Introduction of auditing

Introduction of Auditing
The word Audit is derived from the Latin word audire, which means to hear. Originally,
it was customary for person responsible for maintenance of accounts go to some
impartial and experienced persons, ordinarily judges who used to hear these accounts
and express their opinion about their correctness or otherwise such persons were known
as “Auditors”. Thus the term auditors mean literally hearer i.e., one who hears and is
used ever since the days when public accounts were accepted and approved on the basis
of hearing the accounts read.
Auditing is an important professional task carrying heavy responsibility and calling for
commensurate skill and judgement. Keeping in view the definitions of various authors
we may define the word Auditing as:
Auditing is an examination of the accounting books and the relative documentary
evidence so that an auditor may be able to find out the accuracy of figures and may be
able to make report on the balance sheet and other financial statements that have been
prepared from there.
Definitions of Auditing
Definitions of Audit
It is a bit difficult to give a precise definition of word audit in a word or two, Originally its
meaning and use was confined merely to cash audit and the auditor had to ascertain
whether the person responsible for the maintenance of accounts had properly accounted
for all the cash receipts the payment on behalf of his principle. But the word, audit, had a
wide usage and it now means a through scrutiny of the books of accounts and its ultimate
aim is to verify the financial position position disclosed by the balance sheet and the
profit and loss account of a company. The following are the some of the definitions of
audit given by some writers:
Spicier and Pegler
An audit is such an examination of the books, accounts and vouchers of a business as it
enable the auditor to satisfy that the Balance Sheets is properly drawn up, so as to give a
true and fair view of the state of the affairs of the business and whether the profit and
loss accounts gives a true and fair view of the profit or loss for the financial period
according to the best of his information and explanations given to him and as shown by
the books, and if not, in what respects he is not satisfied.
Montgomery
Auditing is a systematic examination of the books and records of a business or other
organization, in order to ascertain or verify and report upon the facts regarding its
financial operation and the result thereof.
Lawrence R. Dicksee
An audit is an examination of records undertaken with a view to establishing whether
they correctly and completely reflect the transactions to which they relate. In some
circumstances it may be necessary to ascertain whether the transactions are supported
by authority.
F.R.M De Paula
An audit denotes the examination of Balance sheet and profit and loss accounts prepared
by others together with the books, accounts and vouchers relating there to in such a
manner that the auditor may be able to satisfy himself and honestly report that in his
opinion, such Balance sheet is properly drawn up so as to exhibit a true and correct views
of the state of affairs of the particular concern according to the information and
explanations given to him and as shown by the books of acconts.
A.W. Hanson
An audit is an examination of such records to establish their reliability and the reliability

of statement drawn from them.
R.B. Bose
Audit may be said to the verification of the accuracy and correctness of the books of
accounts by independent person qualified for the job and not in any way connected with
the preparation of such accounts.
Taylor and Perry
An audit is an investigation by an auditor into the evidence from which the final Revenue
Accounts and Balance sheet or other statement of an organization have been prepared, in
order to ascertain that they present a true and fair view of the summarized transactions
for the period under review and of the financial state of the organization at the ending-
date, so enabling the auditor to report thereon.
Scope of Audit
Scope of Audit 1. Legal Requirements
The auditor can determine the scope of an audit of financial statements in accordance
with the requirements of legislation, regulations or relevant professional bodies. The
state can frame rules for determining the scope of audit work. In the same way
professional bodies can make rules to conduct the audit. The auditor can follow all the
applicable on the audit work while checking the accounts of a business concern.
2. Entity Aspects
The audit should be organized to cover all aspects of the entity as far as they are relevant
to the financial statement being audited. A business entity has many areas of working. A
small entity may have few functions while a large concern has many functions. The
auditor has duty to go through all the functions of a business. The audit report should
cover all function so that the reader may known about all the working of a concern.
3 Reliable Information
The auditor should obtain reasonable assurance as to whether the information contained
in the underlying accounting record and other source data is reliable and sufficient as the
basis for preparation of the financial statements. The auditor can use various techniques
to test the validity of data. All auditors while doing the auditor work usually apply the
compliance test and substance test. The auditor can show such information in the report.
4. Proper Communication
The auditor should decide whether the relevant information is properly communicated
in the financial statements. Accounting is an information system so facts and figures
must be so presented that reader can get information about the business entity. The
auditor can mention this fact in his report. The principles of accounting can be applied to
decide about the disclosure of financial information in the statements.
5. Evaluation
The auditor assesses the reliability and sufficiency of the information contained in the
underlying accounting records and other source date by making a study and evaluation
of accounting system and internal controls to determine the nature, the nature, extent
and timing of other auditing procedures.
6. Test
The auditing assesses the reliability and sufficiency of the information contained in the
underlying accounting record and other source data by carrying out other tests, enquiries
and other verification procedures of accounting transaction and account balance as he

considers appropriate in the particular circumstances. There are compliance test and
substantive test in order to examine the date. The vouching, verification and valuation
technique are also used.
7. Comparison
The auditor determines whether the relevant information is properly communicated by
comparing the financial statement with the underlying accounting records and other
source data to see whether they properly summarized the transaction and events
recorded therein. The auditor can compare the accounting record with financial
statement in order to check that same has been processed for preparing the final
accounts of a business concern.
8. Judgements
The auditor determines whether the relevant information is properly communicated by
consideration the judgement that management has made in preparing the financial
statements, accordingly, the auditor assesses the selection and consistent application of
accounting policies, the manner in which the information has been classified and the
adequacy of disclosure.
The auditor must have the quality of judgement when accounting books to not provide
true data.
9. Work
Judgement permeates the auditor’s work. for example, in determining the extent of audit
procedures and in assessing the reasonable of the judgments and estimates made by
management in preparing financial statements. The accounting data is based on
personal judgment of accountant and managers in preparing final accounts. Such
judgment also affect the working of an auditor. He is also bound to make guess work on
the basis of available data.
10. Evidence
The audit evidence available to auditor is persuasive rather than conclusive in nature.
Due to judgment and persuasive evidence absolute certainty in auditing is really
attainable. That is why the auditor can express an opinion as true and fair instead of
exact and cent percent correct. The personal judgments affect the value of many items.
The value of such items becomes an opinion so cent percent accuracy is not there.
11. Mis-Statement
The auditor carries out procedures designed to obtain reasonable assurance that
financial statement are properly stated in all material respects. Because of test nature
and other inherent limitations of an audit, together with inherent limitations of any
system of internal control, there is an unavoidable risk that even some material
misstatement may remain undiscovered. The statements show true and fair view instead
of exact view of operations.
12. Errors
The auditor may get an indication that some fraud or error may have occurred which
could result in material misstatement would curse the auditor to extend his procedures
to confirm or dispel his suspicion. It is the duty of auditor to check cent percent items in
order to discover the error in accounting books and other records when he smells any
doubt. He should clear the doubt or confirm it while going through the record.
13. Opinion
Constraints on the scope of the audit of financial statement that impair the auditor’s
ability to express an unqualified opinion on such financial statements should be seen out
in his report and a qualified opinion or disclaimer of opinion should be expressed as a
appropriate.

Main Objectives of Accounting
Introduction The main purpose of Auditing or object is to find the opinion of an
auditor about the correctness and reliability of accounts and the financial position of the
business concern. For this purpose auditor has to check the arithmetical accuracy of the
books of account and to find out that whether the transactions entered in the books of
account are correct or incorrect. This is done by various methods like inspecting
comparing and checking. So all that work that is done by the auditor ensures him that
figures are facts.
Main Objectives of Auditing
1. Reporting
The objective of an audit of financial statement is to enable the auditor to express an
opinion whether the financial statements are prepared, in all material respects in
accordance with an identified financial reporting frame work. The phrases used to
express the auditor’s opinion are given a true and fair view or present fair in all material
respects, which are equivalent terms.
2. Purpose of Audit
The purpose of audit is to check the proper accounting to policies. For the better
accounting system it is necessary to follow the accounting policies. Only by this way we
can get the effective result. The auditor’s purpose is to check that accounting policy has
been followed or not.
3. Law Which is Prescribed
Another objective of the auditor is to check that the accountant has used the prescribed
law. There are so many laws related to working of business. The auditor can indicate
whether the proper law has been applied or not.
4. Opinion
The purpose of the audit is to get the correct opinion about the business so for this the
auditor should be honest, confident and he must have the ethical standard for his work.
5. True and Fair View
The purpose of the auditing is to determine the correctness of statement. After auditing
the financial statement has the correct and true view about the business.
6. Prevention of Errors
The audit is committed for the prevention of errors. These errors can be prevented
through internal check also.
7. Detection of Errors
Another purpose of audit is to detect the errors. The auditor uses different ways and
means to find your errors.
8. Prevention of Fraud
The prevention of fraud is another purpose of auditing. It consists of the omission of the
effect of transaction, recording or transaction without substance etc.
9. Detection of Fraud
The detection of fraud is also the purpose of the audit. It is the responsibility of the
management to detect the fraud.
10. Cost Audit
To verify the correctness of cost accounting is the main purpose of the cost audit. The
management had a duty to follow the cost objectives in maintaining the records of
business transaction.
11. Property Audit
The examination of the proper use of money is the main purpose of the property audit.
How and where the money of business is used must be mentioned in this audit.
12. Management Audit
The management audit refers to the audit of the management structure either these are
according to the requirements of the business or not. It is a voluntary audit.

