Table of Contents

S. No. Topic Pg. No.

1. INTRODUCTION TO AUDITING 1-12
2. AUDITING, ACCOUNTING AND INVESTIGATION 13-16
3. TYPES OF AUDITS 17-27
4. VOUCHING 28-40
5. VALUATION AND VERIFICATION OF ASSETS 41-62
AND LIABILITIES
6. INTERNSHIP REPORT 63-67
 CHAPTER 1
INTRODUCTION TO AUDITING
INTRODUCTION
Auditing is checking the other accounting information of a business entity’s financial
statements. It is a systematic procedure where the economic condition of the entity is Analysed.
The person is responsible for the process is called an “Auditor”. In this process, it is checked
if the business is running profitably or not. Auditing is an important process for the company,
the investors, the government, creditors, shareholders, etc. They very much rely on audit
reports to make important business decisions.

MEANING

The Indian Companies Act of 1913 prescribed the qualifications of an auditor for the
first time. The Government of Bombay was the first to conduct related courses of study, such
as the Government Diploma in Accountancy (GDA).

The Auditor’s Certificate Rule was passed in 1932 to maintain a uniform standard in
Accounting and Auditing. The Chartered Accountant Act was enacted by the Parliament of
India in 1939. The Act regulates that a person can be authorized to audit only when he qualifies
in the examinations conducted by the Institute of Chartered Accountants of India.

HISTORY AND BACKGROUND OF AUDITING:

The term audit is derived from the Latin term ‘Audire,’ which means to hear. This was
apt to the earlier days where an auditor would listen to the accounts read over by an accountant
in order to check them. It was in use in all ancient countries such as Mesopotamia, Greece,
Egypt. Rome, and India. Arthasastra by Kautilya detailed rules for accounting, auditing of
public finances and even punishment for fraudulent activities. The original objective of
auditing was to detect and prevent errors and frauds. Auditing evolved and grew rapidly after
the industrial revolution in the 18th century with the growth of the joint stock companies. The
shareholders who were the owners needed a report from an independent expert on the accounts
of the company managed by the board of directors who were the employees. The objective of
audit shifted and audit was expected to ascertain whether the accounts were true and fair rather
than detection of errors and frauds, hence changing the auditing activity from a negative
activity to a positive activity.

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DEFINITION:

“Auditing is a systematic and independent examination of an enterprise's data,

statements, records, operations, and performances (financial or otherwise) for a stated purpose.
In any auditing situation, the Auditor perceives and recognizes the propositions before him for
examination, collects evidence, evaluates the same and on this basis, formulates his judgment
which is communicated through his audit report.”

- The Institute of Chartered Accountants of India

“Auditing is the process of critically reviewing and verifying the financial records of
an organization to ensure their accuracy, completeness, and compliance with legal and
regulatory standards.” -K. Kumar and N. Sharma

“Auditing is a means of evaluating the effectiveness of a company’s internal controls

by assessing financial reporting practices, fraud detection, and compliance with regulatory
requirements.” -John Dunn

“Auditing is concerned with the verification of accounting data with determining the
accuracy and reliability of accounting statements and reports.

-R. Mautz and H. Sharaf.

“Auditing is the verification of financial positions as disclosed by financial statements

by a qualified auditor to report upon their truth and fairness.”

-R.B. Williams

“Auditing is an independent examination of financial information of any entity, whether

profit-oriented or not, irrespective of its size or legal form when such an examination is
conducted to express an opinion thereon.”

- J.K. Sharma

“Auditing is a systematic process of objectively obtaining and evaluating evidence

regarding assertions about economic actions and events to ascertain the degree of
correspondence between those assertions and established criteria”.

-William F. Messier Jr

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 “Auditing is an independent examination and expression of an opinion on an
enterprise's financial statements by an appointed auditor in pursuance of that appointment and
in compliance with any relevant statutory obligations.”

-Mellichamp and Taylor

“Auditing is the accumulation and evaluation of evidence about information to

determine and report on the degree of correspondence between the information and established
criteria.”

- A. Arens and J. Loebbecke

“Auditing is an intelligent and critical scrutiny of books of accounts of a business with

the documents and vouchers from which they have been written up, ascertain whether the
working results of a particular period as shown by Profit and Loss Account and also the
financial position as reflected in the Balance-sheet are truly and fairly determined and presented
by those responsible for their compilation.”

-[Link]

IMPORTANCE OF AUDITING
❖ Enables pursuit of business objectives:
Having an effective audit system is very important for a business as it enables
the business to pursue and achieve its business objectives it’s various businesses.
Business processes require various forms of internal control to facilitate monitoring and
supervision, prevent and detect unusual transactions, measure performance
continuously, maintain records complete business profile and boost operational
productivity. The internal auditor reviews the design of the internal control system,
informally recommends improvements, and documents any significant irregularities to
allow further investigation by management if circumstances warrant.
❖ Assessing the risk of misstatement:
The auditor assesses the risk of material misstatement in the company's financial
statements. Without an internal control or auditing system, a company will not be able
to generate reliable financial reports for internal or external purposes.

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 As a result, the company will not be able to determine how to allocate its
resources and will not be able to know which of its segments or product lines are
profitable and which are not.
❖ Fraud prevention and detection:

Internal audit plays an important role for businesses in preventing fraud.

Periodically analysing a company's operations and maintaining a strict internal control
system can prevent and detect various forms of fraud and other accounting
irregularities. Auditing professionals are involved in the design and modification of
internal control systems for purposes that include, among other things, preventing
fraud. An important element of prevention can be deterrence, and if a company is
known to have an active and diligent audit system, then reputation alone may deter
employees or suppliers carry out a scheme to defraud the company's business.

❖ Cost of Capital:

Cost of Capital is important for every business, regardless of its size. The cost
of capital largely includes the risk associated with the investment, and if the investment
is riskier, the investor will need a higher rate of return to invest. A strong audit system
can mitigate various forms of risk within a business, including information risk, fraud
and misappropriation risk, and suboptimal management risk due to insufficient
information about business operations.

MERITS OF AUDITING
Here are some of the advantages of an audit programme or benefits of auditing.

❖ Value of business
Purchase events must be identified within management and by the sales team.
It is closely related to grievance redressal, pension funds, etc. In the event of loss of
property, operations must be underpinned by ethical values.

❖ Gathering information about profit or loss

This meeting will discuss the company's profits and losses. Here, employees
can reveal their ideas about what they are missing and how they can overcome these
obstacles.

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 ❖ Confidentiality
During external audits, there is more private information such as internal
employee salaries, CPF, etc. It is important for the person to learn more about the
organization. This is because the auditor performs the review and directs the meetings
that need to take place in connection with the audit.

❖ High-quality perfection
Every organization will strive continuously for success. These decisions will be
made in the case of implementing the specific concept proposed by the organization.
These financial data presentations can be obtained after the full audit process is
complete. This is the same calculation and interpretation of high-quality perfection.

LIMITATIONS OF AUDITING
The main risk of an audit program is that the assurance service reaches incorrect
conclusions. The guarantee must be provided as part of the relevant certification. Below are
some limitations of auditing.

➢ Additional Costs:
Testing involves additional costs for the organization, which are considered a
burden. This involves disruption of some cases. Listeners must be more focused even
in the face of disturbances. Before the audit begins, the auditor needs to get the attention
of all employees in the organization.

➢ Evidence:
Evidence is determined to be diffuse rather than conclusive. The power of
presenting audited accounts leads to major changes in profit distribution accounts.

➢ Harassment of Employees:
Since employees cannot express their opinions in terms of audit, these changes
have been calibrated and employees will be harassed due to the changes.

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 ➢ Inappropriate changes:
Business rules and regulations may change from time to time. It's still unstable
when starting the program. Obviously company policies cannot be changed periodically
like rules and regulations.

➢ Potential for fraud:

Since the information provided after the audit procedure is identifying
information, there is a high likelihood of a situation in which an individual is forced to
commit a crime. This harassment of the auditor commits a crime after the audit is
completed.
➢ Lack of interest:
Education curve will be satisfied with business activities and networks are not
comfortable enough and provide systematic internal recruitment. These can seriously
hinder spending for all employees.

➢ No assurance:
The audit cannot provide any analysed and prepared data. It has financial
accounts for the data provided

DUTIES OF AN AUDITOR:
➢ Duties under section 143 (1)
➢ Let’s quickly understand the duties and responsibilities of an auditor under section
143 (1) in the following section.
➢ The auditor has to enquire whether loans and advances made by the company have
been properly secured and if the terms and conditions thereof are predetermined to the
interest of the company or its members.
➢ He is required to enquire whether the assets of the company being shares or
debentures and other securities have been sold at a price less than at which they were
Purchased.
➢ Whether any shares have been allotted for cash, whether cash received, and whether the
position in the account books and balance sheet is correct and not misleading

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 ➢ Duties under section 143 (2)
The auditor is responsible for reporting the members of the company, the accounts
examined by him, and every financial statement to be laid at the company’s general meeting.
➢ Duties under section 143 (3)
➢ To seek and obtain all the information and explanations necessary for the audit.
➢ To ensure that the books of accounts as required by law have been kept by the
company
➢ To see whether the company has an adequate internal financial control system
in place and its effectiveness
➢ To ensure whether the company’s balance sheet and profit and loss account
are dealt with in the report or in agreement with the books of accounts.

OBJECTIVES OF AUDITING
(I.) Primary objective
The primary objectives of an IA with respect to audit of financial statements are as
under:
To obtain reasonable assurance whether the financial statements are free from material
misstatement and it’s prepared using applicable financial reporting framework
To report on the financial statements and communicate auditor’s findings as required
by SA If reasonable assurance cannot be obtained and a qualified opinion in the auditor’s report
is insufficient then the auditor should disclaim an opinion or withdraw from the engagement if
withdrawal is legally permitted.

(II.) Secondary objective

It is also called the incidental objective, as it is incidental to the satisfaction of the main
objective. The incidental objective of auditing is:
o Detection of Frauds and Errors
The term fraud means the wilful misrepresentation made with an intention of
deceiving others. It is a deliberate mistake committed in the accounts with a view to get
personal gain. Fraud May involve

❖ Manipulation, falsification, alteration of records or documents.

❖ Misappropriate of assets.

