CU-BCOM-SEM III-Auditing Standards in India

UNIT 3 – AUDIT AND INVESTIGATION Structure 3.0Learning Objectives 3.1Introduction 3.2Definition 3.3Audit and Investigation 3.4Difference between Audit and Investigation 3.5Steps and Types of Investigation 3.6 Summary 3.7 Keywords 3.8Learning activity 3.9 Unit End Questions 3.10 References 3.0LEARNING OBJECTIVES After Studying this unit Students will be able to  State the definition of Audit and investigation  Outline about reasons for investigation  Analyze the difference between Audit and Investigation  Describe the steps and types of Investigation 3.1INTRODUCTION An investigation is a task that is carried out with a particular goal in mind. An inquiry entails a thorough examination of the books of accounts, transactions, and events. Internal and management auditors also use investigation exercises because they are voluntary. 51 CU IDOL SELF LEARNING MATERIAL (SLM)

It's not accounting or auditing, but rather a special audit with a restricted or expanded reach that keeps the object in mind. It is more extensive and thorough than auditing. 3.2DEFINITION Dicksee has defined Investigation as “An investigation is an examination of accounting records for a specific purpose”. Scope of investigation No general principle can be laid down with regard to the scope of every type of investigation. Scope of investigation, in each case, would be limited to the period or area to be covered by the investigator. Objectives & Reasons for Investigation The real goal of an auditor undertaking an inquiry on behalf of a client is to provide him with the information he needs in the form of a report on the subject matter. Typically, the aim of an investigation is to gather, examine, and assess evidence in a specific area of operation for a specific reason determined by the individual on whose behalf the investigation is being conducted. The following are some of the most important reasons for conducting an investigation: • A company acquisition is being proposed. • A company sale is being proposed. • Factors that contribute to low profitability. • The source of a high employee turnover rate. • Market data dependability. • A proposed investment in a specific security. • Fraud is suspected. • Participating in an ongoing relationship. • Taking out a loan. 52 CU IDOL SELF LEARNING MATERIAL (SLM)

• Lending money. • Proposed acquisition of a company's controlling stock. 3.3AUDIT AND INVESTIGATION To comprehend auditing in its proper sense, one must first comprehend the differences between auditing and investigation. Investigation, which is another essential service rendered by a licensed accountant, is not the same as auditing. An inquiry is a detailed examination of financial documents with a particular objective in mind. For example, if fraud is suspected and an accountant is employed to investigate the accounts to determine if fraud has occurred and, if so, how much money is involved, the inquiry becomes an investigation. Investigations may be conducted in a number of accounting areas, including the sum of waste and loss, profitability, and cost of production, among others. It normally only affects a few areas at a time. Its essence is to approach the situation with an appropriate preconceived notion for the target. On the other hand, the overall aim of auditing is to decide if the accounts provide a true and fair image. Auditing does not include the review of specific cases, and it does not begin with a preconceived notion about the state of affairs. Unless circumstances necessitate a special investigation, the auditor uses commonly accepted techniques to reveal what he discovers in the normal course of reviewing the accounts: fraud, mistake, irregularity, and anything else that comes to the auditor's attention in the normal course of checking are all thoroughly investigated, and sometimes investigation results from the auditor's prima facie findings. Auditing is different from investigation, which is another significant service, a professional accountant renders. Investigation is a critical examination of the accounts with a special purpose. For example, if fraud is suspected and an accountant is called upon to check the accounts to whether fraud really exists and if so, the amount involved, the character of the enquiry changes into investigation. Investigation may be undertaken in numerous areas of accounts, e.g., the extent of waste and loss, profitability, cost of production, etc. It normally concerns only specified areas, but at times, it may involve the whole field of accounting. Its essence lies in going into the matter with some pre-conceived notion suited to the objective. The techniques fit the circumstances of the case. For auditing on the other hand, the generalobjective is to find out whether the accounts show a true and fair view. 53 CU IDOL SELF LEARNING MATERIAL (SLM)

Audit never undertakes discovery of specific happenings and is never started with a preconceived notion about the state of affairs. The auditor seeks to report what he finds in the normal course of examination of the accounts adopting generally followed techniques unless circumstances call for a special probe: fraud, error, irregularity, whatever comes to the auditor’s notice in the usual course of checking, are all looked into in depth and sometimes investigation results from the prima facie findings of the auditor. However, as per sub section12 of section 143 of the Companies Act, 2013, if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner prescribed in rule 13. Rules 13 of the Companies (Audit and Auditors) Rules, 2014, prescribes that in case the auditor has sufficient reason to believe that an offence involving fraud, is being or has been committed against the company by officers or employees of the company, he shall report the matter to the Central Government immediately but not later than sixty days of his knowledge and after following the procedure indicated herein below: (i) Auditor shall forward his report to the Board or the Audit Committee, as the case may be, immediately after he comes to knowledge of the fraud, seeking their reply or observations within forty-five days; (ii) on receipt of such reply or observations the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within fifteen days of receipt of such reply or observations. (iii) in case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of forty-five days, he shall forward his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he failed to receive any reply or observations within the stipulated time. Further, the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealedcover by Registered Post with Acknowledgement Due or by Speed post followed by an e-mailin confirmation of the same. This report shall be on the 54 CU IDOL SELF LEARNING MATERIAL (SLM)

letterhead of the auditor containing postal address, e-mail address and contact number and be signed by the auditor with his seal and shall indicate his Membership Number. The report shall be in the form of a statement as specified in Form ADT-4. No duty to which an auditor of a company may be subject to shall be regarded as having been contravened by reason of his reporting the matter above if it is done in good faith. It is very important to note that the provision of this rule shall also apply, mutatis mutandis, to a cost auditor and a secretarial auditor during the performance of his duties under section 148 and section 204 respectively. If any auditor, cost accountant or company secretary in practice do not comply with the provisions of sub-section (12) of section 143, he shall be punishable with fine which shall not be less than one lakh rupees, but which may extend to twenty-five lakh rupees. 3.4 DIFFERENCE BETWEEN AUDIT AND INVESTIGATION BASIS OF AUDIT INVESTIGATION DIFFERENCE Legal binding Audit of annual financial Investigation is not compulsory statements of a company is under the Companies act, 2013 compulsory under the Companies but voluntary depending upon Act, 2013 necessity. Objective Audit is conducted to ascertain Investigation is conducted with a whether the financial statements particular object in view, viz to show a true and fair view know financial position, earning capacity, prove fraud, invest capital, etc. Periodicity Audit is conducted on annual Investigation may be conducted Nature basis for several years at a time, say three years. Involves test checking or sample Requires detailed study and 55 CU IDOL SELF LEARNING MATERIAL (SLM)