13. Tax Audit
Tax audit is conducted to satisfy the income tax officer. This type of audit is conducted to
determine the income. Usually the partnership and the sole proprietorship conduct this
type of business.
14. Social Audit
The measurement of social performance of the business is the main object of social audit.
15. Profit Verification
Audit is concern to check the profit verification in a business concern. Profit has to main
position in any type of business, only the expert auditors can check the fluctuation of the
Profit.
16. Admission of Partners
For the admission of the new partner the audit plays an important role. It provides
information to new as well as old partner for the settlement of the new terms according
to the volume of assets and liabilities.
17. Purchasing Price
For the buyers and sellers of a certain business concern it is necessary to know the real
value of the business assets and liabilities. The audit is helpful in finding out the real
value of the business.
18. Loan From Lenders
Audit is also very helpful and it is also its purpose to find the value of the assets and
liabilities or its financial position. From which the management can approach the banks
and all the financial institutions for the loan. Auditor report is a proof for the business
concern.
19. Operations
It is a part of social audit. The main purpose is to prevent the misuse of resources.
20. Moral Check
Moral check is in fact or more clearly a psychological check. Its object is to create a fade
mind to the staff of the business that after a particular period of time a specific person
has duty to check the books of accounts.
Importance of Auditing
Importance of Auditing
For Business
1. Errors are Located
Auditing is helpful for business. The error can be located through it. The location and
correction of error is possible through auditing. The true and fair information about
business is available.
2. Frauds are Discovered
Auditing is helpful for business. The discovery of fraud is possible through it. The guilty
persons can be held responsible. The auditing accounts show fair about business.
3. Loans Become Easy
Auditing is useful for business. Lenders for granting loans accept the auditor’s accounts.
The reputation of borrowers increases due to auditing. Thus auditing accounts help the
businessman to expand his activities.
4. Advise about Weakness
Auditing is useful for business. The people can seek advise from auditors. The auditors
are professional and they know their work very well. They can spotlight the grey area. It
is the duty of the business man to act upon the advise of the auditors.
5. High Moral Values
Auditing is essential for business. There is moral check on the management and other
staff. Auditing puts the pressure on the staff of work honestly. There is no pending work

so there is less chance of errors and frauds.
6. Tax Payments
Auditing is useful for business, tax authority accept audited accounts for assessment of
taxes. There is no further inquiry or investigation from department. The audited
accounts lessen the worries of business people.
7. Tax Owners
Auditing is useful for business. The tax authorities accept audited accounts for
assessment of taxes. There is no further inquiry or investigation from tax department.
The audited accounts lessen the worries of business people.
For Owners
7. Efficiency Improves
Auditing is beneficial for business. The auditing determines the efficiency of employees.
The training and qualifies management is an asset for any business. Such management
can play dynamic role in framing and implementing the policies.
8. Dispute is Settled
Auditing is essential for business. The audited accounts are helpful to settle the disputes.
The audited accounts become the basis of making decisions. The dispute may relate to
infringement of patents or trademarks.
9. Planning Becomes Possible
Auditing is helpful for business. The audits accounts present true and fair view of
business activities. The facts and figures can be used to prepare budge and estimates for
the next years. The projected cash receipts and payments, income statement and balance
sheet can be prepared.
10. Improvement of Internal Control
Auditing is helpful for business. The auditor can point out the weakness of internal
control system. The business management can take steps to remove these weaknesses.
The effective control systems are essential for large-scale business enterprises.
11. Fluctuation in Profits
Auditing is helpful for business. The auditor can make the detailed study to find of
fluctuation in profits. There are various reasons for changes in profits. The auditor can
determine the true cause of such changes.
12. High Credit Rating
The auditing is beneficial for business. The auditing accounts increase the credit
standing of any business house. The lenders can rely on audited accounts for granting
credit facility. In fact auditing is a screening test of business entity.
13. Listing at Stock Exchange
The auditing is beneficial for business. The listing of securities at stock exchange is
optional. The public limited companies can get registration at stock exchange. Stock
exchange management for registration purpose accepts the audited accounts.
14. Shareholders Protection
Auditing is beneficial for owners. The shareholders feel that their rights are protected
through auditing. They can know the performance of management. Audited accounts
help to determine the value of shares.
15. Partner Satisfaction
Auditing is helpful for partners. The sleeping partner feels satisfaction when there are
audited. The managing partners can use business property for their personal benefit.
There is moral check on managing partners.
16. Proprietors
Auditing is useful for proprietors. The audited accounts help the sole traders that their
business is going on properly. The error and fraud are pointed out auditors. The owners
can determine the efficiency of their employees or assistants.
17. Beneficiary
Auditing is valuable for beneficiaries. The auditor of a trust can nominate any person as

trustee to look after the property of a trust. Auditing can safeguard the right of
beneficiaries. There is a moral check on the trustee to follow the by – laws of trust.
18. Deceased Estate
The auditing is helpful for dependents of decreased person. The audited accounts
presents true and fair view of financial statements. The family can rely on audited
accounts for distributing the estate of deceased person.
19. Insolvency
The auditing is beneficial for creditors. The audited accounts show true and fair view of
state of affairs of sole proprietorship or partnership. The creditor can get their money
first and then owners can get refund of capital. The audited accounts help to settle the
cases at an early date.
For Government
20. Better Performance of Tax Department
Auditing is beneficial for government. Tax officers accept the audited accounts. The
assessment order can be issued without further clarification. There is saving of money
and time due to audited accounts. The performance of tax officers is improved.
21. Exact Revenue Amount
Auditing is beneficial for government. The collection of revenue is possible at an early
date. The people are allowed to deposit various kinds of taxes. The recovery of income is
made at the start of the year. The government can start welfare project on the basis of
total revenue collected.
22. Progress of Economy
Auditing is essential for government policies. The true fair view is stated in audited
accounts. The stage of economic progress can be determined. The government can take
measures to raise the rate of economic growth.
23. Purchase of Private Business
Auditing is helpful for government. The private business houses may not work in favour
of general public. The government can take over such business units. The purchase price
is decided on the basis of auditing of accounts.
24. Sale of Government Business
Auditing is useful for government. The policy can be framed on the basis of audition
accounts. The management comes to know the value of business. The government can
sell state – owned unit to private sector. The bid price is settled on audited accounts.
25. Inspectors
The auditing is helpful for government. The auditing accounts show the fair value of all
assets. The value of assets. The value of assets is the basis of tax. This issue can be settle
through audited accounts. The auditors are experts in their field. They know all methods
of property valuation. They can issue certified the government agencies for valuation of
property.
For General Public
26. Insurers can Settle Claims
Auditing is essential for insurers. The settlement of fire or marine insurance claims is
easy through audited accounts. The policy holders and insurance company can settle
actual loss of property.
27. No Loss to Lenders
Auditing is essential for lenders. The banks and other lenders ask the borrowers to
submit audited accounts before granting loans. The audited accounts are helpful to check
the trust worthiness of customers.
28. Creditor are Protected
Auditing is essential for creditors. They can know the true performance of their debtors.
The creditor can accept this promise only when he feels that debtor is reliable
businessman. Auditor accounts provide basic information about reliability.
29. Bidders Can Offer High Rate

Auditing is helpful for bidders. Audited accounts provide information about net worth of
any business. The people interested in purchasing the business can rely on such
information. They know the fair value of business. They can offer reasonable price
through open bidding.
30. Better Pay to Employees
Auditing is helpful for employees. They are interests in profits. Auditing accounting
prove true and fair view of profit. The employees can demand higher pay, fringe benefits
and participating in profits. Audit of accounts with the independent person help the
employees to make settlement with the employers.
31. Investors Can Take Decisions
Auditing is helpful for inventors. The audited accounts can be used to calculate value of
shares and other securities. The bargains power is given to the people who have money
and they want earn income. They can protect their rights through reliable information.
Kinds of Auditing
Kinds of Auditing Continuous Auditor Running Audit
Continuous auditor also known as running audit or detailed audit. In large-scale
business it is not possible for the auditor to get the true and fair view about the business
in a short time period. So for the purpose of finding the correct information the
continuous audit is conducted. Continuous audit is the audit that is conducted
throughout the year with the fixed or non-fixed period.
Interim Audit
In normal word Interim means half yearly. It is conducted usually between two annual
general meetings and only one time, not in intervals.
Final Audits or Complete Audit or Balance Sheet Audit
Final audit is also called as the Balance sheet audit or the Periodical Audit. Final audit is
started when the books of accounts closed at the end of the year. It is the most
satisfactory form of audit from the point of view of an auditor. In this audit there is cent
percent checking of the accounts. In case if the business has an effective and proper
internal control system. Then the audit sampling is possible.
Final Audit
Final Audit
Final audit is also called as the “Balance sheet audit” or the “Periodical audit”. Final
audit is started when the books of accounts closed at the end of the year. It is the most
satisfactory form of audit from the point of view of an auditor. In this audit there is cent
percent checking of the accounts. In case if the business has an effective and proper
internal control system. Then the audit sampling is possible.
Characteristics
The following are the main essentials or features or characteristics of the final audit.
• In one session an auditor make only one visit.
• This type of audit can be conducted on both the large and small type of business.
• It is conducted when the accounting period ended.
• In this audit the auditor can do test checking.
• Auditor report is a prerequisite.
• It is conducted to report to shareholders.
• The audit is completed on a short period.

Advantages of Final Audit
Advantages of Final Audit
1. Alteration Chances Limited
In the other types of audit the alteration is possible in the audit. But in the final audit the
alteration of any type is not possible after the audit.
2. Checking of Complete Record
In the final audit there is complete checking of the books of accounting. He can decide
either to check cent percent or by sampling.
3. Advantage for the Shareholders
Final audit serves the shareholders by giving them the most reliable financial
information for the investment purpose.
4. Advantage for the Owner
Sometimes the business is so large that even one owner doesn’t know the real position
about the business. So final audit throws light on the business position and provides him
satisfaction.
5. Convenient or Suitable
Final audit is very suitable for the auditor and client staff. It saves both the parties from
continuous disturbance.
6. Saving of Time
In the continuous audit the work of audit is continuous through out the year. It takes a
lot of time. But as compare to it final audit takes a very short time. So, in the final audit
the time is saved.
7. Legal Demand
Final audit is also helpful in checking either the management has fulfilled the legal
requirements or not. The management is bound to fulfill the legal requirement.
8. Economical
Final audit is beneficial for the client. It is not a regular burden on him, because it is
conducted only once in a year at the end of the accounting period. So, it gives the
maximum benefit with minimum cost.
9. Improves the Efficiency
In this audit the performance of the staff improves due to finding out the weak points of
the employees by the auditor by overcome these weakness the staff can improve his
efficiency.
10. Submission of Report
About the fairness and correctness of accounts final report is very important for the good
will of the company.
11. Staff Duties
In final audit there is no clash of duties between the audit and accounting staff. They
performed their work accordingly. The accounting staff remains busy throughout the
year in his work and the audit staff his work when the accounting staff ends his work.
12. Convenient for Management
The benefit of final audit is that it is convenient for management as well as for audit staff.
The auditor can start and complete the audit at one session. The queries can be cleared
on the same day.
13. Minimum Time Period
The time required for final audit is less as compared to continuous audit. The auditors
can start and complete many audits. They can raise their income by means of new audit
work.
14. Planned Work
The final audit has minimum time. So, the work of audit is completed under planning.