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 ❖ Suppression or omission of effect of transaction from records or
documents.
❖ Recording of transaction without substance.
❖ Misapplication of accounting policies

Fraud may be Divides into Following Categories:

Frauds

Misappropriation Misappropriation Manipulation of

of cash of goods: Accounts

A. misappropriation of cash
Misappropriation of Cash is usually done by theft of cash receipts, petty cash,
cheques, negotiable instruments, showing fictitious payment to workers, creditors,
purchases etc.
Misappropriation of cash is very easy. A person with a little effort can misappropriate
cash particularly in large scale business where contact between the owners of the
business and the person handling is not very close. The transactions relating to receipt
of cash are omitted from the records or recorded with the lesser amount in the cash
book, thereby all such cash or part of it is pocketed by the cashier. A strict control
system shall be adopted for receipts and payments of cash so that work of one clerk is
automatically checked by another. This technique of audit is known as internal check.

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 Examples of misappropriation of cash can be quoted:

❖ Recording fictitious purchases and thereby cash involved therein is

misappropriated.
❖ Omitting credit note received from the suppliers and discount allowed by them.
❖ Various receipts like bad debts recovered, sale of scrap or rejected stock may
be concealed.
❖ The credit sales may not be recorded and money received from customers
pocketed.
❖ Cash received from sale or return or V.P.P. may be pocketed.
Misappropriation of goods:
The misappropriation of goods is easy in case of a business which produces or deals in
goods of high value and less bulky. Usually businessmen do not bother much for
defalcation of goods as compared to misappropriation of money. This type of
misappropriation is difficult to detect unless proper records are maintained. Defalcation
of goods can be done by:

❖ Issuing false credit notes to customers for sale returns and such goods
are misappropriated.
❖ Goods may be stolen by employees from the godowns.

❖ Misappropriation of goods can be detected by thorough checking of

records and physical verification of stocks as well as purchases and sales
carefully.
Manipulation of Accounts
It implies presentation of accounts more favourably than what they
actually are The fraud through manipulation of accounts is known as window
dressing because accounts are manipulated to show a wrong picture of the profit
or loss of the business and its financial state of affairs. Window dressing means
showing a wrong picture. Manipulation of accounts without defalcation of
either cash or goods is not very common. But when it is done, the amount
involved may be very large. Generally, the people at the top management level
commit this type of fraud.

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 Detection and Prevention of Errors:
Generally, errors are the result of carelessness on the part of the person
preparing the accounts. Auditor should be very careful because sometimes an
accounting manipulation may appear to be an error. An error is an unintentional
mistake or misdescription in the books of accounts or records whether by the
way of:
❖ Clerical or mathematical mistake in record of data.
❖ Oversight or misrepresentation of facts or
❖ Misapplication of accounting policies.
❖ An error is generally taken to be innocent and not deliberate.

Detection and
Prevention of Errors:

Errors of Errors of Errors of Errors of Compensating

Principle Omission Commission Duplication Errors

Errors of Principle
When principles of book keeping and accountancy are not followed in the treatment and
recording of item of a transaction, it is known as error of principle. Following are the examples
of such types of errors:

❖ Items of income posted to a personal account like rent credited to the personal account
of the person making payment, it will reduce the profits and increase creditors in the
balance sheet.
❖ Items of expenses posted to personal account like rent paid to the landlord posted to the
debit of his account thereby profits will increase as well as debtors in the balance sheet.

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 ❖ When valuation of various assets is not made as per the principles of accountancy like
valuation of stocks, investment, plant and machinery, etc. These errors have great
impact on the financial statements prepared for the business.

Errors of Omission:
When a transaction is omitted fully or partially from books of accounts, such type of errors
is known as error of omission. Usually it arises due to mistake of clerk. Such errors can be
detected only by careful scrutiny. Following are the examples of such type of errors:
❖ Omission of purchase from purchase day book.
❖ Omission of sales from sales day book.
❖ Omitting the entry for charging depreciation in the books.
The above transactions ought to have been recorded in the books of accounts but due to
mistake of oversight or carelessness, have been totally omitted from the books. Error of
Omission may be unintentional or otherwise. In this case, profit or loss for the year is
affected.
Errors of Commission:
When entries are made in the books of original entry or ledger are incorrect, wholly or partially,
such errors are of commission. Usually these errors are arising due to negligence in recording
of some business transaction in the books of accounts. These errors may not affect trial balance,
profit or loss account and balance sheet. These errors may be intentional or otherwise.
Following are the examples of errors of commission:

❖ Posting to wrong side of an account, instead of debiting an account it may be wrongly

credited and vice-versa.
❖ Wrong subsidiary book used for recording a transaction.
❖ When a transaction is posted twice in the books of original entry or posting to account
in ledger is made twice or balance of account is shown twice in the trial balance.
Errors of Duplication:
When a transaction is recorded twice and also posted twice in ledger. Such an error will
not affect trial balance. Sometimes supplier sends the invoice in duplicate and both the copies
of the bill are recorded separately. It is more difficult to locate such errors. Only through
checking and comparing of vouchers with entries in the books of original entry will reveal such
errors. While going through an account, will reveal errors of duplication, if two entries on the
same side are appearing with the same amount.
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Compensating Errors:
It results in either wholly or partially in the effects of the errors. While apparently
there may be a little or no difference between the two sides of the Trial Balance, giving an
impression that all or most of the business transactions have been properly recorded and
posted, in reality there might be a number of errors lying hidden in the books of accounts.

(III.) Specific Objective

➢ Materiality Auditing: Audit materiality is one of the most important concepts for
auditors. Misstatements, including omissions, are considered to be material if,
individually or taken together, they are reasonably expected to influence the
economic decisions of users based on the financial statements. Materiality in audit
comprises both quantitative and qualitative aspects.
➢ Efficient Auditing: An economy and efficiency audit, or simply efficiency audit,
focuses on the resources and practices of a program or department, according to the
“Encyclopaedia of Public Administration and Public Policy,” which provides
descriptions of typical audit activities. An economy and efficiency audit might
analyse the procurement, maintenance and implementation of resources, such as
equipment, to identify areas that require improvement. Alternately, it might
examine the practices of a department or program to find inefficient or wasteful
processes.

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 CHAPTER 2
AUDITING, ACCOUNTING & INVESTIGATION

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MEANING OF AUDITING, ACCOUNTING, AND INVESTIGATION
AUDITING
An audit is the examination or inspection of various accounting records by the auditor,
followed by the physical verification of inventory to ensure that all departments are following
the established transaction recording system. This involves verifying the accuracy of the
financial statements provided by the organization. Audits can be performed internally by
employees or heads of a specific department and by an external firm or independent auditor.
The idea is to examine and verify the accounts by an independent body to ensure that all
accounting records are prepared fairly and without misrepresentation or fraud. The verification
and attestation process continues until the study is completed and the auditor is authorized to
report under the specified terms.
ACCOUNTING
Accounting is the art of recording, classifying, summarizing and reporting transactions
for the purpose of showing the financial position of an entity - a business unit, club, charity,
etc. –that has income and expenses. Accounting can be defined as a set of principles and
conventions as well as a general process established for gathering financial information relating
to an entity's resources and their use to achieve unit's goals. This is an area of expertise
necessary for the operations of all types of organizations. In a popular sense, accounting is
called the “language of business” because of its role in maintaining and processing all the
relevant financial information an entity needs for management and reporting purposes.
Accounting deals with numbers and measurable quantities
INVESTIGATION
An investigation can be defined as a special examination and investigation of
accounting books and other relevant documents with a view to determining the truth or
assessing a situation or determining the cause of occurrence in business. So, investigation is a
special type of examination of accounts and records carried out by an investigator for a
predetermined purpose depending on the necessity of the situation and with regard to
something more is to check the accuracy of data on financial situation. This involves examining
accounts and records for a specific purpose. Surveys are conducted with the purpose of
collecting specific information about a particular stage of a business or its activities.

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 DIFFERENCE BETWEEN AUDITING & INVESTIGATION
BASISFOR AUDITING INVESTIGATION
COMPARISON

The main Purpose of Investigations have certain

Auditing is to See Whether specified objects, like future
Scope the balance sheet Shows true earning capacity, extent of
And fair View of statement of suspected fraud and mis-
affairs of profit &loss account appropriations, matters concerning
shows fair view. purchase of business.

Period Covered Audit of accounts is usually Investigation covers several years

for a financial year. say 2, 3 or 5 years to find out
average earning capacity, financial
position etc.

Statutory Audit of accounts is statutory Investigation of accounts may or

Requirement requirement as per may not be statutory requirement

Companies Act, 2013. under Companies Act, 2013.

Initiated by Audit is always initiated by Investigation may be normally

outsider proprietors only. carried out on behalf of outsiders
who either want to purchase the
business or to become partners, to
advance loans etc.

Investigation of In the ordinary sense The audited accounts are further

investigated accounts are not investigated for some special
Audited account audited. purpose in view.

Evidence In case of auditing, the The investigator looks for

auditor is concerned only substantive evidence and even
with prima facie evidence. conclusive evidence are also seen.

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 DIFFERENCE BETWEEN ACCOUNTING & INVESTIGATION
BASIS FOR ACCOUNTING INVESTIGATION
COMPARISON

Meaning Accounting means An inquiry conducted, for

systematically keeping the establishing a specific fact or truth
records of the accounts of an is known as Investigation.
organization and preparation of
financial statements at the end
of the financial year.

Purpose To show the performance, To detect fraud, embezzlement,

profitability and financial financial manipulation, or other
position of an organization. unlawful activities.

Start Accounting starts where Investigation starts where auditing

bookkeeping ends. ends.

Level of Detail Very detailed and captures all Uses financial statements and
details related to financial records
transactions and records
Level of An Accountant is not required An Auditor must have knowledge
Knowledge to have knowledge of audit of accounting as well as audit
techniques procedures. techniques and procedures.

Focus To accurately record and To investigate on fraudulent event

present all financial occurred
transactions and statements.

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 CHAPTER - 3
TYPES OF AUDIT

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INTRODUCTION

Auditing is a vast concept containing several functions, objectives and purposes. Hence
to view Audit as a singular concept would be a complex activity and would mean to look over
several vital factors and facts that would comprise the true nature of auditing. To understand
and study the multifaceted subject of auditing, it becomes a necessity to classify various kinds
of auditing. Auditing can be classified into several kinds based on various view points, and that
would form the purpose of this chapter of the journey in learning and understanding Auditing.

CLASSIFICATION OF AUDIT

An Audit can be classified under different groups on different bases.