techniques to draw evidences examination of facts and figures Limitations Suffers from inherent limitations No limitations owing to nature of Evidence engagement Report Audit seeks prima – facie It seeks conclusive evidence evidence Audit report is addressed to the It is addressed to the party on Shareholders whose instruction investigation was conducted 3.5STEPS AND TYPES IN INVESTIGATION An Investigation requires the following steps in order of sequence: Fig 3.1 steps in order of sequence 56 Source: Institute of Chartered Accountants of India Types Of Investigation CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 3.2 Types Of Investigation Source: Institute of Chartered Accountants of India Section numbers mentioned above are in reference to the Companies Act 2013. 3.6 SUMMARY  A term known as propriety audit is commonly used in government audit. The term \"propriety audit\" refers to determining whether transactions were carried out in accordance with existing laws, principles, and standards.  A compliance audit is a thorough examination of a company's compliance with regulatory rules, policies, and regulations. A compliance audit's aim is to see whether the auditee is adhering to specified laws, rules, policies, or procedures.  Efficiency refers to how effectively a company uses its capital to manufacture products and services. The term \"efficiency audit\" refers to a comparison of real and desired/projected outcomes. Its aim is to determine if plans have been carried out successfully.  Internal auditing ensures that internal controls are sufficient to minimise risks, which governance procedures are effective and functional, and that organisational priorities and objectives are met. 57 CU IDOL SELF LEARNING MATERIAL (SLM)

 An audit is a comprehensive examination of financial documents with a particular purpose in mind.  Auditing does not include the review of specific cases, and it does not begin with a preconceived notion about the state of affairs.  A statutory or non-statutory investigation can be conducted. 3.7 KEYWORDS  Prima Facie-At First appearance  Statutory - requirement by law 3.8 LEARNING ACTIVITY 1. List out a detailed program for conducting investigation of financial records to determine the financial strength of a company ______________________________________________________________________________ _____________________________________________________________________________ 3.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define the term Investigation? 2. State any 5 reasons for getting Investigation done? 3. Difference between Audit and Investigation 4. When can Investigation be conducted? Long Questions 1. Explain the stages involved in Investigation? 2. What are the types of Investigation and explain them in detail? 3. Discuss in detail about Audit and Investigation 58 CU IDOL SELF LEARNING MATERIAL (SLM)

B. Multiple Choice Questions 59 1. Audit of Financial Statements is Compulsory under ______________ a. Companies Act 2013 b. Income Tax Act 1962 c. Central Excise Act 1944 d. None of these 2. A/an ___________ is not an official investigation into alleged wrongdoing a. Audit b. Internal Control c. Internal Check d. None of these 3.An Audit is conductedwhen there is a preconceived notion of existence of Fraud a. True b. False c. Partly True d. None of these Answers 1-a 2-a 3-b 3.10 REFERENCES Textbook:  T1 ArunaJha, Auditing, Taxmann’s Publications, University Edition  T2 Ravinder Kumar, Auditing: Principles and Practice :PHI Learning Pvt. Ltd Reference Books:  R1 N.D Kapoor, Auditing, Sultan Chand & Sons  R2 Gupta; Contemporary Auditing, Tata McGraw Hill CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 4 – WORKING PAPERS AND EVIDENCE Structure 4.0. Learning Objectives 4.1. Introduction 4.2. Types of working papers 4.3. Need for working papers 4.4. Quality control for Audit Work 4.5. Audit Sampling 4.6. Summary 4.7. Keywords 4.8. Learning activity 4.9. Unit End Questions 4.10References 4.0LEARNING OBJECTIVES After studying this unit students will be able to:  State the meaning of working papers  Learn about need for working papers  Outline about Quality control for Audit work  Describe about Test check and Routine check 4.1INTRODUCTION Audit Working Papers The audit working papers are a record of the audit engagement's preparation and execution. Every year, auditors keep a collection of working papers for each audit engagement. The current working papers apply to the audit working papers for the current year. The Auditing Norm SA 230 “Audit Documentation” covers audit working papers.Audit working papers are the Auditor's 60 CU IDOL SELF LEARNING MATERIAL (SLM)

property, and he is allowed by law to keep them for a fixed period of time. It may take the form of a physical object or an electronic file. 4.2TYPES OF WORKING PAPER FILES The format and content of audit reports should be tailored to the specific audit situation. The detail found in audit documentation is the primary record of the work done by auditors in compliance with standards and the conclusions drawn by the auditors. The auditors' professional judgement is used to determine the amount, form, and quality of audit documents. As a result, audit documentation does not have to be on paper but can also be on electronic media. The following are the factors that influence the type and quality of documentation for a specific engagement: • The essence of the relationship. • The essence of the client's business practise. • The client's current situation. • Reporting style. • Any existing laws that apply to the customer. • The client's records are kept. • Internal controls are in place. • The need to direct and supervise the work of audit assistants engaged in the specific assignment. Contents Of Permanent Audit Files • If the commitment is recurring, a copy of the original appointment letter. • Any contact with the retiring auditor prior to accepting the appointment as auditor, if any. • A letter of authorization from the previous auditor. • Information about the entity's legal and organisational structure. In the case of a company, this includes the Memorandum and Articles of Association. 61 CU IDOL SELF LEARNING MATERIAL (SLM)

 In case of partnerships- Partnership deed.  In case of trusts- Trust deed.  In case of societies- Certificate of registration/ Rules and Bye-laws. • The client's organisational framework. • A list of the governing body's members, including their names, addresses, and phone numbers. For example, in the case of a corporation, the list of directors, the list of partners in a partnership, and the list of trustees in a trust. • Copies of previous year's audited financial statements • Details about the sister's interests • Contact information for bankers, registrars, lawyers, and other professionals Contents Of Current Audit File The current file normally includes: • Correspondence related to annual reappointment approval. • Extracts from the minutes of significant Board and General Meetings that are applicable to the audit. • Documentation of the audit and audit program's preparation process. • Transactions and balances analysis • A log of the types, dates, and scope of auditing procedures conducted, as well as the outcomes of such procedures. • Documentation that assistants' work was supervised and checked. • Copies of correspondence with other auditors, experts, and third parties • Copies of letters or reports sent to or addressed with the client about audit matters, such as the terms of the engagement and material shortcomings in applicable internal controls. • Representation letters or approval letters from the agency. • The auditor's conclusions about important aspects of the audit, such as how exceptions and irregular issues, if any, revealed by the auditor's procedures were resolved or dealt with. • Copies of the financial data being reported on, as well as the audit reports that go with it. • Conduct an audit and highlight key points. • Internal regulation is a major flaw. 62 CU IDOL SELF LEARNING MATERIAL (SLM)