An audit programme is maintained which provides the schedule of the working of the
audit staff and the principal auditor can control the audit work.
15. Work Continuity
In the final audit the work of audit go through without any break and same way the
auditor can be satisfied for the doubt, which raise from his work on the same time.
16. Small Business
The final audit is useful for small-scale business units. The fee charged by auditor is less
as compared to continuous work. The small income of business can afford small audit
fee.
17. No Relations
The merit of final audit is that it provides no chance to audit staff to develop friendly
relation with accounting staff. The accounting staff is not in a position to get undue
benefit from audit staff.
18. Full Information
The final audit is useful as it provides full information about business matters. The
auditor can take decision on the spot for completion of audit work and submission of
audit report.
19. Income of Auditor
This type of audit is also helpful for the auditor. Because this audit saves the time of the
auditor and he can conduct many other audit of other business.
20. Information of Client
Final audit serves the shareholder by giving them the most reliable financial information
for the investment purpose.
21. Technical Knowledge
According to the law all the companies are bound that a qualified and experienced
person who must be a chartered accountant can conduct the audit. He is a qualified
person and there are no chances of fraud or errors.
22. Element of Friendship
In final audit there is a short time for the auditor staff. So, in the auditor staff or
accountant staff no friendship or soft corners created because their understanding is up
to some limits. So there are no chances of fraud created by the both staffs.
23. Beneficial for Client’s Staff
As final audit is conducted at the close of the books of Accounts. The client’s staff is not
distributed as in continuous audit. They can easily complete their work and the records
are provided at the proper place.
24. Protection
In any business the directors can change the figures according to their interest but the
final audit protect the rights of the shareholders by providing them correct information.
25. Guidance
The auditor not only provides the true and fair information but also guide the
management how can they improve their accounting systems.
26. Thread of Work
In the final audit there is no interval in the work of auditor and it is carried on till its
completion. So the audit staff cannot loose the thread of the work, which is performed by
them.
27. Moral Check
In the final audit there is moral check of the person who performed the work. The
signatures are specified on that work.
Disadvantages of Final Audit
Disadvantages of Final Audit

1. Shortage of Time
The auditor has many clients and their financial year ends on the same date. So it
becomes very difficult for the auditor to finish the work in time. It is a disadvantages of
final audit.
2. Delay in Report
The decisions of the business are made on the basis of the audit report. But this report is
made one or two months late. So there is also delay in the making of important
decisions.
3. Complete Checking Not Possible
It is very difficult for the auditor to check the each and every entry made in the books of
account. He applies only test to save the time. So many mistakes remain untouched.
4. May Misrepresent
There may be also a chance that audit report may not represent the correctness of
accounts because each and every transaction is not checked.
5. No Moral Influence
In this audit there is less pressure on the accounting staff. The audit staff comes once in
the year. So the employees are not altering in their work.
6. Late Corrections
In this audit the errors are locate at the end of the accounting period. Some way, the
corrections of errors are also late. And the entire producer takes more time.
7. Audit Report
The demerit of final audit is that report is not presented in time. It may be submitted one
or two months late. The decisions are to be made on the basis of audited accounts.
8. Planned Frauds
In this type of audit, the management has a whole year to think and decide how to make
the frauds. So they commit a planned fraud, which is very difficult to find by the auditor.
9. Previous Year Data
Past data is provided to the auditor for audit in this type of business. The errors and
frauds are also previous they have no concern with present or future.
10. Thorough Checking
In the final audit there may not be thorough checking. The auditor may select the
sampling. In this way the errors and frauds are not located and the purpose of audit dies.
11. Planning for Future
In the final audit the future planning is not prepared in time because audit work start
when the accounting work ends. The audit work is completed late and the projected
financial statements are also completed late.
12. Delay in Accounting
For the accounting staff it is not possible to prepare the financial accounts just at the end
of the year. Due to audit there is delay in finalizing the accounting matters.
13. Monthly Report
If in a business monthly or quarterly report are required. In this type of business the
final audit cannot be conducted.
14. Proper Attention
The auditor cannot pay the proper attention towards the audit because he is bound by
the fixed time.
15. Proper Decision
As he is bound by the time period he cannot judge the weakness of the business properly
and cannot give the proper decisions to workers.
16. Interim Dividend
The business, which conducts the final audit, it is very difficult for him to declare the
interim dividend.

Continuous Audit
Continuous Audit
The audit that remains continue throughout the financial year is called continuous audit.
Characteristics of Continuous Audit
• The auditor visits the business regularly.
• It is conducted in the large business concern.
• It is conducted through the year.
• Throughout checking is possible.
• It is an expensive audit.
• Audit report is not prerequisite.
• It is used to cover the deficiencies of the business.
• Surprise visits are also possible by the auditor.
• The manager can fix the time.
Advantages of Continuous Audit
Advantages of Continuous Audit
1. Early Location of Errors and Frauds
In the Continuous Audit, the audit visit the clients after a short period. So, he is in a
position to check the information completely in detail. It is helpful in checking the errors
and frauds easily. If the audit is conducted after the year ended. It is not possible to find
the errors or frauds easily.
2. Check on Frauds
In the Continuous Audit the errors are located earlier. So it is also helpful in the early
correction of errors and frauds because it is located at the time when it can be corrected
earlier.
3. Quick Rectification
Due to Continuous Audit errors are located easily and rectified at an early stage.
4. Special Attention
Before the finalization of accounts an auditor has a sufficient time to pay proper
attention to the checking of account and detection of frauds and errors.
5. Guidance to Client
The auditor remains in touch with the business details, so he also indicates about the
mistakes and gives valuable suggestions to the client to keep the accounts in proper
manner.
6. Useful for Declaration of Dividend
The continuous audit is also helpful for the declaration of the dividend. As the accounts
are checked throughout the year, so the audit accounts are ready for the declaration of
dividend.
7. Upto Date Accounts
Accounts of the business are kept up to date by the staff because they know that auditor
may visit and check the accounts at any time.
8. Chance of Over Looking Reduces
Auditor has a close contact with the details of the accounts and he has also sufficient
time to check the records. So the chances of over looking are reduced in this type of
audit.
9. Quick Presentation of Accounts
Continuous audit is very useful because accounts are maintained regularly. So as the

financial years end final audited accounts are presented before the shareholders.
10. Accounts Completion
Another audit benefit is the early completion of the accounts checking. The results of
audit can be found out just at the end of the accounting period.
11. Moral Check
In the continuous audit the auditor make the surprise visit in the business. The clerks are
not aware about the visit. So they are alert and efficient in their work. There is less
chances of frauds in this type of business.
12. Convenient for Auditors
In this audit, the several visits paid by the auditor to the client’s office in enable his work
to proceed easily and smoothly. It also increases his confidence in his capacity to do his
work efficiently and effectively.
13. Regular Staff
The regular visits performed by the auditor, make the clerks alert to maintain the
accounts up to date and accurate for fear that the auditor may land up in the office any
time.
14. Sufficient Time
Continuous audit provides sufficient time to the audit staff. The important and
ambiguous matters may require more time to draw conclusion. There is ample time for
such matters.
15. No Missing Entries
Continuous audit is also helpful in keeping the full record. In the record there is no
missing entries.
16. Early Correction of Errors
The continuous audit is helpful for early correction of errors. The auditor can point out
17. Prompt Filing of Returns
The continuous audit is also helpful for the prompt filing of returns. The management
can submit audited account to the registrar as soon as the end of the year.
18. Early Meetings
This audit is helpful for the early meeting of the shareholders. The accounts are
presented for the distribution of profit.
19. Surprise Visits
The continuous audit provided chances of surprise visit to audit staff. The accounting
staff becomes alert due to surprise visit. It is essential for eliminating the chances of
error and frauds.
20. Upto Date Record
The continuous audit is useful for keeping the up to date record. Such record is needed
by management for borrowing funds, settlement of tax and dealing with labour union.
21. Even Work Load
Due to even workload, the audit staff feels the satisfaction. The books of accounts are
maintained as the routine matters. And there is less chances of errors and frauds.
22. Auditor Advice
In the continuous audit the auditor can find the weakness of the business during the year
and he can make the suggestion for the improvement of the business.
23. Close and Extensive Check
As the auditor visits the client’s office after a month or so, but at regular intervals, a
detailed close and exhaustive cheek can be possible. If the audit is to be under taken after
the end of the year, such detailed checking will be difficult.
24. Technical Detail
In a continuous audit, the auditor is more in touch with the technical details and
business affairs. So, the auditor can help his clients by giving him the valuable
suggestions to improve business.
25. Distribution of Work