❖ Classification on the Basis of Organisation

Under this category, the Audit is classified on the basis of nature of the organisation
for which the Audit work is undertaken. It includes the following types:

Audit required under law

• Companies governed by the Companies Act, 1956/2013

• Banking companies governed by the Banking Regulation Act, 1949

• Electricity supply companies governed by the Electricity Supply Act, 1948

• Co-operative societies registered under the Co-operative Societies Act, 1912

• Public and charitable trusts registered under various Religious and

Endowment Acts Corporations set up under an Act of Parliament or State
Legislative (e.g. Life Insurance Corporation of India)

• Specified entities under various sections of the Income Tax Act, 1961

• Government departments/Public utilities

• Registered clubs, societies etc. registered under Societies Registration Act,

1960

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Audit under voluntary category

• Proprietary concern

• Partnership firm

• Hindu undivided family

• Association of persons

• Non-profit organisations

❖ Classification on the Basis of Function

Under this category, the Audit is classified on the basis of functional activities of
the Auditor. It includes the following types:

• External Audit/Independent financial Audit

• Internal Audit

❖ Classification on the Basis of Practical Approach

The classification of Audit under this group involves a practical approach to the
work. It includes the following types:

▪ Continuous Audit

▪ Periodical Audit

▪ Interim Audit

▪ Partial Audit

▪ Occasional Audit

▪ Standard Audit

▪ Balance sheet Audit

▪ Complete Audit

❖ Classification on the Basis of Audit Dimension

Under this category, the Audit is classified on the basis of dimension of Audit
activities. It includes the following types:

➢ Management Audit

➢ Social Audit

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 ➢ Cost Audit

➢ Cash transactions Audit

➢ Tax Audit

➢ Human resource Audit

➢ System Audit

➢ Propriety Audit

➢ Performance or efficiency Audit

➢ Environment Audit

➢ Government Audit

➢ Secretarial Audit

➢ Energy Audit

CLASSIFICATION ON THE BASIS OF ORGANISATION

Audit is not legally obligatory for all types of business organisations. On the basis of
organisational structure, Audits may be of two broad categories:

Audit Required under Law

This type of Audit is also known as statutory Audit. The organisations which
require Audit under law are as follows:

➢ Company Audit
Audit of accounts of companies registered under the Companies Act is
compulsory. Since control of the company is vested in the company's directors, the need
to protect the interests of shareholders arises. The introduction of Companies Act
1956/2013, which outlines the procedure of Audit work, the different books of accounts
to be maintained, rights, duties and liabilities of the company and the auditor while
performing the process of auditing
➢ Bank Audit
Audit of banking companies is made compulsory under the statute, since it is
governed by the Banking Regulation Act, 1949. The objective of bank Audit is not only
to check the financial result and financial position, so far as its truth and fairness are
concerned, but also to review whether the banks are engaging themselves in those
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 businesses which are given in the Act only and follow the regulations to operate the
banking business as per the regulations given in the Act.
➢ Co-operative Society Audit
Audit of co-operative societies is conducted by the co-operative department of
the state government or by the Registrar of co-operative societies, as the case may be.
The co-operative societies are governed by the Co-operative Societies Act, 1912, which
gives the detailed procedures of audit for a co-operative society. These types of
societies engage in a good number of financial transactions. So, these types of
organisations have the statutory obligation to introduce audit for their better
performance.
➢ Trusts Audit
The income of the trusted properties is distributed by the trustees among the
beneficiaries as per the trust deed. As the beneficiaries of the trust in most of the cases
do not know the techniques of reading the books of accounts, the chances of being
defrauded by the trustees cannot be avoided. So, this type of Audit protects the
beneficiaries of the trusted properties against the possible losses by unscrupulous
trustees.
➢ Insurance Audit
The insurance companies that are governed by Insurance Act, 1938, include fire,
marine and other miscellaneous insurance businesses. The books of accounts that are
to be maintained by the insurance companies are governed in accordance with the
provisions of the said Act. The Auditor will examine the details of the books of accounts
and check the reliability of the internal check systems. The Audit of insurance
companies, in fact, enhances the confidence of the policy holders.
➢ Specified entities as per Income Tax Act
According to the various provisions of the Income Tax Act, certain entities are
required to get their accounts Audited to fulfil the requirement of the income tax
regulations. These entities are required to appoint a qualified Auditor to conduct Audit
of their financial statements in order to get exemptions and deduction from the income
of the entity.

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 ➢ Audit of government departments and government public utilities

Different government departments and public utilities are also subject to

independent financial Audit. The requirement for such Audit is contained in the
constitution of India. In addition to that, government departments and public utilities
also have the internal Audit system of their own.

➢ Audit of registered clubs, societies etc.

Though it is not compulsory in all cases, the Audit of societies, clubs etc., which
are registered under the Societies Registration Act, 1960, conduct Audit of their
activities to continue registration. In addition to that, different government grants and
loans are given to these societies, clubs etc. on the basis of their application along with
the Audited income and expenditure account and the balance sheet. It is the
responsibility of the secretary of the society or the club to submit the audited financial
statements to the members in the annual meeting of the society or club.

CLASSIFICATION BASED ON FUNCTION

➢ External Audit

External Audit is conducted by an independent external Auditor. This type of Audit is

usually conducted to fulfil the requirement of the provisions of law. Qualified chartered
accountants who are not connected with the preparation of accounts or management of the
organisation can be appointed as external Auditors. The Auditor who conducts such an Audit
is 'independent' of the enterprise under Audit, i.e. he is an independent professional who does
not have any such relationship with the enterprise as might adversely affect his ability to form
an objective judgment about the financial statements.

➢ Internal Audit

Internal Audit is conducted by specially assigned staff within the organisation. It is an Audit
through which a thorough examination of the accounting transactions as well as the system
according to which these transactions have been recorded is conducted. Internal Audit is
undertaken to verify the accuracy and authenticity of the financial accounting and statistical
records presented to the management. As per AS-7, the scope and objectives of internal Audit
vary widely and are dependent upon the size and structure of the entity and the requirements
of its management.

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CLASSIFICATION ON THE BASIS OF PRACTICAL APPROACH

❖ Continuous Audit

A continuous Audit or a detailed Audit is an Audit which involves a detailed

examination of the books of accounts at regular intervals of, say, one month or three months.
The Auditor visits his clients at regular or irregular intervals of time during the financial year
and checks each and every transaction.

❖ Periodical Audit

Periodical Audit is one which is taken up at the close of the financial or trading period
when all the accounts have been balanced and Trading and Profit and Loss Accounts and the
Balance Sheet have been prepared.

❖ Interim Audit

Interim Audit is an Audit, which is conducted in between the two annual Audits with
a view to find out interim profit of the business to enable it to declare an interim dividend. It
means carrying out of audit work at any time during the financial year in order to ascertain
the interim profit or loss or state of financial affairs of the concern. If the directors of a
company may desire to declare interim dividends or bonus only when first half-year is over.
It would require the interim audit to be carried out to ascertain true profits of the concern for
the period.

❖ Partial Audit

It is a kind of Audit where the work of the Auditor is curtailed. The Auditor is asked
to check a few books. For example, he may be asked to check the payment side of the cash
book. Partial Audit is not permitted in case of limited companies (private or public) as,
according to the Companies Act, the duties of an Auditor of a company cannot be curtailed.

23
 ❖ Occasional Audit

As the name indicates, this type of Audit is conducted once in a while, whenever the
need arises and the client desires it to be carried out.

This is possible only in case of proprietary concerns but in case of joint stock
companies, banking and insurance companies etc. the Audit has to be carried out once or
twice a year according to the Companies Act.

▪ is Audit work, as the client's staffs are not accustomed to the procedures of
Auditing.

❖ Standard Audit

Standard Audit can be defined as a "complete check and analysis of certain items and
contingent upon effective internal check, appropriate test checks on remaining items, the
whole of work being in accordance with general Auditing standards."

❖ Balance Sheet Audit

Balance sheet Audit means limited Audit in which all the balance sheet accounts are
verified and tests imposed only on those profit and loss items which are directly related to the
assets and liabilities such as repairs and maintenance, provision for depreciation, bad debts
etc. Accounts such as these are analysed, but otherwise no detailed Audit is conducted.

❖ Complete Audit

In complete audit the auditor is supposed to check all the documents such as financial
transactions relating to a particular financial year. Nothing is unchecked. It is convenient for
small business houses. In large businesses, however, it is rarely practicable, as the time
required to do it is considerable, and it may delay the presentation of audited accounts beyond
a reasonable period.

CLASSIFICATION ON THE BASIS OF AUDIT DIMENSION

The scope of an Audit varies widely and depends on the purpose of the Audit, the dimension
of Auditing work and the conditions of the Audit requirement. On the basis of this dimensional
aspect, Auditing can be classified under the following types:

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➢ Management Audit

Management Audit is a comprehensive critical review of all aspects of the management

process. It covers all areas of management like planning, organising, co-ordination, control etc.
It assists at all levels of the management in the effective discharge of managerial functions. A
management Audit is forward-looking and independent

➢ Social Audit

Business organizations are now regarded as a great social force. They are not expected
to be only engaged in profit earning activity and paying dividend to the shareholders. Social
Audit is aimed at an assessment of the performance of an entity towards the fulfillment of social
obligations.

➢ Cost Audit

Cost Audit is an effective means of control in the hands of the management to have an
idea about the working of the costing department of the organisation and to suggest ways and
means for its smooth running. It is the detailed checking as well as the verification of the
correctness of the costing techniques, systems and cost accounts.

➢ Cash Transaction Audit

Cash transaction Audit is the oldest concept in Auditing system. In the olden times, a
person was appointed to check cash transactions only, i.e. whether the person responsible for
recording cash receipts and payments on behalf of the business owner has done his job properly
or not. So, when an Audit of all items of cash book, is conducted it is known as cash Audit.
The Auditor will check the receipt and payments made by cash with the vouchers and
documents.

➢ Tax Audit

Tax audit refers to audit of incomes or expenses or specific claims of deductions or

exemptions for the purpose of assessment of income tax. Tax audit is required in addition to
financial audit, which does not fulfil the specific requirement of the tax authority. Since the
assessment year 1985-86, certain provisions under Section 44AB of the Income Tax Act was
introduced for compulsory tax audit of accounts of certain persons. These persons shall get

25
their accounts of the previous year audited by an accountant before the 'specific date' and obtain
before that date the report of such audit in the prescribed form duly signed and verified by a
qualified accountant.