4.3THE NEED FOR WORKING PAPERS The following are the requirements for working papers: • They assist in the preparation and execution of the audit; • They assist in the supervision and evaluation of the audit work, as well as the review of the work quality, in compliance with AAS 17 \"Quality Control for Audit Work\"; • They show evidence of the audit work done to back up the auditor's findings; • They record the schedule, test results, and other information in a straightforward and logical manner. • The working papers should show that professional requirements were followed. • They show that internal monitoring has been thoroughly investigated and analyzed. • They show that the facts gathered, and procedures carried out provide a fair basis for an opinion. Notebook For The Audit • An audit book is typically a bound book in which a wide range of observations made during the audit are reported. • The audit notebook is the auditor's permanent record. • The auditor normally keeps a separate audit notebook for each individual audit. • The audit notebook should be held in a neat, orderly, and systematic manner. • An audit notebook is a valuable piece of evidence that auditors can use to defend themselves if they are accused of anything. 4.4 QUALITY CONTROL FOR AUDIT WORK The purpose of this standard is to define quality management standards for an audit firm's policies and procedures for audit work in general, as well as procedures for work assigned to assistants on an individual audit. Factors to think about when integrating quality management into auditing The following important considerations should be made when integrating quality management into audit work: 63 CU IDOL SELF LEARNING MATERIAL (SLM)

• Professional Requirements: Adherence to fundamental values like freedom, honesty, objectivity, and confidentiality, among others. • Experience and skills: Audit staff should possess the requisite level of ability and competence. • Assignment: Only qualified staff should be assigned to audit work. • Delegation: At all levels, there must be adequate guidance, oversight, and analysis of work. • Consultation: When possible, consult with experts both within and outside the company. • Client Acceptance and Retention: Potential clients should be evaluated on a regular basis, and current clients should be reviewed. • Monitoring: Quality management processes and practises should be tracked for continued adequacy and organisational effectiveness. • The quality management practises, and procedures of the company should be clearly communicated to all employees. Working Papers/ Documents Retention Retention period: The auditor should keep the working papers for as long as necessary to fulfil his practice's needs and to comply with any applicable legal or professional record retention criteria. Under the Companies Act of 2013, auditors must keep working papers for a minimum of seven years. 4.5 TEST CHECK AND ROUTINE CHECK Test checking Examination in Depth means examination of a few selected transactions from the-beginning tothe end through the entire flow of the transaction. It involves studying the recording of transactions the various stages through which they have passed. Test checking is the process of choosing and analysing a few transactions from a large number of transactions. If the auditor considers the entries under scrutiny to be right, he or she assumes the remaining entries are correct as well. The method is based on sampling theory, a commonly used statistical technique. Testing each and every transaction that occurs throughout the year is both 64 CU IDOL SELF LEARNING MATERIAL (SLM)

costly and inefficient for the auditor. As a result, the auditor verifies and examines a few representative transactions in order to assemble sufficient audit proof upon which to base his judgement. Test checking reduces the auditor's workload; if the auditor discovers that the documents, he checked are correct during test checking, he would not need to conduct more comprehensive checks. The Auditor's Test-Checking Responsibilities The auditor's duties or actions to take while using test checks are as follows: 1. The test check entries should be descriptive of all transactions and selected at random. 2. The auditor should choose the test without regard to any input from the client's staff. 3. Using his intelligence and technical skills, the auditor can select the entries for the test check with care. 4. No test check should be used when vouching entries in the cash book or bank passbook. 5. The auditor should not use a test check when reviewing the entries for the first and last months of the year, and all entries should be carefully checked. 6. The test check should be organized in such a way that it covers a significant portion of each employee's responsibilities. 7. When deciding on the form and scale of the samples to be examined, the auditor should take into account his previous experiences. Routine inspection Routine checking involves double-checking entries as they appear in the books of account to ensure that the routine bookkeeping process has been implemented correctly and that accounting records are arithmetically correct. This type of work does not establish that the accounts are correct in any way because it does not go behind the entries in the records and would not be able to fully substantiate the transactions. As a consequence, routine checking isn't widely regarded as an important part of auditing, especially when self-balancing ledgers are used and a trial balance has been decided upon. Routine check-ing, on the other hand, should not be ignored by an auditor; it is useful in 65 CU IDOL SELF LEARNING MATERIAL (SLM)

detecting minor errors. He should be particularly wary of audit clerks who miss or neglect this type of work because it can become tedious. 2. Aspects of Verification (a) At each stage, relevant records and authorities are examined; it is also judged whether the person who has | exercised the authority in relation to the transactions is fit to do so in terms of- the prescribed procedure. (b) While auditing in depth, the Auditor reviews all the accounting and operational aspects of the| transaction from the origin to the end. This enables him to have an overall view and evaluate the procedures through selected transactions. 3. A Representative Sample must be open, and each item selected must be traced meticulously. 4. A smaller number of transactions are checked at each successive stage with an in-depth test, on statistical grounds (based on probability theory) that the optimum sample size decreases as the Auditor's \"level of confidence\" concerning the functioning of the system increases. 5. Examination in depth reconstructs the audit trail and reveals more about the functioning (or malfunctioning) of the client's system in practice than the haphazard and mechanical approach to testing 6. Example: Audit in depth of transactions relating to purchase of goods involves verification of the following (a) Purchase Requisition - pie-printed, pre-numbered and authorised. (b) Invitation of quotations and analysis of the same. (c) Official Purchase Order, sequentially pre-numbered, authorised and placed with approved suppliers only. (d) Receipt of goods, together with Delivery Challan / Advice Note. (e) Admission of goods to stores after verification of quality, quantity etc. (f) Entry in Stores Records. (g) Receipt of Supplier's Invoice and Statement. (h) Approval of Purchase Invoice regarding compliance for specification, quantity and quality. 66 CU IDOL SELF LEARNING MATERIAL (SLM)

(i) Entries in Purchases daybook. (j) Postings to Purchase Ledger and Purchase Ledger Control Account. (k) Payment of Cheque in settlement of invoice after availing discounts; if any. (1) Entry for payment in Cash / Bank Book. (m) Posting from Cash Book to Ledger and Control Accounts. 1. Test Checking means to select and examine a representative sample from a large number of similar items. 2. Test Checking is an accepted auditing procedure wherein instead of checking all transactions, only a part of it is checked in detail to form an opinion on the whole Features of Test checking Test checking consists of selecting and checking a proportion of transactions selected by the Auditor. The salient features of Test Checking are - 1. Scientific: It is a mathematical truth that a scientifically selected sample would reveal the features and characteristics of the population. The statistical theory of sampling is based on a scientific law. Hence, it lacks basis and acceptability. 2. Estimation Process: Test Checking and Sampling can never .bring complete reliability; it cannot give accurate results. It is a process of estimation. What error is tolerable for a particular matter under examination is a matter of the individual's judgment in that particular 3. Coverage of material items: Entries involving large amounts or relating to material accounts are seen exhaustively and other entries are picked up for verification from the remainder according to a certain plan. Sometimes entries are checked for a few specified months exhaustively and the rest go unchecked. 4. Full Coverage over a time period: Test Check is normally planned in such a way that the audit programmes for 3 to 5 years cover all types of transactions in case of a medium or large sized Company. Thus, if in one year the months of January, June and December are checked; April, July and September may be checked in the second year and so on. 67 CU IDOL SELF LEARNING MATERIAL (SLM)