Continuous audit is also helpful in distribution of load of work on the staff. The work of
audit continues the whole year. The audit staff can easily make the audit programme
according the time required.
Disadvantages of Continuous Audit
Disadvantages of Continuous Audit
1. Alteration of Figures
The records and figures in the books of accounts, which have already been checked by
the auditor, may be altered after the audit is over. A dishonest clerk can do it do defraud
the accounts.
2. Expensive
Continuous audit is more expensive as compared to other kinds of audit, because the
auditor has to devote more time to this audit.
3. Inconvenience
In this audit, the auditor visits the client’s office at regular intervals to check the
accounts and records these frequent visits made by the auditor may dislocate the work of
his client and cause convenient to him.
4. Mechanical Work
The work of audit becomes too mechanical because it remains continue throughout the
year.
5. Queries Problem
If the auditor’s two visits interval is long then so many queries remains outstanding.
6. Small Business
Continuous audit is not fit for small business concerns. A small business has few
transactions so there is no need of audit for whole one year. The owner as manager can
know facts behind books as details audit is burden.
7. Client Work
The demerit of continuous audit is that the work of the client suffers due to clash of
duties and the client staff remaining busy for the whole years. When the audit work is
started work of accounting staff as books are not spare.
8. Staff Initimacy
The accounting staff and audit staff work side by side for the whole year. Friendship
among the employees and auditors may lead to error and frauds. The sympathetic view
of audit staff may fail to show true and fair view.
9. Missing Link
In the audit the auditor has to come at regular interval to check the accounts and hence
the link between the past and present work cannot be maintained. Consequently the
thread of work is very likely to be lost.
10. Low Income
The continuous audit keeps the staff busy for one year. They are not able to start and
complete many audits at the same time. The given to one business is much higher as
compared to final audit. So it is not suitable for audit staff from financial point of view.
11. Spoon Feeding
Frequent visits by the auditor may induce the client’s staff to depend upon him even for
minor things.
12. Expensive
A continuous audit is an expensive form of audit in that the more frequent visits by the
auditor means the higher fees of auditor.
13. Wastage of Time
This type of audit is not helpful for the auditor because in this time period they cannot
conduct any other audit. So this is low-income audit for the auditor.

14. Words of Client
Another disadvantage of the audit is that the works of the client staff suffer due to the
work of both positive. The books of the accounts are not free for the other party to do.
15. Type of Business Concern
This is not fir for the small type of business concern. In the small business concern, there
are only few transactions. So there is no need for this concern.
16. Mechanical Work
In this type of audit, the auditor has to repeat all the products as bookkeeper does where
as audit work by nature should not be under thinking and boring.
17. Extensive Notes Taking
In this type of audit possible alteration after audit can be avoided by taking note on diary
regarding audit of internal control. So the continuous audit requires the compilation of
bundle of notes.
18. Chances of Collusion
Frequent visits of auditor may establish some unhealthy relationship between the client’s
staff and auditor’s staff. Thus there are chances of moral check. Upon them and there
may be collusion between them.
Internal Control
Internal Audit
Internal audit is an evaluation and analysis of the business operation conducted by the
internal audit staff. (who are employee of the business)It is the part of over all system of
internal control established in an organization. “Internal audit is the independent
appraisal of activity with in an organization for the review of accouting, financial and
other business practices as a protective and constructive arms of management. It is a
type of control which functions by measuring and evaluating the effectiveness of other
type of controls.” Professor Walter B Meigs define internal audit
Internal auditing consist of a continuous, critical review of financial and operating
activities by a staff of auditors functioning a full time salaried employees.
Internal Control
The concept of internal control has evolved gradually over the years, with the greatest
development occurring at the beginning of 1940. Not only the complexities of modern
business techniques but also the increased size of business units have encouraged the
adoption of methods which, while increasing the efficiency of the business, also act as a
safeguards against errors and frauds. Furthermore, the regulation of business activities
under an efficient system of internal control may obviate the necessity of protracted
detailed work by an independent auditor with beneficial results to all parties concerned.
Thus the inpetus for development of internal control has come from both management
and auditor. The effect on auditing has been to reduce the need of routine mechanical
verification of book-keeping, accuracy, permitting substitution of a less time-consuming
approach that involves reasoning and judgment and stress on such activities as review,
analysis, evaluation and statistical sampling.
Internal Check
Internal check is an arrangement of duties allocated in such a way that the work of one
employee is automatically checked by another. These are no separate staff engaged to
carry out the system of internal check. It, in fact, represents only the arrangements of
duties of the staff in a way. The system of internal check is devised in such a way that the

possibilities of errors, frauds and irregularities are minimized.
Following matters are included in the internal check
• Matters relating to allocation of power.
• Division of work.
• Methods of recording transactions
Various Types of Internal Control
Types of Internal Control
1. Organization
Organization is concerned with placement of workers on their jobs. Authority and
responsibility go together. The workers are responsible for their activities. The head of
department is responsible for looking after the worker of his own department.
2. Segregation of Duties
The segregation of duties is necessary. There are many employees. All aspects of a
transaction are not complete by one person. The recording of transaction by many
persons can reduce the risk of errors and frauds. The division of duties can improve the
working of workers.
3. Physical
The physical internal control is desirable to safeguard assets. The access to assets must
be limited. The authorized persons can be allowed to examine the assets. The persons
may visit the warehouse or they may release the assets through requisition slips. The
assets require lockers, iron safe possession of keys and use of passes of warehouse.
4. Approval
All transaction in any business requires proper approval of responsible person. The limit
for approval may be fixed. The creditor recovery officer can approve credit sales. The
foreman can approve overtime wages. Purchase officer can approve the purchase of
goods.
5. Accounting
The accounting control is concerned with approval of transactions, accurately processing
and correctly recording. The control of total, preparation of trail balance reconciliation’s
and control accounts is necessary. There is examination of vouchers that every aspect is
not over looked so far this type of control is concerned.
6. Management
The top-level management can apply certain controls beyond the routine working of
business. The management control, include internal audit review of management
accounts comparing actual result with budgets, supervisory control and many other
review procedure of business functions.
Principles of Internal Control
Principles of Internal Control
1. Simple Record and Books
The principal of the internal control is also the simple records such as the record of
employees, plant register list of shareholders etc are kept in usual simple manner books
should be kept up to date and at regular internals these should be balanced. He different
persons should make handling of cash transactions. For instance the cashier should not
be allowed to record the cash in the accounts book. He should have no concern with
written ledgers.
2. Independent Checking
Another person should independently and automatically check work performed by one
person.
3. Principle Relating to Staff
It is also the part of the internal control. The employees are placed on the business

according to their ability. The employees are bound for the duties for which they are
assigned. Duties of each staff member should be clear and there should be no confusion
and doubt in this regard. In case of any staff member absence duties arrangements
should be made in advance.
4. Changing
It is also an important principle that no one should handle the transaction from
beginning to end, because in this situation there is a chance of fraud. Generally most of
the frauds are committed due to this reason.
5. Proper Supervision
It is also a principal of the internal control. All the senior officers have a right to
supervise the activities of their juniors. It is necessary for the benefit of the business.
6. Clear Rules
All those rules relating to cash stock receipts and issuance of goods should be very clear
and well defined. It should be also checked that the employees should follow their rules
properly.
7. Instructions in Writing
All the instructions should be in written form according to the best internal control
system.
8. Qualified and Competent Staff
For the better internal control system the qualified staff is necessary. And it should also
necessary that the stuff is placed at a proper place.
9. Double System of Accounting
For the internal control the double accounting system is very helpful. No doubt, it is an
expensive system but it helps a lot for the internal control.
10. Incentive for Honest Worker
Honest and hardworking person must be encouraged. He should be given some reward
in the shape of promotion and cash. This principle is also very effective in improving the
internal control.
11. Use of Machines
It is also the principal of the internal control how to use the machines. He has to check
either the proper machines have been installed and if it does so the work can be
completed in time.
12. Performance of Duties Record
For the best internal control it is necessary that the performance of all the employees
must be recorded.
13. Record of Goods and Assets
All the companies assets and property record should be maintained properly. There
should be also the security measures for the property.
14. Surety Bonds
To protect the company from fraud and to make the internal control more effective
surety bonds can be taken from the employees.
15. Division of Duties
Division of duties is a part of internal control. The employees can be placed on jobs
according to their abilities. The duties are assigned to which they are accountable.
16. Rotation of Duties
Rotation of duties is a principle of internal control. An employee must be from one seat
another. It is necessary for increasing the efficiency and avoiding the chances of errors
and fraud.
17. Division of Work
Division of work is a principle of internal control. The total amount of work is
determined. It is divided among the department’s branches and sections. It has become
possible due to specialization and division of labour.
18. Subsidiary Record

Subsidiary record is a principle of internal control. The detail every account is
maintained. Stock of goods may consist of many items. As a whole it is called stock
account or stock control account and every group of items can be stated in subsidiary
record.
19. Confirmation From Outsiders
The confirmation from outsiders from outsiders is a principle of internal control. The
letters may be written to debtors to confirm their accounts balances. There may be
positive or negative approach in collecting information from sundry debtors.
20. Checking Physical Existence
The auditor can check the physical existence. He can see the asset in the possession of a
responsible officer. He can touch, court and check the items at business premise.
21. Dependent Work
Dependent work is a principle of internal control. One person cannot be allowed to do
every aspects of a transaction. The work depends upon many persons. Every person is
dependent upon others to perform his duties.
22. Supervision
Supervision is a principle of internal control. The officer, foreman or supervision has the
right to look after activities of junior workers. The supervisory control is essential to
make the business effective.
23. Internal Audit
Internal audit is a part of internal control. The management can ask expert employees to
examine the accounts of the business. It helps the concern to check and frauds. The
progress of the entity is disclosed through it.
24. Fidelity Bond
It is an agreement between the issuance of company and the employee. In case of loss the
insurance company can pay compensation for loss of cash or goods. The cashier can get
insurance from the insurance company.
25. Control Accounts
Control accounts are proposed to check the accuracy of the accounting books and other
record. The total debtors accounts and total creditors accounts or sales ledger
adjustments and purchase ledger adjustments accounts are prepared.
Objects of Internal Control in Detail
1. Assets Protection
The assets are the backbone of any business. These assets are in the custody of some
specific officers of the business. The internal control system checks the valuation and
protect the assets of the business.
2. Accurate Record
The main object of the internal control is to maintain all records and transactions of the
business according to the generally accepted accounting principal.
3. Follow Policies
The purpose of internal control is follow policies of management. The policies are
guidelines for obtaining the business objectives. All employees try their best to follow the
rules of the game.
4. Prevention of Error
The purpose of internal control is to prevent errors. There may be unintentional mistake
due to overwork or carelessness. There is normal load work with every person. Others
check the work of one person.
5. Prevention of Frauds
The purpose of internal control is to prevent fraud. It is an intentional misrepresentation
of financial information by one or more individuals among management, employees or
their parties.