➢ Human Resource Audit

One of the defects of financial accounting is its failure to show the human resources in
the balance sheet. However, it is a fact that external users may wish to know the degree of
employee morale, customer satisfaction, product quality and the reputation of an entity. So,
disclosure of information regarding human resources in the annual report of the company may
help a lot to the investors in framing an opinion whether to invest or not.

➢ System Audit

The purpose of the system Audit is to design appropriate system of accounts suitable to
the business and to obtain information, through the process of investigation for improving the
accounting method. In fact, accounting systems are required to be revised in order to ensure
that it may provide the information desired by the executives as an aid to management.

➢ Propriety Audit

Propriety Audit is concerned with scrutiny of executive decisions bearing on the

financial and profit and loss aspect of the concern with special reference to public interest and
commonly accepted customs and standards of conduct. While performing a propriety Audit,
the Auditor would judge whether the standards of propriety have been maintained in making
payments, incurring expenditure or entering into transactions.

➢ Performance/Efficiency Audit

Efficiency Audit provides the means to appraise the performance of the enterprise and
to diagnose the weakness of the enterprise. It aims to determine whether the resources of the
business flow into remunerative or paying channels. It is concerned with the review of the
organisational environment, measuring return on investment, cash flow performance etc. and
comparing these with the standard.

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➢ Environmental Audit

Environmental Audit is an excellent management tool for relating productivity to

pollution. Environmental Audit is the examination of the correctness of environmental
accounts. In broader sense, environmental Auditing is the examination of accounts of revenues
and costs of environmental and natural resources, their estimate, depreciation and values
recorded in the books of accounts

➢ Government Audit

The government offices, departments, undertakings registered as companies, are also

subject to independent financial audit. Usually a statutory auditor, appointed by the
Comptroller and Auditor General of India, audits the accounts of government Companies.

➢ Secretarial Audit

This is also a relatively new concept and is coming to be recognized with growing
complexities in the corporate laws. Compliance with the provisions of various corporate laws
is as important as to be in the business. Any failure to comply may invite heavy penalty and/or
even imprisonment. It is therefore imperative for corporate entities to ensure compliance with
the applicable legal requirements, which are numerous.

➢ Energy Audit

It is a relatively new branch of Auditing. It is emerging as a consequence of heavily

depleting physical energy resources in the world. Need for conservation of energy is the most
important parameter of modem day world. Energy Audit is focused to see whether right amount
of energy, both organic and inorganic, is used by the enterprises and there [Link] no avoidable
loss or waste of energy due to human in difference.

27
CHAPTER 4
VOUCHING

28
VOUCHER
A transaction is recorded in the books only when a Documentary Evidence is available
to support the transaction. It may be a receipt, counterfoil of a receipt, resolution passed in a
meeting, cash memo, pay-in-slip, purchase invoices, sales invoices, minutes of a meeting. All
such documentary evidence Are known as vouchers.
Eric L. Kohler defines a voucher:
(i) A document which serves as an Evidence of the disbursement of cash. For example,
a receipted bill, a cancelled cheque, petty cash receipt, the carbon copies of a cheque.
(ii) A document serving an Evidence of the authority to disburse cash. For example, an
approved invoice from a supplier, a pay roll.
(iii) A form (used with a voucher system) to which bill, receipt and other evidences of
indebtedness are often attached. Showing the authority for the payment, the particulars of
settlement, and other relevant details, a disbursement voucher.
(iv) The written evidence of a business or accounting transaction sometimes contained
in a single document without attachments. For example, a journal voucher.

Types of Vouchers

Vouchers can be classified into two types:

VOUCHERS

Primary Voucher Collateral Voucher

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 ❖ Primary vouchers. When a Written Evidence is available in original, it is known as
primary vouchers. For example, cash memo, purchase invoice.

❖ Collateral vouchers. In certain cases, evidence in original Are not available. Copies
of such evidences are made available for the purpose of audit. Aim is to satisfy the
auditor regarding the correctness of transaction recorded. For Example, carbon
copies of sales invoices, copy of resolution passed at a meeting. Following are the
examples of vouchers for various transactions.
VOUCHING
Vouching is a technical term which refers to the inspection by the auditor of
documentary evidence supporting and substantiating a transaction. Simply stated, vouching
means a careful examination of all original evidence i.e. invoices, statements, receipts,
correspondence, minutes and contracts etc. with a view to ascertain the accuracy of the entries
in the books of accounts and also to find out, as far as possible, that no entries have been omitted
in the books of accounts. When vouching uncovers an error, the auditor may need to
increase the sample size being audited in order to gain assurance that a system operates
properly. Vouching is a method of examination with the help of documentary evidence in order
to ascertain the accuracy of the transaction recorded in the books of accounts.
OBJECTIVES OF VOUCHING
Vouching is concerned with examining documentary evidence to ascertain the
authenticity of entries in the books of accounts. It is a technique used by the auditor to judge
the truth of entries appearing in the books of accounts. Success of an audit depends on the
efficiency with which vouching has been conducted. The following are the objectives for which
the auditor adopts vouching techniques:
➢ To check that all transactions recorded in the books of accounts are supported
by documentary evidence
➢ To verify that no fraud or error has been committed while recording the
transactions
➢ To see that each and every transaction recorded has been adequately authorised
by a responsible person
➢ To ensure that distinction has been made between capital and revenue items
while recording the transactions

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VOUCHING OF TRADING TRANSACTION
❖ Vouching of Credit Purchases
Transactions relating to credit purchases are recorded in Purchase Book. The main
objective of vouching purchase book is to ensure that all the goods purchased during the year
are being received and the client makes payment only for the goods being delivered by the
supplier. The auditor before vouching the purchase book should satisfy himself about the
effectiveness of the internal check and control system relating to purchases. While vouching
purchase book the auditor should consider the following points:

i. The auditor should cautiously check the entries in the Purchase Book with the purchase
invoices. While examining the purchase invoice the auditor should pay attention to the
following points: -
• Invoices are in the name of the client.
• The date of the invoice should relate to the period under audit.
• The name of the creditor in the invoice agrees with the name entered in the
purchases book.
• Orders should be placed by a responsible officer and there should be another
responsible officer to pass the invoice for payment.
• Invoice should be initialled by the Invoice clerk as being checked.
ii. The auditor should vouch the entries in the Purchase Book with the invoices, copies of
orders placed, Goods Inward Book and delivery notes.
iii. Auditor should ensure that only credit purchases are recorded in the Purchases Book.
iv. Auditor should also ensure that purchase of capital goods, i.e., purchase of plant and
machinery or any capital asset are not entered in Purchase Book. But instead they
should be accounted in fixed assets account.
v. Auditor should check the totalling and casting of the purchases book and ensure that all
taxes, octroi and freight are added to the purchases and trade discount allowed are
deducted.
vi. When directors or partners purchase goods for personal use, auditor should ensure that
such purchases are charged to their personal accounts.
vii. Auditor should compare the Gatekeepers Goods Inward Book and the stock sheets with
the purchases book to ensure that all goods taken into stock have been entered in the
purchases book.

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❖ Vouching of Purchase Returns
Goods returned by the client to the suppliers due to poor quality, defective goods and
goods not according to the sample are recorded in the Purchase Returns Book. When the goods
are returned, the supplier’s account should be debited. The debit is made through the purchase
returns book on the basis of a Debit Note. The supplier, on receipt of the debit note issues a
Credit Note indicating the acceptance of the debt. Further, the auditor should proceed to vouch
purchase returns in the following manner:
i. When goods are returned, auditor should verify whether it is properly recorded in the
Purchase Returns Book or Returns Outward Register.
ii. Auditor should verify the debit note issued by the client to the supplier or the credit
note issued by the supplier.
iii. Auditor should vouch the quantity returned with the Purchase Returns Book,
Gatekeepers Outward Register, storekeeper’s record and credit notes received from the
supplier.
iv. The auditor should verify the purchase returns of the first and last month of the year to
avoid manipulation of accounts.
v. The auditor should ensure that current year’s returns are not accounted in the
subsequent year.

❖ Vouching of Credit Sales

In Sales Book, only credit sales of goods are recorded. Auditor before vouching the
sales book should check the effectiveness of the system of internal check and control in
operation. The auditor should carry out vouching of credit sales in the following manner:
i. The auditor should verify the efficiency of the system of internal check in operation by
test checking the transactions.
ii. Auditor should vouch Sales Book with the copy of the invoices, Orders Received Book
and Goods Outward Book and ensure that all sales made are accounted.
iii. Auditor should check the casts, postings and carry forwards of the Sales Book.
iv. Auditor should see whether there is any omission or inflation of sales.
v. Auditor should ensure that sale of capital assets is not considered as ordinary sales and
accounted in Sales Book.
vi. Trade discounts allowed to customers should be checked and differences if any
observed should be enquired.

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❖ Vouching of Sales Return
Goods which have been sold when return by the customer on account of poor quality,
defectiveness or due to other reasons are accounted in Sales Returns Book. The auditor should
bear in mind the following points while vouching them:
i. The auditor should vouch the entries in the Sales Returns Book with the Gatekeepers
Returns Inwards Book and Stock Register.
ii. Auditor should verify the copy of the Credit Note issued to the customer and ensure
that the credit note is properly authorized and signed by a responsible officer.
iii. Auditor should check the postings from the Sales Returns Book to the Sales Returns
Account and Customer Ledger.
iv. Auditor should verify the returns from the customers at the beginning and end of the
year.
v. Auditor should ensure that goods returned by the customers are included in closing
stock and are valued at cost or market price, whichever is less.

❖ Vouching of Goods Sent on Sale or Return Basis

When goods are delivered to a customer on condition that if goods are not approved
within a particular period the customer can return the goods. Such a type of sale is called as
Goods on sale or return basis. The auditor should vouch sale on return basis by considering the
following points:
i. Auditor should verify that a separate sale or return journal with necessary columns for
sale price of goods, value of goods returned and retained should be maintained.
ii. Auditor should vouch the goods on sale-or-return journal with invoices,
correspondences with the client.
iii. The auditor should ensure that goods sold on approval should not be treated as complete
sale unless the customer approves the sale.
iv. Auditor should check that until the goods are approved it should be shown as goods
with customers in closing stock in Balance Sheet.