5. Surprise Element: The staff and management of the Auditee Company should not be able to anticipate the pattern of test checking, otherwise, they will predict the areas and periods to be covered in any one year and will be careful regarding the same. 6. Flexibility: If test checking becomes routine, predictable and mechanical, it loses its value. Hence, the Auditor should keep changing the methods of test checking at reasonably frequent intervals. 7. Judgment Based: The extent of test checking would primarily depend on the Auditor's judgment of a particular situation. This judgement in turn depends on the previous experience of the Auditor, current developments and the efficacy of Internal Control System. The factors to be considered for deciding upon the extent of checking on a sampling plan are - 1. Size of the organization under audit. 2. State and efficacy of the internal control. 3. Adequacy and reliability of books and records. 4. Tolerable error range. 5. Degree of the desired confidence. When Test Check Can Be Used? Test checks can be adopted in the following cases - 1. Volume of Transactions: In case of big concerns where number of transactions is quite large. 2. Time factor: Where the Auditor has very little time at his disposal to check all the transactions of a medium or large sized concern. Identical Transactions: When there are a number of transactions of identical and homogeneous nature. Internal Control: When there exists a satisfactory internal control system, manual and / or computerized. Advantages and disadvantages of Test check Advantages Of Test Checking 68 CU IDOL SELF LEARNING MATERIAL (SLM)

The advantages of Test Checking include -  Audit Objective: The Auditor is required to form an opinion on the Financial Statements. Even after 100% checking, he may not derive absolute satisfaction. Hence, proper and careful test checking serves the audit objective in obtaining reasonable audit assurance.  Expertise: Application of test check principles involves the application of mind and intelligent judgment. It enables the Auditor to use his expertise effectively.  Exception Principle: Test Checking adopts the principle of exception in control. If certain aspects of internal control do not create suspicion, there is no need to verify all those transactions exhaustively.  Scientific Assessment of Risk: The Auditor assesses the risk of material misstatements in the Financial Statements in a scientific manner by drawing suitable samples and studying the same in detail.  Saving in time: As fewer transactions are verified; time is saved to a great extent. This, in turn, enables completion of all the audits / verification procedures in time.  Reduction in Work: Volume of work is reduced by test checking methods. Audit processes are not carried out mechanically on all transactions. Disadvantages The disadvantages of Test Checking are – Naive and Biased: The extent to which test checking can be resorted to is a matter of Auditor's personal assessment. It does not ensure selection of representative samples of adequate size and offers opportunities for bias to enter into selection process. Unauthentic: Test Checking lacks authenticity, precision and an acceptable basis. It does not give the Auditor an idea about the degree of reliability that can be placed on the findings for application to the whole set of entries. Higher Risk: runs the risk that some of the material error may not be discovered and some of the important areas may go unaudited. Sometimes, it may increase the level of inherent Audit Risk. Unscientific: It involves lot of arbitrariness on the part of the Auditor in determining and selecting the number of transactions. Therefore, the approach cannot be considered as a scientific one. 69 CU IDOL SELF LEARNING MATERIAL (SLM)

Difference in activity levels: Where activity levels vary in a year, e.g., a few months of peak production and sales seasons, the Auditorcannot draw reasonable conclusions about the transactions of thewhole year merely by checking transactions of a few specified months. Lack of Surprise Element: If the surprise element is absent, the client may predict the pattern of checking. Test Checking VS Routine Check Particulars Test Checking Routine Check Meaning Test checking is an accepted Routine checking is the detailed checking auditing procedure wherein only of all transactional aspects such a part of its transactions is as casts, sub – casts, carry-forwards, checked to form an opinion extensions and calculations etc. in instead of checking the subsidiary books, checking of posting into transactions. the ledgers, casting of ledger accounts and extraction of their balances etc Objectives To obtain a reasonable level (a) to verify the arithmetical accuracy of of satisfaction about all the entries, transactions but verifying a (b) to verify the accuracy of posting to few representative ledgers. transactions called “sample (c ) to check that the ledger accounts have been correctly balanced, and (d) to ensure that no figures are altered after checking. Advantages (a) Saving in time. a) Checking of posting and ledgers. (b) Proper and careful test (b) Arithmetical accuracy can be checked. checking is helpful & serves (c ) Trial balance tallying is facilitated. 70 CU IDOL SELF LEARNING MATERIAL (SLM)

the audit objective. (d) Easy detection of errors and frauds. (c )Volume of work is (e) Delegation of audit work to junior staff reduced. (d) Time available for other audits. Disadvantages a) Client staff may become a) Is a highly mechanical careless. process. (b) Some errors and frauds (b) Monotonous activity may go undetected. may lead to boredom. ( c )All items and transactions (c ) Major items of frauds are not checked. and high-level intricacies (d) An element of doubt and and complexities may not risk is present in the be revealed. Auditor’s opinion (d) Compensating Errors and Errors of Principle will not come to light. Audit Sampling Meaning: 1. The purpose of this Auditing Standard SA 530 is to establish standards on the design and selection of an audit sample and the evaluation of the sample results. This SA applies equally to both statistical sampling methods. Either method, when properly applied, can provide sufficient appropriate audit evidence 71 CU IDOL SELF LEARNING MATERIAL (SLM)

2. When using either statistical or non-statistical sampling methods, the auditor should design and select an audit sample, perform audit procedures thereon, and evaluate sample results so as to provide sufficient appropriate audit evidence. 3. “Audit sampling” means the application of audit procedures to less than 100% of the items within an account balance about some characteristics of the items selected in order to form or assist in forming a conclusion concerning the population. 4. It is important to recognise that certain testing procedures do not come within the definition of sampling. Tests performed on 100% of the items within a population do not involve sampling. Likewise, applying audit procedures to all items within a population which have a particular characteristic (for example, all items over a certain amount) does not qualify as audit sampling with respect to the population examined, nor with regard to the population as a whole, since the items were not selected from the total population on a basis that was expected to be representative. Such items might imply some characteristic of the remaining portion of the population but would not necessarily be the basis for a valid conclusion about the remaining portion of the population. Factors In Determining Sample Size- Sampling Risk (1)When determining the sample size, the auditor should consider sampling risk, the tolerable error, and the expected errors. Sampling Risk (2) Sampling risk arises from the possibility that the auditor conclusion, based on a sample, may be different from the conclusion that would be reached if the entire population were subjected to the same audit procedure. (3) The auditor is faced with sampling risk in both tests of controland substantive procedure as follow: (a) Tests of control: (I) Risk of under reliance: The risk that, although the sampleresult does not support the auditor’s assessment of controlrisk, the actual compliance rate would support such an assessment. 72 CU IDOL SELF LEARNING MATERIAL (SLM)