6. Best Use of Resources
The purpose of internal control is the best use of resources. There is a need of optimum
combination of resources for maximizing profits. Internal control can point out
weakness, which can be removed.
7. Nature of Audit Test
The purpose of internal control is to determine nature and extent of audit test. When
there is effective internal control there will be few audit test other wise there is need of
through checking.
8. Reliable Record
The purpose of audit is to maintain reliable accounting record. The equal distribution of
work among the employees provides complete and reliable record, as it is free from error
and fraud.
9. Reduces Work Load
The purpose of internal control is the reduction of workload. The effective internal
control can be useful for auditors. They can check few items and remaining items will be
treated as checking by the auditor.
10. Location of Errors
The purpose of internal control is the location of errors. There are many types of error,
which may be found in the accounting record. The internal control procedures are useful
to locate the error in accounting.
11. Detection of Fraud
Detection of fraud is the purpose of internal control. The compliance procedure and
substantive procedures can be applied to detect the fraud. Basically it is a management
responsibility.
12. Record of Business
Internal control system is also required for the maintainers of the reliable accounting
record. Due to the internal control the records are without the errors and frauds.
13. Record of Expenditures
Same way the internal control system keeps the records of all the expenditure of the
business and there are fewer chances of errors and frauds.
14. Recording of Transaction
Due to the internal control system all the transactions are recorded properly in the
correct account in the proper period.
15. Actual Comparison
The assets and the other records, which are recorded, can be easily compared with the
actual existed information.
16. Preparation of Statement
Another object of the internal control is to ensure about the preparation of the financial
statement at the proper time as the balance sheet or profit and loss.
17. Management Objectives
The objectives of the system of internal control are to ensure the achieving of the other
important management control.
Limitations of Internal Control
1. Cost
The management thinks that cost of a control procedures must not be in excess of
potential loss due to error or frauds.
2. Transactions
The internal control tends to be directed a anticipated types of transactions and not at
unusual transactions.
3. Error
There is possibility of human error due to carelessness distraction, mistake of judgement

or the misunderstanding of instructions.
4. Circumstances
There may be collusion with parties outside the entity employees of the entity. Due to
such collusion there is possibility of circumvention of control.
5. Responsibility
There is chance that a person responsible for exercising control could abuse that
responsibility, for example, a member of management overriding a control.
6. Conditions
There is possibility that procedure may become inadequate due to changes in conditional
and compliance with procedure may deteriorate.
Principles of Internal Check
1. Sufficient Staff
The principle of internal check is sufficient staff. The employees can be appointed
according to the workload. The management can determine the amount of work, which
is distributes among the departments. The persons are hired to perform their duties. The
overloading can creates trouble for management.
2. Division of Work
Division of work is a principle of internal check. The management can determine the
total amount of work. The whole work is divided among departments. The heads of such
department are responsible for completion of work according to timetable.
3. Co-Ordination
Coordination is a principle of internal check. All departmental managers are bound to
coordinates with other in order to achieve organization objectives. When there is fault in
one department, the work of other department suffers. The objectives cannot be
achieved. Internal check determines the degree of coordination among the managers.
4. Rotation of Duties
Rotation of duties is a principle of internal check. The workers feel bore by doing the
same work from year to year. There is a need of rotation of duties. It is in the interest of
concern as well as employees. The efficiency is improved due to changes is duties.
5. Recreation Leave
The recreation leave is a principle of internal check. The employee can check recreation
leave. It is necessary for mental health. He can commit fraud as the new employee in his
place can disclosed teh matter. The internal check system can work in the interest of
business. The weakness is of one person is disclosed due to leave.
6. Responsibility
The responsibility is a principle of internal check. The employee can enjoy recreation
leave. It is necessary for mental health. He can enjoy recreation leave. It is necessary for
mental health. He cannot commit fraud as the new employee in his place can disclose the
matter. There internal check system can work in the interest of business. The weakness
in of one person is disclosed due to leave.
7. Automatic Machines
The principles of internal check is that machines must be used to do accounting work if
permissible. The machines can do a lot work without delay. The changes of fraud and
error are reduced to a minimum. The working of machines improves efficiency of
accounting staff.
8. Checking
The principle of internal check is to check the work of other employees. Many persons
perform the work. The officers can put his signatures to verify the work done by his
subordinate. In this way one work passes many hands. The changes of error and fraud
are minimized due to checking and counter checking.
9. Simple

The principle of internal check is simples in working the employees can understand the
working of internal check system. A person can work under the supervision of other
employees. The line of authority moves from top to bottom level. All workers can
understand their duties in the organization.
10. Documents Classification
The classification of documents is the principles of internal check. The business
documents are prepared, collected, recorded and placed in proper files. The index is
prepared to compile the data. The filing system is useful to place the latter. In case of
need the documents are traced at once.
11. Dependent Work
Dependent work is a principle of internal check. The work of one employee is dependent
upon others. One work passes in the hand of two or three persons till it is complete.
Another person checks the passes done by one person. No person is all in all to start and
complete the transactions.
12. Harmony
The principles of internal check are harmony among the employees and departments.
The understanding is essential for business goals. The management is to achieve other
social and national objectives. The harmony is basis for successful internal check.
Vouching
Introduction It means to test the truth of items appearing in the books of original
entry. It is an important part of an auditor’s duty to certify as correct the transactions
recorded in the looks of accounts. The Accountant of a business is responsible for
passing entries in the books of prime entry. The question arises how and on what basis
such entries have been passed. The auditor’s primary duty is to check these entries and
only then certify the accounts as correct and free from any error or fraud.
Definition
A careful examination of all original evidence such as invoice receipt of correspondence
minutes, contracts etc.
Vouching is very useful in proving the accuracy of the entries in the books of accounts. It
also indicates about that transaction, which is omitted from the books of account.
Importance
Vouching is called the essence of auditing. So audit is not possible without vouching. The
object of vouching is to find out the accuracy of the entries appearing in the books of
accounts and detect that no entry has been omitted from the books of account.
Principles of Vouching
1. Arranged Voucher
In the books of accounts the vouchers are based an entry. A voucher is helpful to support
any transaction, which may be cash memo fill, voucher, ticket or others.
2. Checking of Date
The voucher date can also be checked; it must be related to the current year. The date of
the last or future year must not be adopted.
3. Checking of Authority
The vouchers are considers correct only when the proper authority signs on them. For
the approval of the dealing the owner or the management must put the signatures for the
approval of dealing if the vouchers are without the signatures of the proper authority.
They are not considers the true.
4. Cutting or Change
There should be no changes in the vouchers. Any person for making the fraud can
change the time, date, amount and name of concern. So, these changes cannot be

acceptable till the approval authority has made the signature.
5. Compare the Words and Figures
The auditor should satisfy himself amount written on the vouchers, it figures and words
are same or not.
6. Transaction Must Relate to Business
For the correctness of the vouchers it is necessary that it relate with the business.
Concern, the vouchers must be in the name of the business and also the manager. If it
does not the vouchers are not acceptable and doubtful.
7. Case of Personal Vouchers
The auditor should not accept the voucher in personal name. There is a chance than an
officer of the company has purchased any item in his personal capacity.
8. Checking of Account Head
Auditor must be satisfied about the head of account in which cash is deposited and
drawn. He should examine the documentary evidence in these regards.
9. Revenue Stamps
For the stamps, the stamps act 1899 is applicable while fixing the revenue stamps. The
stamps are required according to the valuation of the amount or cash memo. There is no
need of vouchers if amount is less than twenty rupees.
10. Case of Cancelled Voucher
The auditor should not accept the cancelled vouchers because it has already served the
purpose of payment. There will be a danger of double payments, if it is accepted.
11. Important Notes
For finding the correct decision, the auditor can also take help from the working papers
of the previous year and others paper or note related to business and available with the
management.
12. Minutes Book
When the meeting of shareholders is held. All the resolutions and decisions of the
directors and shareholders are recorded in the minute’s book. This minutes book must
be examine by the auditor. He has to check that these decisions have been implemented
in the books of accounts or not.
13. By Laws
In case of company the article of association and memorandum are basically the rules
and regulations. But on the other hand in the societies and clubs the by laws are used to
determine the powers of management. The auditor goes through these rules and
regulations to find the true and fair view.
14. Agreements
The auditor must examine all the related papers of the business such as the agreement,
correspondence and others. The basic information can be received to the auditor by such
papers.
15. Deed of Mortgage
Some times, you are the sale or purchase of any assets, the management can enter into
the agreement is prepare in this case. If the agreement is prepare in this case. If the
agreement is made for a loan against the immovable property then the mortgage deed is
signed. It is compulsory for the auditor to study the content of the deed.
Techniques of Vouching
1. Correct Accounts
The auditor can check the accounts debited and credited are correct in all respects. The
rules of debit and credit can be followed for dividing the transactions into accounts.
2. Agreements
The auditor must examine the agreements, correspondence and other papers relating to
business activities. Such agreement provides basic information to the auditor. He can