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❖ Vouching of Journal Book
In addition to Purchase book, Sale book, Purchase return and Sales return book, the
following entries are recorded in the journal book −
▪ Opening and closing entries
▪ Various provisions for Taxes and doubtful debts
▪ Provision for depreciation
▪ Interest received and interest paid

VOUCHING OF CASH TRANSACTION

Vouching of Cash Receipts (Debit Side of Cash Book)
We will discuss the cash receipts which are placed on the debit side of cash book for
following items −
Opening Balance
Opening balance of cash book represents cash in hand at the start of the year and
should verified from the balance sheet of last financial year.

Cash sales: There are more chances of mis-appropriation of cash sales. The concerned
sale may make the sale and may not make entry for cash received. Internal control system
regarding cash must be effective. In big concerns salesman is not allowed to receive cash from
customers. Even good also delivered by some other person.
Cash Received from Debtors
• The carbon copies or counterfoils of cash receipt book should be verified.
• Cash receipt should be serially numbered.
• Cash received should be entered on the same date when the cash is actually
received.
• The discount allowed to customers should be properly authorized by a
responsible officer.

Repayment of Loan by Others

• Calculation of interest received and interest should be credited to interest
received account.
• Verification from bank statement if directly deposited by party into bank.

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 • Checking of carbon copies or counterfoils of cash receipts.
• To ensure that there should be no violation of Income Tax rules as payment of
loan exceeding Rs. 20,000/- cannot be repaid in cash. It should be through
Cheques, Demand Draft, NEFT, RTGS or any other available banking
channels.
Rent Received
• To check rental agreement or lease deed.
• In case where the rental income is received from more than one property,
separate account for each property should be maintained.
• The Auditor should verify that the rent for all the twelve month is received or
not.
• The amount of rent should be verified from the rent deed or the lease deed.
• If TDS (Tax Deducted at Source) is deducted by the party, there should be
proper accounting of TDS.
Sale of Investments
• To check bank statement if the sales proceeds have reached the bank account.
• To verify broker commission, note or debit note, if investments are sold through
broker.
• To ensure separate accounting is being done for capital receipts and revenue
receipts. Dividend or profit or loss on sale of investment is a revenue receipt
and the sales proceeds of the investment cost should be booked as capital
receipt.

Subscription
• Subscription register should be verified.
• Verification of subscription received during the year and the subscription
receivable.
• Counterfoil of cash receipt should be verified.

Interest and Dividend Received

• Verification of the dividend warrant letter along with the covering letter for
verification of dividends in case of dividends received through cheque.

35
 • Verification of bank statement, if the dividend is directly credited to the bank
account.
• Interest on security can be vouched from the securities schedule.
• Interest on fixed deposit can be verified from bank statement and TDS
certificates.
• Interest received from outsiders to whom company has granted loan could be
verified from statement of account of party along with TDS certificates.
• Provision should be made for interest accrued but not due.
• All interest received and accrued should be properly accounted for in the books
of accounts.
Commission Received
• Verification of agreement on the basis of which the commission is received.
• Calculation of the commission receivable.
• The commission received should be verified from counterfoils, bank
statements, cash receipts, etc. and the provision for commission receivable
should be rightly accounted for in the books of accounts.

Proceeds from the Sale of fixed assets.

• Sale of fixed assets may be vouched with minute book of Board of Directors,
correspondence, Agents sale account and sale contract. It should be seen that
proper account has been credited. Any profit arising on the sale of asset shall
be credited to revenue account which is not available for distribution of
dividends. If any expense on the sale assets is paid, sale proceeds of the asset
should be reduced by such amount and balance should be credited to asset
account. It must be seen that sale of fixed assets has been sanctioned by the
authorised person or committee.
(Voucher-Sale deed, Broker's Sold Note, Correspondence)
Royalty Received.
• Royalty received can be examined from the following
(a) Terms and conditions for payment of royalty.
(b) Correspondence with the lessee.
(c) Calculation of royalty.
(d) Counterfoils of receipt issued.

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 Insurance Claims.
• Insurance claims received can be vouched with copy of insurance claim lodged,
correspondence with the insurance company counterfoil of the receipt issued.
It should be verified that insurance claim recovered has been recorded in the
proper account.
(Vouchers-Accounts, Correspondence)

Vouching of Cash Payments (Credit Side of Cash Book)

All the payment made to creditors, expenses incurred in cash and all other payments
done appear on the credit side of cashbook and the Auditor is required to vouch cash payments
because chances of cash misappropriation are very high. Following points need to be
considered for different types of cash payment –

Opening Balance
The opening balance of cashbook can never be credited because cash of
company cannot be in negative but the credit bank balance represents the overdraft
account from bank or utilization of cash credit limit as sanctioned from bank.
Payment to Creditors
• Receipt issued by the creditors.
• If the creditor is paid amount as full and final settlement, the balance amount,
if any stands in the ledger account of the creditor; this amount should be
credited to discount received.
• If any advance payment is made to creditor that should be clearly mention.
• Statement of account of creditor.
Payment of Salaries
• Attendance record of employee and salary register.
• Appointment letter of new employees.
• Comparison of current month salary with last month’s salary and if there is any
abnormal change in amount, Auditor should verify the same.
• Alteration in amount of deductions on account of advance, loan, fine, funds,
insurance, TDS, etc.

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Payment of Wages
• Adequacy of Internal Control System.
• Payment of wages at higher rate than allowed.
• Payment shown to ex-workers in the current month.
• Lower or non-deduction of advance or other deductions due.
• Payment to fictitious workers.
Purchase of Plant and Machinery
• Purchase invoice of machinery.
• Freight inward charges, installation charges, erection and commissioning
charges should be capitalized.
• Treatment of Excise duty according to the excise rules.
Purchase of Land & Building
• Study of Leasehold agreement, if land is purchased on lease hold basis.
• Payment should be as per lease term.
• All the expenses incurred to acquire leasehold property should be debited to
respective property account.
• Auditor should study the conveyance deeds in case property is purchased under
free hold basis.
• For verification of payment, the Auditor can check the payment receipt and the
conveyance deed.
Rent Paid
• Rent Deed.
• Rent receipt from Landlord.
• Provision for un-paid rent at the end of the year.

Insurance Premium
• Insurance policy issued by the Insurance Company.
• Insurance premium receipt
• Insurance premium should not be related to any official of the company.

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 Income Tax
• Advance Tax Challan
• Self-Assessment Tax challan
• Income Tax demand notice
• Assessment order
Excise Duty
• Rate of Excise Duty
• Excise records and sale invoice for verification of excise duty
Director’s Fees
• Directors receive fees for attending the Board meetings.
• Verification of attendance registers.

Acquisition of Copy Rights and Patents:

The acquisition of copyrights and patents should be vouched with receipt issued by
seller, agent's note, agreement, the purchase of patents and copyrights. All those expenses
which are incidental to the acquisition of patent rights should also be capitalised. If the patents
and copyrights are developed through research and development, all the expenses incurred on
research and development should be capitalised as the cost of copyrights and patents.

VOUCHING OF IMPERSONAL LEDGERS

Impersonal ledgers are also called General Ledgers or Nominal Ledgers. They are of
two types such as Nominal Accounts and Real Accounts. Nominal accounts are related to
Trading and Profit & Loss Accounts whereas real accounts record assets. If these accounts are
inaccurate, they will affect the Profit and Loss Account and the Balance Sheet. Therefore, the
auditor should vouch the items appearing in the impersonal ledgers thoroughly so that the
chances of manipulation by fictitious entries of expenses can be eliminated. The transactions
in the Impersonal Ledger relate to Profit and Loss Account, In case of real or capital accounts
to the balance sheet. These are given below.
(a) Prepaid expenses like salaries, commission, rent, interest etc.
(b) Accrued incomes like interest, commission etc.
(c) Accrued liabilities like compensation to employees, pension, gratuity, lease rent, taxes etc.

39
 The Impersonal Ledger will be vouched as follows:

i. The postings of cash transactions to the Impersonal Ledger should be carefully checked.
ii. The Journal should be carefully vouched to ensure that each entry is supported by
sufficient evidence.
iii. The auditor should carefully check the totals of the various other books of original entry
and the postings thereof to the Impersonal Ledger.
iv. Sometimes direct entries are passed from one account to another in the Impersonal
Ledger. In such a case the auditor should vouch them in the manner in which he
examines those items, which pass through the Journal.
v. Auditor should check very carefully the adjustments, which are usually done at the end
of the year when the final accounts are prepared. Such adjustments include outstanding
assets and liabilities, depreciation, etc. As these adjustments pass through the Journal,
their postings to the Impersonal Ledger should be checked. Special attention should be
paid to these adjustments because they ultimately affect the position reflected by the
final accounts.
vi. The total of the subsidiary books should be checked.
vii. The balances in the Impersonal Ledger should be checked and verified with the Trial
Balance.
viii. Reviewing the adequacy of internal control system in operation.
ix. The system should be such as reduces the chances of fraud and mistakes to the
minimum

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 CHAPTER 5
VERIFICATION AND VALUATION OF ASSETS AND
LIABILITIES

41
VERIFICATION

Verification means proving the correctness. One of the main works of auditor is verification
of assets and liabilities. Verification is the act of assuring the correctness of value of assets and
liabilities, title and their existence in the organization. If balance sheet incorporates the
incorrect assets, both profit and loss account and balance sheet do not present true and fair
views. Thus, verification means to confirm the truth or accuracy and to substantiate. It is a
process by which the auditor satisfies himself not only about the actual existence, possession,
ownership and the basis of valuation but also ensures that the assets are free from any charge.
While verifying the assets, an auditor should consider the following points:

➢ Ensuring the existence of assets.

➢ Acquiring the assets for business.
➢ Ensuring the proper valuation of assets.
➢ Ensuring that the assets are free from any charge.

VALUATION

Valuation is the act of determining the value of assets and critical examination of these
values on the Basis of normally accepted accounting standard. Valuation of assets is to be made
by the authorized officer and the duty of auditor is to see whether they have been properly
valued or not. For ensuring the proper valuation, auditor should obtain the certificates of
professionals, approved Values and other competent persons. Auditor can rely upon the
valuation of concerned officer but it must be clearly stated in the report because an auditor is
not a technical person. An auditor should consider the following points regarding the assets
while making valuation off assets:

➢ Original cost
➢ Expected working life
➢ Wear and tear
➢ Scrap value

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 DIFFERENCE BETWEEN VALUATION AND VERIFICATION

BASIS FOR VALUATION VERIFICATION

COMPARISON

Meaning Valuation is the act of determining Verification means a process to

the value of assets and critical substantiate the validity of assets and
examination of these values on the liabilities appearing in the Balance
basis of normally accepted Sheet.
accounting standard.