(II) Risk of over reliance: The risk that, although the sampleresult supports the auditor’s assessment of control risk, theactual compliance rate would not support such as an assessment. (b) Substantive procedures: (I) Risk of incorrect rejection: The risk that, although the sampleresults the supports the conclusion that a recorded accountbalance or class of transactions is materially misstated, in factit is not materially misstated. (II) Risk of incorrect acceptance: The risk that, although thesample result supports the conclusion that a recorded accountbalance or class or transactions is not materially misstated. (4) The risk of under reliance and the risk of incorrect rejectionaffect audit efficiency as they would ordinarily lead toadditional work being performed by the auditor, or the entity, which would establish that the initial conclusions wereincorrect. The risk of over reliance and the risk of incorrectacceptance affect audit effectiveness and are more likely tolead to an erroneous opinion on the financial statements thaneither the risk of under reliance or the risk of incorrectrejection. (5) Sample size is affected by the level of sampling risk the auditoris willing to accept from the results of the sample. The lowerthe risk the auditor is willing to accept, the greater the samplesize will need to be. Tolerable Error Tolerable error is the maximum error in the population that the auditor would be willing to accept and still conclude that the result from the sample has achieved the audit objective. Tolerable error is considered during the planning stage and, for substantive procedures, is related to the auditor's judgement about materiality. The smaller the tolerable error, the greater the sample size will need to be in tests of control, the tolerable error is the maximum rate of deviation from a prescribed control procedure that the auditor would be willing to accept, based on the preliminary assessment of control risk. In substantive procedures, the tolerable error is the maximum monetary error in an account balance or class of transactions that the auditor would be willing to accept so that when the results of all audit procedures are considered, the auditor is able to conclude, with reasonable assurance, that the financial statements are not materially misstated. 73 CU IDOL SELF LEARNING MATERIAL (SLM)

Expected Error If the auditor expects error to be present in the population, a larger sample than when no error is expected ordinarily needs to be examined to conclude that the actual error in the population is not greater than the planned tolerable error. Smaller sample sizes are justified when the population is expected to be error free. In determining the expected error in a population, the auditor would consider such matters as error levels identified in previous audits, changes in the entity's procedures, and evidence available from other procedures. Selection Of The Sample The auditor should select sample items in such a way that the sample can be expected to be representative of the population. This requires that all items in the population have an opportunity of being selected. While there are a number of selection methods, three methods commonly used are: Random selection, which ensures that all items in the populationhave an equal chance of selection, for example, by use of randomnumber tables. Systematic selection, which involves selecting items using aconstant interval between selections, the first interval having arandom start. The interval might be based on a certain number ofitems (for example, every 20th voucher number) or on monetarytotals (for example, every Rs 1,000 increase in the cumulative valueof the population). When using systematic selection, the auditorwould need to determine that the population is not structured insuch a manner that the sampling interval corresponds with aparticular pattern in the population. For example, if in a populationof branch sales, a particular branch's sales occur only as every100th item and the sampling interval selected is 50, the result wouldbe that the auditor would have selected all, or none, of the sales ofthat particular branch. Haphazard selection, which may be an acceptable alternative torandom selection, provided the auditor attempts to draw arepresentative sample from the entire population with no intentionto either include or exclude specific units. When the auditor usesthis method, care needs to be taken to guard against making aselection that is biased, for example, towards items which are easily located, as they may not be representative. Evaluation of Sample Results 74 CU IDOL SELF LEARNING MATERIAL (SLM)

Having carried out, on each sample item, those audit procedures that are appropriate to the particular audit objective, the auditor should: (a) analyse any errors detected in the sample. (b) project the errors found in the sample to the population; and (c) Reassess the sampling risk. Analysis of Errors in the Sample In analysing the errors detected in the sample, the auditor will first need to determine that an item in question is in fact an error. In designing the sample, the auditor will have defined those conditions that constitute an error by reference to the audit objectives. For example, in a substantive procedure relating to the recording of accounts receivable, a mis-posting between customer accounts does not affect the total accounts receivable. Therefore, it may be appropriate to consider this an error in evaluating the sample results of this particular procedure, even though it may have an effect on other areas of the audit such as the assessment of doubtful accounts. When the expected audit evidence regarding a specific sample item cannot be obtained; he auditor may be able to obtain sufficient appropriate audit evidence through performing Alternative procedures. For example, if a positive account receivable confirmation has been equated and no reply was received, the auditor may be able to obtain sufficient appropriate suit evidence that the receivable is valid by reviewing subsequent payments from the, customer. If the auditor does not, or is unable to, perform satisfactory alternative procedures or if the procedures performed do not enable the auditor to obtain sufficient appropriate audit evidence, the item would be treated as an error. The auditor would also consider the qualitative aspects of the errors. These include the nature and cause of the error and the possible effect of the error on other phases of the audit. In analysing the errors discovered, the auditor may observe that many have a common feature, for example, type of transaction, location, product line, or period of time. In such circumstances, the auditor may decide to identify all items in the population which possess the common feature, thereby producing a sub-population, and extend audit procedures in this area. The auditor would then perform a separate analysis based on the items examined for each sub-population 75 CU IDOL SELF LEARNING MATERIAL (SLM)

The auditor needs to consider whether errors in the population might exceed the tolerable error. To accomplish this, the auditor compares the projected population error to the tolerable error taking into account the results of other audit procedures relevant to the specific control or financial statement assertion. The projected population error used for this comparison in the case of substantive procedures is net of adjustments made by the entity. When the projected error exceeds tolerable error, the auditor reassesses the sampling risk and if that risk is unacceptable, would consider extending the audit procedure or performing alternative audit procedures. 4.6 SUMMARY  Auditing Norm SA 230 \"Audit Documentation\" covers audit working papers. Audit working papers are the Auditor's property, and he is allowed by law to keep them for a fixed period of time. The format and content of audit reports should be tailored to the specific audit situation. Audit notebook is a valuable piece of evidence auditors can use to defend themselves if they are accused of anything. The auditor normally keeps a separate audit notebook for each individual audit.  An audit book is typically a bound book in which observations made during the audit are reported. Examining transactions in Depth means studying the recording of transactions the various stages through which they have passed. Test checking is the process of choosing and analysing a few transactions from a large number of transactions. Under the Companies Act of 2013, auditors must keep working papers for a minimum of seven years. The Auditor's duties or actions to take while using test checks are as follows.  The test check entries should be descriptive of all transactions and selected at random. No test check should be used when vouching entries in the cash book or bank passbook. Routine checking isn't widely regarded as an important part of auditing. Examining in depth reconstructs the audit trail and reveals more about the functioning (or malfunctioning) of the client's system. Test checking consists of selecting and checking a proportion of transactions selected by the Auditor.  Test Checking is normally planned in such a way that the audit programmes for 3 to 5 years cover all types of transactions in case of a medium or large sized Company. Size of 76 CU IDOL SELF LEARNING MATERIAL (SLM)