vouch the transactions based on such agreements.
3. By-Laws
The memorandum and articles of association are rules and regulations in case to
company. The by-laws of societies and clubs and used to determine management power.
The auditor has the right to go through these rules and regulation.
4. Mortgage Deeds
The management may enter into agreement with any party for the purpose and sale of
assets. The deed or agreement is prepared. In case of loan against immoavable property
mortgage deed is signed. The content of deed must be situated.
5. Minutes Book
The auditor should examine the minute’s book. The resolution and decision of directors
and shareholder are recorded there. He can see that such decision have been
implemented in the books of accounts.
Procedures of Vouching
1. Reading Out
The vouching is a task of the auditor. The junior audit can read out the contents of the
vouchers. He can inform the senior auditor about the data name of organization, number
of voucher and amount of vouchers.
2. Comparison
The senior can head the contents called out by junior auditor. He tally each and every
item stated in the voucher with entries in the books of accounts. Thus comparison is a
part of vouching procedure.
3. Ticking
The senior auditor can use various ticks or symbols to clear the items checked. The ticks
may be an abbreviation of words. Such ticks or symbols may differ from auditor to
auditor because these are code words.
4. Stamping
The senior auditor instead of signature or initials he can use stamps for checking the
vouchers can use the rubber stamps. The rubber stamp may have the wording checking
and cancelled on it.
5. Signatures
The senior auditor can vouch the entries with the help of vouchers. He can put his
signature or initials on every voucher for safety measures. The signed vouchers cannot be
presented again for another entry.
6. Query
The voucher may be missing. The entries may be doubtful due to over writing and
erasing. The audit staff can make the word “Q” against such entry. This entry is recorded
in working papers.
7. Management
The audit staff can be giving sometime to the management for clearing the objections.
The doubtful entries are handed over in written form. The management can examine the
record in detail.
8. Reply
The management may reply after one or two days about the doubtful entries. The auditor
can examine the reply of the managers. The auditor can judge whether the reply is right
or wrong.
9. Clearance
The audit staff can clear the query for which proper answer is made available. The
auditor may not be satisfied with the answer of objections. He can inform the
management about this query.
10. No Satisfactory

The auditor may reject the unsatisfactory reply. He has skill, training and experience. He
can use all available means to test the truth. He can note down poor clarification in
working papers.
11. Objections
The objection stated in the working papers can be discussed with the management at the
end of audit. He can form an opinion on the basis of such objections. He can submit his
report either clear or qualified.
Objectives of Vouching
Objectives of Vouching
1. Proper Evidence
The purpose vouching is to note that proper evidence is available for every entry. The
signatures, initials and rubber stamp are evidence that document has been authorized
and checked.
2. Proper Authority
The purpose of vouching is to note that there is proper authority behind every
transaction. In the absence of any signature of manager the transaction are not
acceptable at all.
3. Right Period
The purpose of vouching is to check that date of the vouchers relate to accounting period.
The adjustments in books are made on the basis of current year record of transactions.
4. Correct Amount
The purpose of vouching is to check that correct amounts have been recorded in the
entry. The vouching is useful to record only correct amounts in the books of accounts.
5. Capitals and Revenue Analysis
The purpose of vouching is to examine the analysis of transaction into capital and
revenue. The expense relating to one year is treated as revenue other wise it is called
capital.
6. Purchase for Business
The purpose of vouching is to check that purchase relate to the nature of business. The
private purchase cannot be recorded as business due to vouching.
7. Arithmetical Accuracy
The purpose of vouching is to see the arithmetical accuracy of books of accounts. The
auditor to confirm that books are accurate can check the total subtotals, casting and
posting.
8. Postings
The postings of total from journal to the ledger can be voucher by the auditor. He can see
through vouchers that posting are complete and correct.
9. No Error
The purpose of total vouching is to check that there are no errors in the books of
accounts. The errors are the result of carelessness or over work. But audit staff is not
over loaded so they can locate error.
10. No Fraud
The purpose of vouching is to examine that no fraudulent payments are made. The fraud
can be committed due to matching of minds of employees and customer. The auditor can
vouch the entries top disclosed such frauds.
11. Castings
The purpose of vouching is to check castings or loads. The auditor can calculate all total
by himself. He can compare the totals with books to maintain accuracy.
12. Cast at Bank
The purpose of vouching is to determine true cash at bank. He can vouch receipt and
payments. The result is that he can check whether cashbook is correct or not.

13. Cash Balance
The purpose of vouching is to check that cash in hand figures are facts. The cash can be
counted. He can compare it with cashbook. He can apply test checking to determine
accuracy.
14. Reporting
The purpose of vouching is to form an opinion for the purpose of reporting. In case of
true and fair view there is good report. In the absence of such result there may be
qualified report.
Auditor’s Liabilities
Liabilities of an Auditor
(A) Civil Liabilities
Civil liabilities arise when there are dispute between two parties for a loss caused to one
due to the act of another. In this case, the auditor is called upon to pay damages as
decided by the court. These may be of the following types
1. Liability of Negligence
Negligence means acting carelessly or failing to perform a duty enjoyed upon a person.
An auditor is expected to perform his duties as an agent of the shareholders by exercising
care and diligence in the implementation of statutory requirements for the maintenance
and presentation of the financial statement. Auditor must be kept himself up to date with
the information if he commits some negligence the purpose of audit is failed.
2. Liability of Liable
In the report the auditor may criticize any person. If it is based on the fact there is no
liability of the auditor. On the other hand the auditor is liable in order to avoid this
liability the auditor should take care that the report is based on facts and is prepare with
good intention.
3. Liability of the Third Party
The auditor is expert in finding out the errors and frauds and is aware how to check the
books of accounts. Many third parties as the shareholders, investors, tax authorities,
creditors and government rely upon his reports. So if he makes any type of error or
fraud, he is liable to pay the damages.
4. Misstatement in Prospectus
According to section 59 The civil liability of an auditor arises due to misstatement in
prospectus. Where a prospectus invites person to subscribe for shares or debentures of a
company, the auditor shall be liable to pay compensation to every person who subscribe
for a purchase any shares or debentures on the faith of the prospectus for any loss or
damage be may reason of any untrue statements.
5. Breach of Contract
If the auditor fails to fulfill the term of the contract the civil liability arises of an audited.
In case if he omits the all or some conditions of contract, if he cannot make the secrecy, if
fails to provide the true and fair view to the owner, he is liable to pay to the owner if
sustain any finacial loss.
(B) Criminal Liabilities
Since for certain purpose of the companies Act, and auditor is deemed to be an officer of
the company, he is a liable for such. Act of omission or commission constituting offence
under the Act.
6. Misstatement in Prospectus (Sec-63)
Here a prospectus containing any untrue or misstatement is issued with the consent of
auditor who shall be punished the with imprisonment which may extend up to two years
or with fine which may extend up to Rs. 5,000/- or both.
7. Requirements of Reports (Sec-225)

Here the auditor does not confirm to the requirement of reports as per sec-229 he shall
be punished with fine, which may extend up to Rs. 1,000.
8. Assistant to Investigate (Sec-240).
Auditor has statutory duty to assist any investigator appointed by the central
Government in collecting any information of the company otherwise he shall be
punished with imprisonment which may extend up to six month or with a fine up to Rs.
2,000/- or both for continuous default Rs. 200/- per day may also be charged.
9. Assistance to Prospectus (Sec-242)
On the basis of report of an inspector control Government may prosecute any officer.
Auditor is to assist in such prosecution otherwise he is to be punished for contempt of
court.
10. Return Books, Papers Property etc. (Sec-477)
At the time of winding up of a company, court may ask the auditor to return any property
books or papers of the company otherwise he can be arrested.
11. Public Examination (Sec-478)
On the report of official liquidation, the audition of the companies to the publicly
examined. Notes of such examination shall be used as evidence in any civil or criminal
proceeding against the auditor.
12. Falsification of Books of Accounts (Sec-539)
Where the auditor is guilty of destruction, multilation, alteration, falsification of any
books papers securities, he shall be imprisoned which may extend up to 7 years and shall
also be liable to fine.
13. Prosecution of Auditor (Sec-545)
Where auditor is found be guilty of any criminal offence by the liquidator of the
company, he shall be prosecuted.
14. False Statement In Any Return
Where the auditor makes any false statements in any material respect in any return
report, certification, balance sheet etc, he shall be imprisoned which may extend up to 2
year and shall also be liable to fine.
15. Disqualified Auditor (Sec-254(6))
The company ordinance has clearly stated the persons who are not qualified as auditor,
but if an unqualified auditor may act as auditor of the company. He is liable to fine up to
Rs. 5,000/- rupees.
16. Non-Compliance (Sec-260)
In case when the auditor makes any report or signed against the legal requirement and
the report may be not true the auditor is liable to fine for Rupees 2,000/- if it is willful
fault.
17. Auditor Report
If the auditor make the report with the extent to profit himself and the third party for
any loss for a material consideration it is a criminal liablity. He may be punished for six
months and fine upto 2,000/- rupees.
18. Assist Inspector (Sec-268)
The auditor has to give all the necessary assistance in connection with investigation to
the inspector. Some times the auditor may fail to give it. In this case he shall be
punishable up to one year and fixed up to ten thousand rupees.
19. Auditor Account (Sec-384(4))
The auditor is liable to submit his report after or within he two months at the end of the
period to which account relates. If he fails there is a fine up to rupees 5,000/-
20. False Evidence (Sec-419)
If any person provides false evidence he is punishable up to two years and liable for fine
also. The evidence may be affidavit oath or some affirmation etc.
21. Winding (Sec-420)
The criminal liability of company officers including auditor may be composed may year