Concept Verification is concerned with the Valuation is concerned with the

examination of the ownership rights determination of value of the assets
of the assets of an entity, their and liabilities of an entity at which it
existence and possession along with will be disclosed in the balance sheet.
their valuation.

Scope Verification is a broader concept. It Valuation is a narrower concept as

includes among different other compared to verification, because it is
aspects, the valuation part of assets only a part of the whole process of
and liabilities. valuation.

Objective The main objective of verification The main objective of valuation is to

is to ascertain whether the assets ensure that the assets and liabilities of
and liabilities owned by the entity the entity are correctly valued by
are correctly disclosed in the following the prescribed norms of the
financial statements at their proper competent authority.
value.

Nature The nature of work involved in the Valuation process, on the other hand
verification process is to some involves the determination of value of
extent complicated as it involves the assets and liabilities as per the
assessment of legal ownership as prescribed norms and guidelines.
well as possession of the assets by
the entity.

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VERIFICATION AND VALUATION OF INTANGIBLE ASSETS

➢ GOODWILL: Goodwill is the Value of Reputation of the Firm. It enables the firm
to earn more than the normal rate of profit.

❖ Valuation of Goodwill

There are several methods of valuation of goodwill. However, goodwill should

not be recognised in the accounts unless it is purchased. Regarding valuation of
goodwill, an appropriate method is to be adopted to write the cost down out of the
available profits and in this way, it should be ensured that the capital of the
business is represented by tangible assets only.

❖ Verification of Goodwill

Goodwill is the excess of the price paid for a business as a whole over the book
value or the computed value or the agreed value of all tangible assets purchased.
It is not possible to be verified physically; hence verification of goodwill means
proper checking of accounting entries passed for goodwill.

➢ PATENT: A patent is an official document, which secures to an investor exclusive right

for years to make, use or sell his invention.

❖ Valuation of Patent

The patent is valued at cost less depreciation. Cost is the acquisition cost, which
may be purchase cost or invention cost. Also the cost of registration of patent
should be included in the valuation, while the renewal fees should be charged off
to revenue.

❖ Verification of Patent

Actual patent should be physically verified by the auditor and it should be seen
that it has been duly registered. In case of joint registration of the patent with an
individual, who might have developed the patented article, it should be seen that
a registered assignment by the individual in favour of the company has been made.

44
➢ COPYRIGHT: A copyright is the exclusive legal right to produce or reproduce some kind
of literary work. It is the legal protection provided to an author by which the publication of
his work by other is prohibited. The period of copyright is for the life of the author and fifty
years after his death.

❖ Valuation of Copyright
o The auditor should see that the value of copyright is determined on proper
basis including the period of copyrights.
o It should be ensured that if any copyright does not command sale of any books,
the same should be written off in that year.
o It should be confirmed that the legal life of the copyright has not been expired.
❖ Verification of Copyright

In verifying copyright, the auditor should inspect the agreement between the
author and the publisher. If there are many copyrights with the business of the
client, the auditor should ask for a schedule thereof from the client and verify them
from the schedules.

➢ TRADE MARK: “Trade mark is a distinctive mark attached to goods offered for sale in
the market so as to distinguish the same from similar goods and to identify them with a
particular trader."

❖ Valuation of Trade Marks

The trade mark is a symbol of the organisation's prestige. The value of trade
mark may be justified by reference to its renewal fees. If the trade mark is
purchased, the price paid for it is to be considered as the value of the trade mark.

❖ Verification of Trade Marks

• Trademarks can be verified by examining the assignment deed duly endorsed
by the office of the register of trade mark. If trademarks are purchased, the
assignment of interest or the assignment deed should be inspected.
• It should be confirmed that the legal life of the copyright has not expired.
• The auditor should see that the copyright having no commercial value has been
completely written off.

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VERIFICATION AND VALUATION OF FIXED ASSETS

➢ LAND AND BUILDINGS: Land and building shown in the books should be according to
the title deed. Profit or loss on sale of it should be duly adjusted in the account. Any addition
to it should be carefully examined by the Auditor.

For the purposes of verification and valuation of land and buildings, it can be classified into
two types:

o Freehold property.
o Leasehold property.

Freehold Property: freehold property, representing permanent ownership of land and

buildings, requires verification to ensure its existence, ownership, and valuation are accurately
reflected in the financial statements.

❖ Verification
i. The auditor should inspect the title deed and see that they appear to be in order.
He should obtain a certificate from the legal advisor of the client confirming
the validity of the title to the property.
ii. He should also verify that the conveyance deed has been duly registered as
required by the Indian Registration Act and the particulars to be endorsed
thereon have been duly endorsed.
iii. If the property is mortgaged, the title deed would be in the possession of the
mortgagee. A certificate to this effect should be obtained.
iv. In the cast of property built or created by the client himself, the auditor should
ensure that proper capitalisation of materials, labour and overhead is done.

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❖ Valuation
i. The original cost and any improvement thereon should be checked with original
deed and receipt. It is also to be seen that all expenses incurred on registration,
brokerage or other legal fees have been duly capitalised.
ii. The cost of buildings should be depreciated at appropriate value, depending
upon the quality of their structure and the use made of them.
iii. The auditor should check the expenditure on repairs so as to exclude that
expenditure from capital cost.
iv. In respect of property built by the client, contractor's bill and other relevant
accounts should be referred.

Leasehold Properly: leasehold property, which is property leased for a set period, requires
specific attention to ensure accurate financial reporting and compliance with accounting
standards, including verifying lease classifications, lease terms, and proper accounting for lease
payments and improvements.

❖ Verification
i. The auditor should inspect the lease or assignment thereof to ascertain the
amount of premium if any paid for securing the lease and its terms and
conditions.
ii. The auditor should also ensure whether the lease has been duly registered.
iii. He should also verify that all conditions prescribed by the lease are being
duly complied with.
iii. He should confirm himself any writing off of any legal expenses incurred to
acquire the lease.

❖ Valuation
i. The value of the leasehold property should be checked from the lease deed. Any
addition or expansion thereon should be examined by reference to the
contractor's bills and other supporting papers.
ii. The auditor should ensure that the provision for any claim that might arise under
the dilapidation clause on the expiry of the lease has been made.

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 iii. He should see that the cost as well as legal expenses incurred to acquire the
lease is being written off at an appropriate rate over the unexpected term of the
lease.
iv. He should also check the accounting of leasehold property to ensure himself
that it is maintained separately.

➢ PLANT AND MACHINERY: Plant and machinery" refers to fixed assets like equipment,
machinery, and tools used in a business's operations, and auditors verify their existence,
valuation, and proper accounting treatment.

❖ Verification
• The auditor should call for the plant register or detailed break up schedule of
plant and machinery. For the balance appearing in the Balance Sheet, he
should identify the specific items and check the details thereof.
• In the case of a company, the management is duly bound to physically verify
the plant and machinery and the auditor should ask for the related working
papas for his examination.
• The additions and disposals during the year should be verified by reference to
the purchase invoices and other appropriate documents.
• The auditor should verify some of the important items of plant and machinery
on test check basis.

❖ Valuation
• The cost price of any plant or machinery plus any cost of installation will be
vouched with supplier's invoices and other supporting documents.
• The auditor should see that proper depreciation has been provided during the
year.
• Auditor should check as to whether any of the items has been disposed off or
sold during the year. If so, he should satisfy that it was properly authorised and
the sale proceeds credited to plant and machinery account. Any capital profit
made should be transferred to capital reserve.
• The auditor should also verify that the plant and machinery has been properly
shown under fixed assets in the Balance Sheet.

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➢ FURNITURE AND FIXTURE: Fixtures and Equipment, are long-term assets used in a
business that are not permanently affixed to a building and are easily movable, requiring
specific audit procedures to ensure accurate valuation and reporting.

❖ Verification
• The auditor should ascertain whether a register is maintained for furniture and
fixtures detailing the nature of the item, its acquisition cost, location, code number
etc.
• Auditor should also verify whether the furniture and fixtures bear on them the code
numbers allotted.
• Auditor should inquire whether physical verification of the furniture and fixtures
has been carried out by the management and if so he should examine the working
papers.
• The auditor should verify physically some of the important items of
furniture and fixtures on test check basis.
❖ Valuation
• The auditor should satisfy that the furniture and fixtures have been properly
depreciated and value written off for damaged or unserviceable items.
• Auditor should see that the cost of furniture and fixture has been properly
ascertained and recorded in the books of accounts.
• Auditor should inquire whether any of the items have been disposed of or sold
during the year. Any capital profit made therein should be transferred to capital
reserve.
• The auditor should also verify that furniture and fixtures have been properly
shown under fixed assets in the Balance Sheet.

➢ MOTOR VEHICLES: Motor vehicle auditing involves a systematic examination of

vehicles, focusing on safety, compliance, and operational efficiency, often using checklists
to assess various aspects like tires, lights, fluids, and safety features, as well as driver
training and company policies.

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❖ Verification
• The auditor may call for a schedule of motor vehicles and compare it with the
Motor Vehicles Register maintained by the organisation.
• Auditor should also examine the registration document for each vehicle. He
should compare the registration number and description given in the
registration document with the particulars shown in the ledger account or
Motor Vehicle Register.
• If the vehicle is registered in the name of a person other than the client, the
auditor should inspect the letter confirming the arrangement and ascertain that
there is no charge on the vehicle in favour of such person.
• The auditor should also check the insurance premium receipts to ensure that
the vehicles are fully insured against accidents, theft, etc.

❖ Valuation
• The motor vehicles arc to be valued at cost less depreciation.
• The cost price of any motor vehicle will be vouched with supplier's invoices and
other supporting documents. However, he should see that expenditures on repair
have been charged to profit and loss account and not added to its cost.
• The auditor should verify the adequacy of the depreciation. It is a common practice
for the motor vehicles to be written off over the mileage they are expected to run.
• Auditor should also verify that the motor vehicles have been properly shown under
fixed assets in the Balance Sheet.

➢ ASSETS ACQUIRED UNDER HIRE PURCHASE SYSTEM: The Hire Purchaser gets
possession of the goods at the outset and can use it, while paying for it in Instalments over
a specified period of time as per the agreement.