the organization under audit. State and efficacy of the internal control. Adequacy and reliability of books and records. Tolerable error range.  Degree of the desired confidence. Time factor. Volume of Transactions. Identical Transactions. If the Auditor has very little time at his disposal to check all the transactions of a medium or large sized concern.  Test checking is an accepted auditing procedure wherein only a part of its transactions is checked to form an opinion instead of checking the transactions. Advantages of test checking include saving time, reducing volume of work and accuracy. Disadvantages of Test Checking are – Naive and Biased. Auditing Standard SA 530 is to establish standards on the design and selection of an audit sample. It applies equally to both statistical and non-statistical sampling methods.  Advantages: Arithmetical accuracy can be checked, trial balance tallying is facilitated, easy detection of errors and frauds. Disadvantages: Client staff may become careless; frauds may go undetected. Risk of under reliance: The risk that, although the sample result does not support the auditor's assessment of control risk, the actual compliance rate would support such an assessment. Risk of incorrect acceptance: Risk that a recorded account balance or class of transactions is not materially misstated. Tolerable error: The maximum error that the auditor would be willing to accept and still conclude that the result from the sample has achieved the audit objective.  Smaller sample sizes are justified when the population is expected to be error free. The auditor would consider such matters as error levels identified in previous audits, changes in the entity's procedures, and evidence available from other procedures. 4.7 KEYWORDS  AAS- Auditing and Assurance standards  SA- Standards on Auditing 4.8LEARNING ACTIVITY 1. Learn about the different types of sampling techniques available in selection of sample for Audit 77 CU IDOL SELF LEARNING MATERIAL (SLM)

______________________________________________________________________________ ______________________________________________________________________________ 4.9UNIT END QUESTIONS A.Descriptive Questions Short Questions 1. Write a short note about Audit working papers 2. Describe briefly about Current and permanent Audit file 3. What is meant by the term Test check? 4. Write a short note about Routine check. 5. Describe briefly about sampling error. Long Questions 1. Explain in detail about Test check in Audit and how is it different from routine check 2. What is meant by Audit documentation, explain in detail about the different types of working papers? 3. Explain in detail about Sampling Technique 4. Explain about sampling risk in detail. 5. Describe about different sampling techniques and evaluation of sampling results B. Multiple choice Questions 78 1._________ is an example of Current Audit file a. MOA of a company b. Trust deed copy c. Bank statement d. Both a and b CU IDOL SELF LEARNING MATERIAL (SLM)

2.____________ is a tool where less than 100% of transactions are checked to form an opinion on the financial statements a. Audit Documentation b. Routine Check c. Audit sampling d. None of these 3. For which the following Test check cannot be used a. Vouching purchase of Fixed Assets b. Vouching Year end Transactions c. Vouching petty cash book d. Both a and b 4. The risk of choosing an incorrect sample for test check and forming an incorrect opinion is called as ____________ a. Inherent risk b. Control risk c. Detection risk d. Sampling risk 5. A sample selected from large value transactions is known as _____________ 79 a. Stratified sampling b. Random sampling c. Haphazard sampling d. None of these Answers 1-d 2-c 3-d4-d 5-a CU IDOL SELF LEARNING MATERIAL (SLM)

4.10 REFERENCES Textbook:  T1 ArunaJha, Auditing, Taxmann’s Publications, University Edition  T2 Ravinder Kumar, Auditing: Principles and Practice :PHI Learning Pvt. Ltd Reference Books:  R1 N.D Kapoor, Auditing, Sultan Chand & Sons  R2 Gupta; Contemporary Auditing, Tata McGraw Hill 80 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 5 – AUDIT PROCEDURE 81 Structure 5.0Learning Objectives 5.1Introduction 5.2Audit plan / Audit programme 5.3Vouching 5.4Verification 5.5Difference between Vouching and Verification 5.6Audit documentation 5.7Audit procedures 5.8Summary 5.9Keywords 5.10Learning activity 5.11Unit End Questions 5.12References 5.0 LEARNING OBJECTIVES After studying this unit students will be able to  State the meaning of Audit procedure  Learn about Routine check and test check  Appreciate the concept of Audit plan  Learn concepts relating to Vouching and verification  Analyze the Audit procedure in obtaining Audit evidence 5.1 INTRODUCTION CU IDOL SELF LEARNING MATERIAL (SLM)

The audit protocol describes how the audit work should be carried out. It is an auditor's standard operating procedure for carrying out his audit work. Certain elements of audit procedure are consistent with all audit projects. They are as follows: Routine inspections:- Routine testing is the process of checking castings and postings in the organization's common books. In other words, it is an auditor's analysis of subsidiary records and ledger accounts. The following operations are included in routine checking: a) In the original entry books, check the castings, sub castings, carry forward, and other estimates. b) Ledger postings are double-checked. c) Verification of the casting and ledger balances d) Verification of the balance move from the ledgers to the trial balance. The following books are generally checked on a regular basis. a) Cash register b) Petty cash register c) Make a book purchase d) A sales manual e) Get a return book f) Returns book for sales g) Book of receivables h) Book of Accounts Payable i) The journal itself j) Register of Sales k) Register of Purchases l) Ledger for personal use m) Book of wages and bonuses 82 CU IDOL SELF LEARNING MATERIAL (SLM)

n) Stock sheet Benefits of regular inspection 1) It makes it easier to double-check the original entry in the book. 2) Postings are thoroughly examined during regular checks. 3) It aids in the verification of the arithmetical precision of the entries in the ledger. 4) Regular checks reveal clerical mistakes and basic frauds. 5) In order to prepare a trial balance, it's a good idea to check the posting and casting. 6) It is a clear and straightforward task that any audit clerk may complete. Routine checking has a number of drawbacks. 1) It can only detect arithmetic errors and common frauds. 2) Since it is a mechanical examination, it is monotonous. 3) It is unimportant in the audit of a company that has a self-balancing mechanism in place. 2. Testing of tests, samples, or limited verification: Test checking is the process of an auditor checking a few transactions at random to form a final judgement on the entire collection of transactions. It involves taking a representative sample from a large number of related objects and examining it. Sampling is used in test checking. One aim of test checking is to derive characteristics from a representative sample that are present in mass transactions. Test checking conditions, essentials, or precautions 1) The success of test testing is primarily determined by the business's internal check method. 2) The test checking sample should be chosen at random. 3) It can only be used in transactions that are homogeneous. 4) The test checking sample should be chosen without prejudice. 83 CU IDOL SELF LEARNING MATERIAL (SLM)

5) One sample should be chosen in such a way that it encompasses the work of all of the client's employees. Cash book products should not be subjected to test testing. The client should not be informed about the method of test checking. The auditor should choose one sample for test testing him. There are certain transactions that aren't appropriate for test checking. Yes, they are. 1) Entering and exiting the room. 2) Entries in the cash book 3) Seasonal market transactions. 4) Transactions that do not occur on a regular basis. 5) A declaration of bank reconciliation. 5.2AUDIT PLAN An audit plan is a methodical, step-by-step process that allows auditors to concentrate on the most critical aspects of the audit. Establishing the overall audit strategy and developing an audit plan are both part of audit planning. Developing an overall audit plan: The audit strategy lays out in broad terms how the audit will be performed, as well as the audit's scope, timing, and course. The audit strategy then directs the development of the audit plan, which includes the comprehensive answers to the risk evaluation of the auditor. When developing an audit plan, the auditor should take into account the following factors: • Describe the scope of the engagement by identifying the characteristics that define it. • Determine the engagement's reporting goals so you can schedule the audit's timing and the type of correspondence you'll need. • In the auditor's professional opinion, consider the considerations that are essential in guiding the audit team's efforts. 84 CU IDOL SELF LEARNING MATERIAL (SLM)