before or during liquidation of company of criminal offences like concealing or removing
property, concealing or falsifying document and papers. The liquidation can go to the
court of law for proving the breach of duty.
22. False Statement (Sec-492)
Whoever makes a statement false or incorrect or omits any material fact shall be
punishable with imprisonment for a term, which may extend to three year and shall be
liable to a fine not exceeding twenty thousand rupees.
23. Pakistan Penal Code (Sec-197)
Whoever makes a statement false or incorrect or omits any material fact shall be
punishable with imprisonment for a term, which may extend to three year and shall be
liable to a fine not exceeding twenty thousand rupees.
24. Professional Misconduct
If the auditor fails to follow the rules of their own profession he is liable for the criminal
liability. For this default the council can with draw the certificate of practice. The council
can also go to the court of law for prosecuting the concerned auditor. The auditor can
suffer the jail or fine or both.
(C) Other Liabilities
25. Honorary Audit
The auditor on the honorary basis may also accept an audit work. After the completion of
the audit work he is bound to submit his report.
26. Joint Audit
When the two auditors carried out the work of audit it is called as the joint audit. It is
possible by the two independent auditors under the agreement. Sometimes, a business
concern may have two or more than two business places in different cities or countries
conduct the audit by one auditor. So this audit is conduct the responsibilities lies on the
head of every auditor who had done the work of audit. It is also stated in the audit report.
Audit Working & Audit Note Book
Definition of Audit Note Book
Audit notebook is a diary on which auditor scribble down all important inquiries to avoid
the possibility of unquestioned material facts.
Importance
Justice William throws light on the importance of audit notebook in the following words,
The audit notebook that contained detailed information proved to be very helpful to the
auditor in every critical moment.
For preparing the audit report it is very useful for that auditor.
In case of negligence charge against the auditor, but note book good evidence can be
presented. It may be also used for future guidance and reference. It also enables to
auditor to know that what work his assistant at each audit has done.
Advantages of Audit Note Book
1. Audit Report
The audit notebook is helpful to prepare audit report. The auditor can record the
weakness of accounting records. The queries not properly answered are started in the
audit report when the auditor is satisfied he can submit a clear report.
2. Staff Honesty
The audit notebook is used to determine the integrity and honesty of audit clerks. The
moral and ethical value can be examined through audit work. When a person completes
his work in time. Time period auditor can appreciate him. If there is pending work after
the expiry of time period, he can be held responsible for it. The audit staff must be

honest in his work.
3. Helpful For Memory
The audit notebook is help to keep things fresh in memory. The auditor can read the
book on daily basis. He can note the weakness on fingertips. The auditor can retain the
data in his memory for a longer period of time. He can ask the management to clear the
doubtful points before preparing audit report.
4. Reference
The audit notebook is useful for reference. In future it can provide information to the
audit staff. The past data gives an insight into business matters. The auditor can note the
changes. He can form an opinion about the changes in the nature and size of the
business.
5. New Auditor
The audit notebook is useful for new auditor. They can see the weakness of previous
years. The old weak points may not be repeated this year.
6. Court Cases
The audit notebook is helpful to defend an auditor in court cases. The people can go to
court of law in order to fix liability for negligence of duty. The audit notebook is a written
proof of work performed by an auditor.
Definition of Test Checking
According to Professor Meigs,
“Test Checking means to select or examine a representative sample from a large
number of similar items.”
It is clear that test checking is sample checking. The whole data must cannot be
examined. The audit staffs can statistical technique to check the facts and figures. A
certain percentage of transaction can be selected for through examination. The
remaining transactions are supposed as checked.
Essentials of Test Checking
1. Sample
The sample items selected from whole data must be representative. The selection can be
made by any method. The entire data must be presented in the form of sample.
2. Last Month
The last month of the accounting year is most important. The items appearing in the last
month must be given maximum importance at the time of selecting the sample.
3. First Month
The first month of accounting year provides essentials information. The transactions
recorded in the first month must be assigned high weight age in order to select the
sample.
4. Surprise Testing
The auditors include the element of surprise in selection of test. The accounting staff
must be unaware of test checking so that he should not make arrangement for test
checking.
5. Checking Method
The auditor can change his method of selecting the sample. At one time he can one use
alternate method. The selection method must be charged in time to time.
6. Every Type of Transaction
The auditor must select every type of transaction in test checking. There is a need to
include each type of dealing in the sample.
7. Every Employee
The auditor can select the work of every employee. The test checking can be used to
examine the work of all employees in the organization.

8. Through Out The Year
The test checking can be applied to all items appearing in the books through out the year.
The recurring items are most suitable for test checking.
9. Cash Book
The cash book entries must not be used for test checking. There is a need of cent percent
checking of all cash items appearing in cashbook. The control over cash is essential for
efficient business working.
Advantages of Test Checking
Advantages of Test Checking
1. Time Saving
The benefit of test checking is available in the shape of time saving. A simple of items is
checked and remaining items are treated as checked. In this way there is saving in time.
2. Less Labour
The test checking is useful for saving in labour. A lot of work requires many clerks for
completing the audit. But test checking is used to test few items so there is less labour
work.
3. Accurate Books
The test checking is useful to note the accuracy of accounting books and other record.
There is a demand of error free books. The test checking is a step in the right direction to
prove accuracy.
4. Staff Efficiency
The efficiency of accounting staff improves due to test checking. The weakness of
employee is reported to management. The employees try to improve their work by
overcoming their deficiencies.
5. Timely Report
The benefit of test checking is that timely report can be submitted to the management.
The large number of figures can be checked in short period of time so there is no delay.
6. Many Audits
Test Checking is useful to complete many audits in one year. It saves sufficient time,
which can be used to check the books of new clients. The auditor is able to raise more
income.
7. Special Attention
The auditor can pay special attention to important matters. Test Checking reduces the
labour work on the part of audit staff. There is sufficient time period to settle the
important matters.
Disadvantages of Test Checking
1. Errors
The demerit of test checking is that errors are not disclosed by it. In the presence of error
true and fair view is not possible. No doubt the location of errors is the duty of
management but it effects the audit work.
2. Frauds
The demerit of test checking is that planned frauds may not be disclosed. The fraud
discovers is the responsibility of management. The audited accounts cannot show true
and fair view when fraud exists in books.
3. Responsibility
The demerit of test checking is that auditor cannot shift his responsibility of
management. The errors of fraud can be discovered through cent percent checking. So
auditor is responsible for test checking.
4. Report
The auditor report may fail to disclose true and fair view of business matters. After test

the auditor signs checking the auditor report. The auditor is responsible for audit report
based on test checking.
Routine Checking
The auditors check the arithmetic accuracy of journals and ledgers. It is called routine
checking. The purpose is detected the error and fraud of simples nature. The audit staff
can check the balance appearing in journal and ledgers. The sub-total and total are
examined. The differences are calculated. These balance are transfered from one page to
another. The amounts carries forward should be the same. The checking is useful for
determine the accuracy of the books of accounts. The accounting staff cannot chance the
figures after routine checking. The ledger posting is also tested by means of routine
checking. The errors may be locked and frauds may be disclosed by it. The auditor is able
to give his opinion about the fairness of the financial statements. The auditor can fix the
responsibility of the accounting staff for negligence of duty.
Essentials of Routine Checking
1. Sub-Cast
Sub-Cast is a part of routine checking. Sub-total is possible in accounts matters. The sub-
cast must be correct.
2. Casts
Cast is part of routing checking. Total in journal and ledger accounts should be examined
for accurate results.
3. Carry Forward
Carry forward is a part of routing checking. The balance of one page can be transfered to
the next page.
4. Posting
Posting is a part of routing checking. The entries are posted in to the ledger accounts.
Posting must be properly examined.
5. Balancing
Balancing is a part of routing checking. Taking the difference of debit and credit in the
accounts is called balancing.
6. Carry Down
The amounts in an account can be transferred to next page. The carry down is a part of
routing checking.
7. Transfer
Transfer is part of routing checking. The amount is one accounts can be transferred to
another account.
Advantages of Routine Checking
1. Accuracy
The benefit of routine checking is that there is accuracy of accounting books and records.
The sub-total, casts and carry forward posting, balancing and transfer are stated as
correct.
2. Frauds
Routine checking is useful to checking fraud in the books of accounts. The responsibility
lies on the head of management for location of fraud. The management can use this tool
to meet its duty.
3. Positive Verification
Routine checking helps to verify positive made in the ledger. The correct posting can
provide true and fair view of financial statements. The management can verify posting
through it.

4. No Change in Figures
Routine checking is useful to eliminate the alternation of figures. The management can
meet its obligation with the help of routine checking. The employees cannot alter figures.
5. Final Checking
The benefit of routine checking is that final checking work is reduced. The final checking
become early as major work has already been completed through routine checking.
Disadvantages of Routine Checking
Disadvantages of Routine Checking
1. No Care
The work of routine checking is given to junior employee. They do not consider it as
important matter. Therefore the expected result cannot be produced for audit purpose.
2. Fraud
The demerit of routine checking is that planned frauds are not disclosed. The
responsibility of fraud lies on head of management. The audited accounts may fail to
provide true and fair view.
3. Error
The demerit of routine checking is that errors of principle are not disclosed. The
responsibility or error can be placed on the head of management. The audited accounts
may fail to provide true and fair view.
4. Monotony
The work is routine checking is boring and time consuming. The clerks go on checking
the totals and sub-totals and balances. It does not improve the performance of employee
rather it bring monotary.
Auditor’s Report
Audit Report
Auditor’s report is the expert’s opinion expressed by the auditor as to the fairness of
financial statements.
The audit report is the end product of every audit. It is the medium through which an
auditor expresses his opinion on the financial statements. Audit report is an important
part of audit process since it summarize the results of the examination work conducted
by the auditor. The report shows the scope of the work done and the responsibility
assumed by the auditor regarding the fairness or otherwise of hte financial statements.
The auditor draws appropriate conclusions by examining the various statements and
accounts, which he conveys through the audit report. It is a formal communication by
the auditor to the shareholders throwing light on the state of affairs of the company.
Audit report is addressed to the members of the company and is considered at the
Annual General meeting of the company. Audit reports should be so drafted that they
remain simple and intelligible to a common man. The audit report should be explicit so
as to provide greater information and protection to the interest of shareholders and
others.
Essentials of Audit Report
1. Title
An auditor report must have appropriate title, such as “Auditor’s Report”. It is helpful for
the reader to identify the auditor’s report. It is easy to distinguish it from other reports.
The management can issue any report about the business performance. The title o the