❖ Verification
• The existence of the assets acquired can be confirmed by physical verification of
the assets by the auditor or by reviewing the working papers of physical
verification of fixed assets done by the management.
• The company is not the owner of the asset till the last instalment under hire
purchase agreement has been paid. However, the possession right of the asset can
be verified by reference to the hire purchase agreement.

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 • The auditor should also sec that the asset purchased is included in the fixed asset
register.

❖ Valuation
• Fixed assets are generally valued at cost less depreciation. So, the auditor will
have to examine the hire purchase agreement and the price list to ascertain the
cash cost of the asset.
• Depreciation should be deducted and the auditor should ensure that the rate
normally charged by the company on same or similar assets has been applied
on a consistent basis.
• The auditor should confirm the proper recording of assets acquired under hire
purchase agreement. The interest element in the instalments should be charged
to revenue.
• The assets purchased on hire purchase agreement may also be shown at the
capital value of instalments paid to date. In that case also, the depreciation at
the normal rate for the full period on the cash value will have to be charged.

VERIFICATION AND VALUATION OF CURRENT ASSETS

➢ STOCK-IN-TRADE: Stock-in-trade" refers to a company's inventory, which are goods

held for resale, and auditing involves verifying its existence, accuracy, valuation, and
proper presentation in financial statements.

❖ Valuation

The valuation of the closing stock, therefore, is an important step essential for
the determination of the profits of the year and also for truly disclosing the
financial position of the organisation at the end of the year. It is the duty of the
auditor, being intimately connected with these aspects of financial statements, to
verify the existence of the stock-in-trade possessed by the organisation at the end
of the year and to ascertain that the same has been valued correctly on a consistent
basis. The precise duties in regard to verification of stock-in-trade are not defined.

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❖ Verification
i. Review the procedure and arrangements for the maintenance of stock records.
ii. Secure the original rough stock sheet, if available.
iii. Check all additions and test fair proportions of extensions.

iv. Ascertain the basis and method of valuation adopted and confirms that the same
has been followed consistently.
v. Verify the cost of raw materials and stores by reference to purchase invoices.

➢ SUNDRY DEBTORS: Sundry debtors refer to customers or entities who owe money to a
business for goods or services they have purchased on credit.

❖ Verification
• Existence of book debts can be verified by examining the books of accounts and
satisfying that the entries therein are supported by proper sales documents.
• Balance of book debts should be sent to the debtors for their confirmation,
which will also establish the existence of the book debts.
• The examination of debtor's ledgers with related sales documents and
correspondence with debtors will confirm the ownership of book debts.
• The auditor should also inquire whether any dispute is there on any of the
balance included in sundry debtors. In this case, the documents regarding
dispute should be examined.
❖ Valuation
• Usually the balances shown in the debtor's ledger are supported by sales
documents represent the value of book debts.
• The auditor should call for the lists of book debts and debts written off and arrive
at the conclusion about adequacy of write off and provision for doubtful debts.
• The confirmation of balances by debtors will help establish the valuation of book
debts.
• It should be ensured by the auditor that sundry debtors are valued only at realisable
value.

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➢ BILLS RECEIVABLE: Bills receivable refers to the verification of a company's
receivables (money owed by customers) that arise from bills of exchange, ensuring their
accuracy and validity. Auditors examine these bills to confirm their existence, ownership,
and valuation.

❖ Verification
• The auditor should examine the Bills Receivable Book and prepare a schedule of
all those bills receivable that have not yet matured before the date of the
preparation of the Balance Sheet.
• Where the number of bills is large and they are kept with the bankers for collection,
the auditor should obtain a detailed certificate from the bank to ascertain the clear
position about the bills.
• For bills that are discounted or endorsed but remain outstanding at the time of
audit, any contingent liability in respect of such bills should be maintained as a
footnote of the Balance Sheet.
❖ Valuation
• The auditor should see that the bills are properly drawn, stamped and duly
accepted and they are not overdue. In case of the renewal of any bills, the auditor
should examine the new bill with the old bill.
• Sometimes, the bills might have matured and honoured subsequent to the date of
the Balance Sheet, but prior to the date of the audit. The auditor should check the
cash received as shown in the cash book of the next year.
• If the bills have been retired before the date of the Balance Sheet, the proceeds
thereof should be checked by reference to the cash book.
• For the bills discounted prior to the date of maturity and the date of maturity is to
fall after the date of Balance Sheet, the discount on such bills must be properly
apportioned between periods covered by two separate financial years.

➢ CASH AT BANK: "cash at bank" involves confirming the existence and accuracy of a
company's bank balances using procedures like bank confirmations, bank reconciliations,
and examining bank statements.

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❖ Verification
• The auditor should compare the balances as shown in the pass book with the
balances as shown in the cash book.
• The auditor should prepare a bank reconciliation statement or should check the
statement prepared by the client in order to ascertain the correct bank balance.
• Auditor should obtain a balance confirmation certificate from the bank at the close
of the year. iv. He should also obtain separate certificate for Fixed Deposit
Account, Current Account and Savings Bank Account from different banks to
confirm total deposits in different banks.
❖ Valuation
• In order to ascertain the current position with regard to cheques issued but not yet
presented or cheques deposited but not collected, the auditor should confirm
through cash book and pass book figures.
• Where amounts are deposited in foreign banks under exchange control regulations,
the fact to be disclosed.
• Where amounts are kept in different reserve account in the banks, in order to avail
deductions under Indian Income Tax Act, the fact should also be disclosed.

➢ CASH IN HAND: Cash in hand refers to the physical cash a business holds, like petty cash
and undeposited receipts, which auditors verify through counting and reconciliation with
records to ensure accuracy and prevent fraud.

❖ Verification
• The most common practice in verifying cash balance is to obtain a certificate from
the accountant about the actual cash balance in hand on the date of the Balance
Sheet.
• The auditor should verify the cash in hand by actually counting it on the close of
the business on the date of the Balance Sheet.
• In certain cases, the client maintains an unduly large balance of cash in hand
consistently. In those cases, the auditor should make a surprise check to ascertain
whether the actual cash in hand agrees with the balances as shown by the books.

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➢ PREPAID EXPENSES:

Prepaid expenses, which are payments made in advance for goods or services to be received
later, are treated as current assets and require careful scrutiny to ensure accurate financial
reporting.
❖ Verification
• The auditor should verify the receipts for pre-payments, i.e., expenses paid during
the period for future financial periods.
• The amount of pre-paid expenses should be shown in the asset side of the Balance
Sheet under current assets. The auditor should assure that it has been shown
properly in the Balance Sheet.
• Prepaid expenses for the last accounting period should be properly adjusted. The
auditor should see the expenses paid in the last year pertaining to the current
accounting year have been properly adjusted.
❖ Valuation
• The auditor should check the calculations for ascertaining the portion of
expenses belonging to the next period by reference to the contract or other
documents.
• In respect of rent, rates and taxes, the auditor should check the payment
vouchers and satisfy that allocation to carry forward has been made on time
basis.
• In respect of insurance premium, the auditor should also satisfy himself that
the carry forward allocation has been made on the basis of the terms of policy
and the premium paid.

VERIFICATION AND VALUATION OF FICTITIOUS ASSETS

• PRELIMINARY EXPENSES

The expenses incurred for the formation and commencement of a company are usually
grouped under the heading 'Preliminary Expenses'. These include stamp duties, registration
fees, legal costs, cost of printing, etc. In order to verify preliminary expenses, the auditor
should take into consideration the following matters:

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 • It should be confirmed by the auditor that no expenses other than those which are related
to the formation of a company are included under this head.
• The auditor should examine the contracts relating to preliminary expenses. If
preliminary expenses incurred by the promoters have been reimbursed to them by the
company, the resolution of the Board and the power in the Articles of Association to
make such payment should be seen.
• The auditor can cross check the amount of preliminary expenses with that disclosed in
the prospectus, statutory report and the Balance Sheet.
• Being a fictitious asset, it should be written off as early as possible and the auditor should
verify that the balance of preliminary expenses, which has not been written off, is shown
in the Balance Sheet under the heading 'Miscellaneous Expenditure'.
• Underwriting commission and brokerage in shares and debentures should not be
included under the head 'preliminary expenses'. The auditor should also confirm this
aspect.
• The bills and statements supporting each item of preliminary expenses should be
checked.

VERIFICATION AND VALUATION OF CONTINGENT ASSETS

The contingent assets arc those which may arise on the happening of an uncertain event.
As a general practice, contingent assets are not recorded in the Balance Sheet because that
would imply taking credit for revenue which has not accrued. But it is logical as the contingent
liabilities are shown in the Balance Sheet; the contingent assets should also be shown. The
Companies Act does not require disclosure of contingent assets in the Balance Sheet.

❖ Valuation:
No Valuation Until Recognition:
Contingent assets are not valued until their existence is confirmed, and they are recognized
on the balance sheet.
Focus on Disclosure:
The valuation of contingent assets is not a primary concern until they become probable and
can be recognized as an asset.

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 Future Events:
The value of a contingent asset is dependent on the outcome of the uncertain future event
that will determine its existence.

VERIFICATION AND VALUATION OF FIXED/LONG-TERM

LIABILITIES

➢ DEBENTURES

❖ Verification

• The auditor should go through the Memorandum of Association and Articles of

Association of the company in order to determine the extent of borrowing power
of the company and also to ascertain the limitation upon the borrowing power,
if any.
• A prospectus must have been issued and filed with the Registrar of Companies.
The auditor should verify the prospectus to ensure that the terms of the
prospectus have been complied with.
• Balances from the Register of Debenture holders will have to be extracted and
the total amount received from Debenture holders to be tallied with the total of
Debenture Account in the general ledger.
• The auditor should also examine a copy of the debenture bond to ascertain the
terms and conditions on which the debentures have been issued, the particulars
of assets charged as security and the method of redemption.
• If the debentures are mortgaged debentures, the debentures trust deed should be
studied by the auditor and it should be seen that the terms and conditions of the
trust deed have been fully observed by the company.

➢ SECURED LONG-TERM LOANS

A company can obtain loans from banks and other financial institutions on the basis of
security provided. For the purpose of verification of long-term loans, it can be classified
under two broad categories.

▪ Loans against security of fixed assets.

▪ Loan against security of stock.