• Take into account the outcomes of preliminary engagement exercises as well as experience acquired from previous engagements. • Determine the type, timing, and scope of resources required to complete the engagement. Creating an audit strategy It is important that the auditor prepares properly for his work in order to ensure a high level of efficiency. Planning is important for the smooth execution of audit work and its effective completion, just as it is for every human effort. Planning ahead of time for an audit not only ensures a valid audit opinion, but also assists the auditor in ensuring that: • The audit goal has been identified and is being met. At all stages of the audit, the audit is properly regulated and directed. • High-risk and sensitive areas of the engagement are not overlooked but receive sufficient attention. • The work is done in a cost-effective and timely manner, resulting in a reduction in audit resources. Points to think about when planning an audit: The auditor should consider the following issues in relation to the audit engagement in order to make the preparation more meaningful: In addition to the actual audit work, preliminary work must be completed. Legislative, accounting, or auditing policies or guidelines changes Analytical analysis of accessible management accounts and related management knowledge Changes in management or the company Alterations to the accounting system The deadline for submitting the audit report has passed. Program for Audit 85 CU IDOL SELF LEARNING MATERIAL (SLM)

Rather than being carried out by a single person, most audits are carried out by a group. If the company is small or there isn't much to do, a person might be able to handle the whole engagement on their own. However, due to the amount of work, time constraints, and other factors, most audit engagements require more than one person to complete. The audit team will have a different number of members depending on the audit. The team is usually made up of a Partner, Manager, and Assistants, who are further divided into senior assistants and juniors. There must be some kind of instructions set in order to properly delegate work to each person and what is needed to be done by whom; otherwise, more than one member may be auditing the same region, or some areas may be left completely unaudited. Audit plans or audit programmes are used to ensure that audit assignments are completed efficiently and effectively. The audit programme consists of step-by-step guidelines for team members to follow, or it is simply a list of audit procedures to be completed by team members. It usually takes the form of a checklist that juniors may use to ensure that all relevant procedures have been followed. This can also be useful for keeping track of the work of juniors or assistants in general. Some elements of the audit can be scheduled in advance for the whole year, with the auditor expecting to be audited at regular intervals or as required. Audit programmes are written individually for each audit region and then delegated to individual team members for ease of understanding and convenience. Sample audit programme for verification of Cash payments may look like as follows: Sl. No Particulars Yes/ No Remarks 1 What is the petty cash limit? Whether instances of Cash held more than the limit observed? 2 Whether cash register is maintained, and all receipts and payments are 86 CU IDOL SELF LEARNING MATERIAL (SLM)

properly recorded? 87 3 Whether the register is daily updated and closing balance are properly matched and signed by the cashier? Frequency of physical checking by the person other than cashier, if any? 4 Whether Maker / Checker concept is followed? 5 Whether any instances of difference in closing balance observed? 6 Whether “I Owe you” / “Suspense” vouchers are maintained for cash advance given to staffs during the day? 7 Whether Cash collected are deposited without any delay? 8 Whether cash payments are properly authorized? 9 Is there any authorization limit for the cash payments? If Yes, whether the payments are duly authorized by the responsible person? 10 List of bank accounts maintained CU IDOL SELF LEARNING MATERIAL (SLM)

11 Whether BRS have been prepared and reconciled periodically? 12 Monitoring of stale cheques and reversal thereof 5.3VOUCHING The analysis of documentary evidence in support of entries to determine arithmetic accuracy is known as vouching. Vouching is when an inspector double-checks the entries for other records. Fig 5.1 Vouching The acid test in auditing is vouching. It verifies the accuracy of the transaction in the books of accounts. It is the process of reviewing historical documentation to determine the quality and validity of entries in accounting books. According to Dicksee, “Vouching consists of comparing entries in the books of accounts with documentary evidence in support thereof”. Voucher: A voucher is any documentary documentation that supports the entries in the documents. A voucher is any document that supports the entries in the books of accounts and establishes the arithmetical accuracy. 88 CU IDOL SELF LEARNING MATERIAL (SLM)

Objectives of Vouching: • Ensure that all transactions in the books of accounts are properly registered. To see if any of the transactions' entries are supported by sufficient proof. • To ensure that no fraudulent transactions are reported in the accounting books. • Ensure that all company transactions are reported in the books of accounting. • Ascertain that all transactions are correctly authenticated by a responsible individual. Importance of Vouching • Ensures transaction authenticity • Allows for transaction visibility • Assists in determining transaction importance • Aids in the proper distribution of resources and income, as well as expenditures. • Detects fraud and mistakes • Determines the validity of transactions • Assures accurate accounting • Legal compliance • Ensures that all relevant information is disclosed. Considerations to Be Borne In Mind By The Auditor In The Course Of Vouching • The voucher's date falls during the accounting period. • The name on the receipt and the name on the voucher are the same. • The correct signatory has duly and properly approved the voucher/transactions. • The transaction for which payment was made or for which a sum was paid is related to company. • The transactions under investigation are those of the entity which occurred within the applicable time period. 89 CU IDOL SELF LEARNING MATERIAL (SLM)

• If any changes to the voucher have been made, and if so, if they have been properly reported and approved. • Is there a control number on the voucher or not? • Search for any missing numbers or vouchers. • The transaction is correctly reported in the appropriate account, and income and expenditures are appropriately assigned to the accounting period. • All transactions that have taken place have been recorded. • The amount posted from the voucher must be properly recorded in the final reports and reported in compliance with established accounting policies and procedures. Importance of Vouching • Ensures transaction validity • Aids in understanding transaction relevance • Facilitates distinction between capital and revenue items • Detects frauds and mistakes • Determines transaction authenticity • Ensures proper accounting • Compliance with legislation • Ensures proper transparency Objectives of Vouching The basic objectives of vouching are as under: 1. To ensure that all the transactions are properly recorded in the books of accounts. 2. To see the proper evidence supports all the entries of the transactions. 3 To make it sure that fraudulent transactions are not recorded in the books of accounts. 4 To see that all transactions relating to business are recorded in the books of accounts. 5. To see that all transactions are properly authenticated by a responsible person. 90 CU IDOL SELF LEARNING MATERIAL (SLM)