report is essential.
2. Addressee
The addressee may be shareholder or board of director of a company. The auditor can
audit financial statements of any business unit as per agreement. The report should be
appropriately addressed as required by engagement letter and legal requirements. The
report is usually addresses to the shareholders or the board of directors.
3. Identification
The audit report should identify the financial statement that have audited. The financial
statement may include trading profit and loss accounts, balance sheet and statement of
changes in financial position and sources and application of frauds statement. The report
should include the name of the entity. Moreover the data and period covered by the
financial statement are also stated in it.
4. Reference to Auditing Standards
The audit report should indicate the auditing standard or practice followed in conducting
the audit. The international auditing guidelines need assurance that the audit has been
conducted as per set standards.
5. Opinion
The auditor’s report should clearly state the auditor’s opinion on the presentation in the
financial statement of the entity’s financial position and the result of its operations. The
statement give a true and fair view is an auditor’s opinion. This opinion is usually based
on national standard or international accounting standards.
6. Signature
The audit report should be signed in the name of the audit firm, the personal name of the
auditor or both as appropriate.
7. Auditor’s Address
The address of auditor is stated in the audit report. The name of city is stated in the
report for information of the readers.
8. Date of Report
The report should be dated. It informs the reader that the auditor considered the effect
on the financial statements and in his report of events or transactions about which he
become aware the occurred up to that date.
Qualified Report
A qualified opinion is given when the auditor fells the he cannot issue an unqualified
opinion. The effect of disagreement or limitation on scope is not so material as to require
an advance opinion or a disclaimer of opinion. A qualified opinion should be expressed
as being except to the effects of the matter to which the qualification relates.
1. No Proper Books
A qualified repeat is issued when proper books of accounts have not kept by the business
concern. The law estates the number of books to be maintained by the companies by the
companies. The failure to keep necessary books of accounts induces the auditor to
mention the fact in the reports.
2. Informal Statement
The law states the formal for financial statement. The fourth schedule and fifth are given
in the companies ordinance 1984. The companies must prepare their statement
according to schedule otherwise the auditor can mention weakness in the report.
3. Disagreement Between Books and Statements
The financial statement figures must tally with figures recorded in journal and ledgers.
The different in figures is not acceptable as it may lead to receive the shareholders. The
auditor can qualified his report that figures of books and statement are different.
4. Inconsistent Accounting Policies
The accounting policies must remain the same from year to year. The changes in

depreciation rate valuation of stock and provision for bad debts can disturb the financial
statements. The auditor can state the inconsistency in accounting policies toward by the
management.
5. Ultra Vires Payments
The management can misuse the power of doing the business. They may not followed
articles of association or companies ordinance 1984. The payment of dividend out of
capital is an example. The auditor must report to the shareholders about the misuse of
powers.
6. Expenditure Incurred
The expenditure incurred during the year must be to the purpose of business of
company. The expenses incurred objective may be state by the auditor in the report. The
management is responsible to these wrong payments.
7. Business Conducted
The business conducted investment made and the expenditure incurred during the year
may not meet the requirement of memorandum of association, articles of association
and the companies ordinance. The auditor can inform the owners about the violation of
law.
8. Scope Limitations
The management may have valued closing stock prior to date of appointment of
auditors. There is a scope limitation as auditor was absence at the time of stock valuatio.
The auditor can qualify his report as to the valuation of stack talking.
9. In Appropriate Accounting Method
The auditor may note that depreciation has not been charged on building. The
depreciated on plant and machinery may be recorded at fewer rates. The difference in
actual and recorded expenses may be stated in the report.
10. Inadequate disclosure
The management may have entered in to an agreement for issue of debentures for plant
and expansion. The agreement may restrict the right to pay dividend to shareholders for
next years. The auditor can disclose such agreement to the owners of the company.
11. Departure from Accounting Practice
The qualified report is issued when an auditor is not satisfied with the management
policies. The company may not record the provision for loss on long-term contract. The
disagreement with management can be recorded as adverse opinion in the report for the
information.
12. Breakdown of Accounting System
The auditor can issue the qualified report when he is unable to form an opinion about
the financial statements. There may be fire at computer center business office. The
figures may be estimated so auditor can disclaim his opinion.
13. Failure To Prove Case Sales
The auditor can check the internal control system. The company may be dealing on cash
basis. All sales may be in terms of cash. The poor internal control system may create
hurdle to verify cash sales. The auditor can submit qualified report with out opinion.
14. Contingency
The auditor may qualify his report where there is contingency (tax dispute court case)
which is significant to affect the financial statement of the company. The auditor has the
right to report the matter to the shareholders. The items must be stated in the footnote
as well as audit report.
15. No Zakat Deduction
The Zakat may be deductible at sources under the Zakat and usher ordinance 1980. The
auditor may examine the relevant law. He can not the weakness of the management for
deduction of Zakat. This weakness may be present in the audit report.
16. Incomplete Information
The auditor may not obtain complete and full information and explanation for the

purpose of audit. The facts can be presented to the owners that he is unable to collect
necessary information. He can submit qualified report in order to draw attention. He can
submit qualified report in order to draw attention of owners.
17. No Access to Books
The auditor may be refused to have access to the books of accounts and other relevant
record. In this case the auditor is unable to collect true information necessary for the
purpose of audit. The qualified report can be presented to the shareholder due to non-
availability of all or any book.
Auditor’s Duties
Auditor’s Duties in Respect of Statutory Report
1. Statutory Report
The report, which is submitted by the directors in the first general meeting of the
shareholders is called statutory report. The auditors should duly verify it. The auditor
will take following important steps before certifying the statutory report.
2. Study of Legal Documents
The company Memorandum and Articles as also the prospectus should be carefully
studied and notes should be made of items affecting terms of share capital issue,
minimum subscription, brokerage on shares or underwriting commission, acquisition of
assets and liabilities from vendors, mode of satisfaction of purchase consideration etc.
3. Checking of Shares
A complete and exhaustive audit should be made of share capital and debentures issue,
including checking of entries in the Register of members and he Register of Debenture
holders.
4. Checking of Cash in Hand and Cash at Bank
In order to ascertain the correct balance of cash in hand and in bank, it would be
necessary to include in the checking the revenue receipts and payments also.
5. Verify the Capital Receipts and Payments
A through vouching and checking of the cash book transactions for the purpose of
verifying the capital receipts and payments will be necessary.
6. Checking of Commission
Auditor should check all types of commission paid or unpaid with the issue or sale of
debentures to any one.
7. Verify the Borrowing Power
It should be seen that the limit, if any placed on the borrowing powers of the company is
not exceeded.
8. Verify the Minimum Subscription
The auditor should ascertain that the requirements of the law as to minimum
subscription have been duly complied with.
9. Checking of Bio Data
Auditor should also verify the names, addresses and descriptions of the directors
manages agents and auditors.
10. Verify the Arrears
Auditor should verify the arrears due on calls from directors, managers and agents etc.
11. Scrutiny
Auditor should examine very carefully all the items, which are included in the
preliminary expenses account.
12. Checking of Minutes
Director’s minutes will have to be referred to in order to see that the allotment of shares
and debentures is properly done and that all capital expenditure and loans borrowed are
duly sanctioned.
13. Examine the Passbook

Auditor should examine the bank passbook and verify the receipts and payment with it.
14. Specimen of Auditor’s Certificate
If the undersigned being the auditor of the company, hereby certify that so much of the
report are relates to the shares allotted by the company and the cash received in respect
of such shares and receipts and the payments of the company is correct.
Audit Evidence
Meaning of Audit Evidence
Any document, piece of information, voucher written or oral statement of any
procedure which assists an auditor in forming his opinion in regard to the accuracy of
data under audit.
The role of the auditor is that of an independent professional critic who investigates,
analyses and evaluates the information underlying the statement as a means of reaching
a conclusion as to their fairness. Before and auditor can express an opinion on financial
statements, he must have sufficient evidence that
• The items in the financial statements are supported by the balances in the ledger
accounts.
• The balances in the ledger account summarize correctly the numerous debit and
credit entries.
• These debit and credit entries in the accounts represent proper accounting
interpretation of all the transaction entered into be the business.
Importance of Audit Evidence
While accepting the appointment, an auditor accepts to discharge certain legal
obligations and responsibilities. In discharging his responsibility, the auditor should
convince himself, in the first instance, that the accounts, he is reporting upon, are correct
and the financial transaction recorded are duly supported by the documentary evidence.
If he is not satisfied with the accuracy of the accounts or the authenticity of evidence,
there is no point in certifying the accounts as correct. The examination of evidence is
therefore necessary, so that strength would be based for independent, impartial and
expressed opinion of the auditor. On auditor’s opinion, the Directors, Shareholders and
other initiative action.
Objectives of Audit Evidence
The objects of verifying evidence are
• To ensure that the errors, if any, in the data would be discovered by verifying the
evidences.
• To facilitate the completion of audit programme scheduled and undertaken.
Procedure of Audit Evidence
The following procedure is generally followed for the verification of evidences
• Verification of accounts of account balances shown in the financial statements or
the accounting reports
• To ensure that the procedure installed for control purposes is properly followed
Looking at the evidence for the balance amount shown in the ledger, the auditor has to
work backwards in order to ensure that all those transactions responsible to give rise to
that balance is also duly supported with evidences.
The auditor should also carefully ensure that procedures being followed by the
organization are effective and do not have any room for leakages. In the area where the
financial involvement is heavy, the auditor should carefully review internal control

procedures and the implementation of procedures designed and installed for an effective
control of function.
Key Points for Collecting Evidences
1. Physical existence of the assets
2. Authoritative documents
3. Statement by third parties
4. Calculation by the auditor
5. Satisfactory Internal Control
6. Subsidiary or detailed records
7. Subsequent action of the company
8. Formal statement by company’s officers
9. Interrelationship with in the data examined.

Introduction of auditing

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Introduction of auditing