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Loans against Security of Fixed Assets

• The auditor should examine the Memorandum and the Articles of Association to see
whether the company is empowered to borrow money against fixed assets.
• He should scrutinize the loan account in the ledger and the documents relating to the
fixed assets.
• He should also examine the mortgage deed and find out whether the mortgage is
properly executed.
• He should enquire whether the lender has a right to lend money against such security.
• The auditor should also obtain confirmation from the lender for the amount of loan.

Loans against Security of Stock

• The auditor should inspect the receipts of the go-down keeper, if the loan has been taken
against the go-down keeper's receipts.
• If the stocks are at dock or in bonded warehouse, the dock warrant or the warehouse
certificate duly endorsed in favour of the lender should also be examined.
• The auditor should see that the rent for the warehouse has been paid by the client
regularly. If it has not been paid, adequate provision should have to be maintained for
the purpose.
• He should also obtain a certificate from the lender showing particulars of securities
deposited and confirm that the same has been correctly disclosed and duly registered
with Registrar of Companies and recorded in the Register of Charges.
• The auditor should verify the authority under which the loan has been raised. In the case
of a company, only the Board of Directors is empowered to raise a loan or borrow from
a bank.

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VERIFICATION AND VALUATION OF CURRENT LIABILITIES

❖ SUNDRY CREDITORS

❖ The auditor will verify creditors more or less on similar lines as in the case of sundry
debtors. He should take a statement of balance of the trade creditors duly signed by the
authorised official and these balances should be verified with the purchase ledger
balances.
❖ Auditor may also obtain confirmatory statements from the creditors.
❖ Auditor should also examine the invoices as sent by the suppliers. He should carry out
test checking of purchases made during the year, particularly those made at the close of
the year.
❖ If debts have not been paid for a long time, he should enquire into the situation in detail.
Sometimes, it is seen that instead of paying to the creditors, the amount might have
been misappropriated by the officials.
❖ If the client maintains provision in respect of discount on creditors, he should check the
same with reference to the creditors account.
❖ The purchase ledger should also be checked by the auditor with the books of original
entry, invoices, credit notes etc.
❖ For any purchase returns, he should examine the 'Return Outward Book' and verify
them with the help of credit notes as sent by the suppliers.
❖ The auditor should pay special attention to the entries made either in the beginning or
at the end of the year to check the fictitious entries in this respect.

❖ BILLS PAYABLE

• The auditor should get a statement of bills payable and compare it with the Bills Payable
Book and Bills Payable Account.
• For the bills, which have been met after the date of the Balance Sheet but before the
date of audit, he should examine the Cash Book and Bank Pass Book.
• The bills payable already paid should be checked from the cash book and the auditor
should examine the returned bills payable.
• Auditor should also ensure that the bills which have been paid are not recorded as
outstanding.

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❖ BANK OVERDRAFT

• The auditor should examine the overdraft agreement with the bank in order to ascertain
the terms and conditions of overdraft and the maximum limit thereon.
• The Memorandum of Association in case of a company should be examined to ascertain
the borrowing powers of the company and any limitations thereon.
• The auditor should verify the minutes of the Board Meeting to assure that the bank
overdraft borrowing is being authorised by the board.
• If the client is a company and if the overdraft is against any security, the auditor should
see whether the charge created was registered with the Registrar of Companies, if
required.
• The auditor should also obtain the confirmation certificate from the bank in respect of
amount of overdraft at the close of the year.
• The auditor should also check whether interest on overdraft has been duly accounted
for.
• The auditor should also confirm that the amount overdrawn is within the maximum limit
sanctioned by the bank,
• It is to be seen whether any security was offered for the overdraft in terms of agreement,
depending on which the overdraft is to be classified as secured or unsecured.

❖ OUTSTANDING LIABILITIES FOR EXPENSES

• The auditor should ask for the list of outstanding expenses from the client classified on
the basis of nature of expenses.
• Auditor should verify the supporting documents evidencing the outstanding expenses.
• Auditor should also verify the basis of estimation of outstanding expenses, if they are
provided on an estimated basis.
• Auditor should check the next year cash book in order to see that the usual outstanding
expenses have been paid off by the time of audit.
• Auditor should also ensure that no outstanding expenses have been paid, which has not
been provided in the account. If paid, he should check the adjustment entries passed for
this purpose.
• Auditor should compare the list of outstanding expenses of the current year with that of
the previous year to identify any major deviations.

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VERIFICATION AND VALUATION OF CONTINGENT LIABILITIES

VERIFICATION

❖ Identifying Contingent Liabilities: Review contracts, legal documents, or agreements

that may lead to future obligations, such as guarantees, lawsuits, and warranties.

❖ Assessing Likelihood: Evaluate the probability of occurrence (e.g., probable, possible,

or remote) based on the evidence or expert opinions. Only liabilities deemed probable

and reasonably estimable are disclosed in financial statements.

❖ Legal Opinions and Expertise: For contingent liabilities related to litigation or legal

claims, legal counsel should be consulted to assess potential outcomes and their

financial impact.

VALUATION

❖ Probability Assessment: The financial impact is valued based on the likelihood of the

contingent event occurring. If the liability is probable, it should be recorded with a best

estimate.

❖ Range of Outcomes: If the liability cannot be measured with precision, a range of

possible outcomes may be provided, with the most likely amount recorded or disclosed.

❖ Discounting: For long-term contingent liabilities, the present value technique may be

applied, discounting future cash flows to reflect their current value.

❖ Revisions: Periodic review and updates are necessary as circumstances evolve, which

could alter the likelihood or the estimated amount of liability.

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 CHAPTER 6
INTERNSHIP REPORT

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GST [Good and Service]:

❖ The GST was launched at midnight on 1 July 2017 by the President of India, and
the Government of India. GST, or Goods and Services Tax, is an indirect tax
imposed on the supply of goods and services. It is a multi-stage, destination-
oriented tax imposed on every value addition, replacing multiple indirect taxes,
including VAT, excise duty, service taxes, etc.

TYPES OF GST:

❖ CGST (Central Goods and Services Tax)

❖ SGST (State Goods and Services.
❖ IGST (Integrated Goods and Services Tax)
❖ UTGST (Union Territory Goods and Services Tax)

• The current GST rates in India are divided into multiple slabs: 0%, 5%, 12%, 18%,
and 28%

GOODS AND SERVICES TAX RETURN:

A GST return is a document containing details of all income, sales, and or expenses,
purchases that a GST-registered taxpayer (every GSTIN) is required to file with the tax
administrative authorities. This is used by tax authorities to calculate net tax liability.

❖ Purchase
❖ Sales
❖ Output GST (On sales)
❖ Input tax credit (GST paid on purchases)

TYPES OF GST RETURNS:

❖ GSTR-1: GSTR-1 is a monthly or quarterly return that should be filed by every
registered GST taxpayer, except a few as given in further sections. It contains
details of all outward supplies i.e. sales. Every month 11th day is the final date.

❖ GSTR-2A: A purchase-related document that the GST portal provides to each

business registered with it. The GSTR 2A is generated automatically when a
business's seller or counterparty uploads the GSTR 1 and 5 Forms.

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 ❖ GSTR-2B: GSTR-2B is an auto-drafted ITC statement that is generated for every
normal taxpayer based on the information furnished by his suppliers in their
respective GSTR-1/IFF, GSTR-5 (non-resident taxable person) and GSTR-6
(input service distributor).
❖ GSTR-3B: GSTR-3B is a self-declared summary GST return filed every month
(quarterly for the QRMP scheme). Taxpayers need to report the summary figures
of sales, ITC claimed, and net tax payable in GSTR-3B. Every 20th day is the
final date to file.
❖ GSTR-9: An annual return to be filed once for each financial year, by the
registered taxpayers who were regular taxpayers, including SEZ units and SEZ
developers. The taxpayers are required to furnish details of purchases, sales, input
tax credit or refund claimed or demand created, etc.
❖ GSTR-9C: An audit form that was introduced on September 13, 2018. It must be
filed annually by taxpayers with a turnover above 2 crores, and it must be certified
by a CA. It is a reconciliation statement between the annual returns filed in
GSTR-9 and the taxpayer's audited annual financial statements.

PROCESS OF FILLING GSTR:

i. Step 1: Register for GSTIN
ii. Step 2: Log in to the GST portal
iii. Step 3: Returns dashboard
iv. Step 4: Prepare online.
v. Step 5: Inter details.
vi. Step 6: Check submission status.
vii. Step 7: Tax payment.
viii. Step 8: Offset liability.

VOUCHER:
The voucher is evidence of the occurrence of transactions that are entered in
the books of accounts. It is the authority based on entries made that clearly show the
nature of the transaction.

VOUCHING:
Accounting entries made in the books must be supported by documentary
evidence, and inspection of that evidence is called vouching.
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INCOME TAX RETURNS:
Whether you are an individual, association firm, LLP, local authority,
or a Hindu undivided family, your income for each financial year is
taxed by Income Tax laws. Hence, filing your Income Tax return (ITR)
on an annual basis is essential.

TYPES OF ITR:

➢ ITR-1: Resident individuals having income < Rs.50 lakhs from:

➢ Salary/Pension,
➢ One House Property,
➢ Other Sources.
➢ ITR-2: Every Income from ITR>Rs.50 lakhs:
➢ Capital gains,
➢ More than one house property,
➢ Foreign income/Foreign Assets,
➢ Crypto income (if reported as capital gains),
➢ Holding directorship in a company,
➢ Holding unlisted equity shares.
➢ ITR-3: Every income from ITR-2:
➢ Business/Profession,
➢ Crypto income (if reported as Business Income),
➢ As a partner in a firm.
➢ ITR-4: Resident Individuals and HUFs having total income<
Rs.50 lakhs:
➢ Salary/Pension,
➢ One House Property
➢ Other Sources,
➢ Presumptive income.
➢ ITR-5: Applicable to:
➢ Firms,
➢ LLP’s,
➢ AOP’s,
➢ BOI’s.

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 ➢ ITR-6: Companies not claiming exemption under section 11.
➢ ITR-7: Person/companies under:
➢ Section 139(4A)
➢ Section 139(4B)
➢ Section 139(4C)
➢ Section 139(4D)

PROCESS OF FILLING ITR:

• Register or Log in to the Income Tax e-filling website.
• Enter the required details.
• Select the mode of filling
• Select the status.
• Select the appropriate ITR form.
• If you select ITR 1.
• Summary of tax computation.
• Proceed to validation.

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