relationship between auditor and third parties. In certain cases
negligence of auditor may amount to fraud for which he may be held liable to third parties.
But it must be proved that auditor did not act honestly and he knew about it.

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