When examining a voucher, keep in mind the following: (I) that the voucher's date falls during the accounting period. (ii) that the voucher is made out in the client's name. (iii) that the voucher is duly authorised and (iv) that the voucher included any relevant documents that may have been received or brought into existence on the transactions. Steps used in the Internal Control System Verification: (a) Examine the accounting system in use to ensure that no cash, material, or other asset is left unaccounted for, that no money is paid without related goods or services being purchased or tendered, and that no property is given away without its price being obtained or accounted for. (b) Examine the financial control that has been vested in various individuals, as well as the circumstances under which they may exercise it. (c) Verify that the oversight of various administrative and accounting roles, which is carried out by various members of the team to whom these responsibilities have been delegated, is sufficient. (d) Determine when any mechanical aids are being used to ensure correct receipt accounting and avoid pilferage of cash, stamps, and other valuables. (e) Observe the accounting procedure and routine in action and decide if the checks and counterchecks envisioned by the internal management system are being correctly implemented with the use of procedural evaluations. (f) Confirm that there is a system in place that reconciles the physical existence of various types of assets with their balances in the books of account or store records on a regular basis, and that any discrepancies are reported and adjusted; and that the balances of account receivables, account payables, bankers, and persons with whom securities are deposited are reconciled on a regular basis. Furthermore, those in charge of precious assets have provided sufficient bonds to 91 CU IDOL SELF LEARNING MATERIAL (SLM)

cover the corporation in the event of any misappropriation or misapplication of those assets by those in charge. (g) Ensure that the internal control scheme is checked on a regular basis and that, if possible, processes are changed to close any vulnerabilities discovered during the analysis. In addition, legislative decisions are turned into practical implementation on a regular basis. Students should keep in mind that unless an internal control scheme is comprehensive, it can fail to offer the security that is required. If printed bills with counterfoils are provided for sums received, but no safeguards are in place to prevent cash from being collected by unauthorised individuals, there is no guarantee that all amounts collected have been accounted for. Audit of Income Cash sales are available. 1. Double-check the cash sales register with the carbon copies of the cash sales bill. It is necessary to pay special attention to the first and last months of the fiscal year 2. A regular cash description should be reviewed. 3. The auditor should be more cautious when it comes to cash memos and if no cash is collected, a receipt is given. 4.A certain representative item should be subjected to vouching in depth to get an idea about reliability of internal control. 5. The salesman's description, the gatekeeper's summary, and the cashier's summary It's also a good idea to compare the summaries. 6. The date on which the cash sales bills are issued and the date on which the receipt is issued, the amounts reported in the cash book must be identical. If the dates are not the same, the same should be investigated. 7. When cash sales bills are cancelled, all copies, including the original copy that has been partially cancelled, can be kept in the records. 8. If the organisation has a discount scheme, it should be observed that the policy is implemented consistently. 92 CU IDOL SELF LEARNING MATERIAL (SLM)

9. Where the transactions are made by a seller, the salesman's claims should be checked and reconciled with the cash receipt report. 10. Double-check the entries in the cash book and the impact on the revenue A/c in the ledger. Consignment Sales  When there are a lot of consignments to go out in a year, it's common to have a different consignment Sales Day Book and Ledger.  Under that case, the Day Book entries for the price of goods shipped out and expenses incurred on their transportation and insurance should be checked with copies of proforma invoices and other related documents; the selling price of goods delivered, and expenses incurred by the consignee should be verified from the Account Sales.  Under this scenario, the balances in the Consignment Ledger at the end of the year will reflect the cost of unsold products, as well as a percentage of non-recurring transportation and insurance costs.  These amounts should match the revenue earned from the consignees in their respective accounts.  If the goods sent out for sale on consignment have been charged at the invoice price, the difference between the cost and the invoice price would be credited to the Consignment StockAdjustment Account.  The appropriate part of the amount credited in this account attributable to the inventory remaining unsold at the year end, should be reversed so that credit can be taken for the net amount representing the difference for the part actually sold. Goods sent on sale or return A special Day Book can be used to keep track of items shipped out on a sell or return basis. First, memoranda entries are written in this book, and then after the items have been sold are debiting the party and crediting the Sales Account entries made. The auditor should check the memorandum record to ensure that upon receipt of recognition from each entity, his account has been debited and the revenue account has been credited, and that the products on which the date of consent has elapsed at the end of the year has either been returned or account receivables records had been debited. Furthermore, the closing inventory 93 CU IDOL SELF LEARNING MATERIAL (SLM)

includes the inventory of items shipped out on approval, the term of approval for which did not expire until the end of the year. Sales return 1. Find the amount recorded in the profit and loss account by totalling the Sales Return Journal. 2. Compare the credit notes sent to the customer with each item of sale return. 3. Verify the return inward movement of goods entry in the gatekeeper's record, as well as internal control. Check the stock register entry for accuracy. 4. Compare previous year's sales and returns to this year's. 5. The sales return at the start of the year and at the end of the year should be scrutinised thoroughly. 6. If there is a significant time gap between the original transaction and the return of goods, an inquiry should be made. 7. Inquire about the steps taken after the goods were returned for unacceptable quality and double-check the documentation. Recovery of bad debts 1. Determine the amount to be considered from the trail balance and transfer it to the Profit and Loss Account. 2. Verify the journey entry for the same, as well as its authorization. 3. Check the letter from the person and check the amount received along with the year in which the original depth was written off if the amount is received from a party under liquidation through his liquidator/official receiver. 4. Examine the bank statement for the amount. 5. Review your correspondence with the other party and the official receiver/liquidator. Rental receipts 94 CU IDOL SELF LEARNING MATERIAL (SLM)

Before vouching rental receipts, check copies of bills issued to tenants against copies of tenancy agreements and bills of charges paid by the landlord on behalf of the tenants, such as house tax, water tax, tax deducted at source, electricity consumed, and so on. The entries in the Rental Register for rents paid after that date should be double-checked with copies of rental bills. The amount of rent collected from tenants should be double-checked using receipts issued to them. These should then be tracked down in the Rental Register. Finally, the register should be examined to determine whether any amounts or rents have not been recovered and are considered bad or irrecoverable, and whether they should be written off or a provision made against them. It's also a good idea to go over all of your rental receipts. Details of total accommodation available for rent in different buildings owned by the client should be determined for this purpose. It should be verified that all available housing has been rented out and that rental income has been properly recorded. A certificate should be obtained from the client if it is reported that one or more tenements have remained vacant. Interest and dividend received 1. Check the income in the profit and loss account for the current year. 2. Determine the amount received on account from the previous year and the outstanding balance due. 3. Verify the entries for income received in the cash book. 4. Verify the effect of the Tax Deducted at Source (T.D.S.) calculation in the ledger. 5. Compare the total income received with the previous year's and inquire about any significant differences. 6. Obtain a list of investments and verify that all securities and investments have received income. Obtain a certificate from the bank if any securities have been pledged. 7. Determine the income for the year that has yet to be received and whether or not provision has been made for it. 8. Check the calculations if there is any interest received. 9. In the case of bank interest, double-check the entry on the bank statement. 95 CU IDOL SELF LEARNING MATERIAL (SLM)

Check to see if any fixed deposits have matured or if any have been opened recently. Royalties received The auditor should review the relevant contract and look over the key provisions concerning royalty payment terms. The royalty rate, the method of calculation, and the due dates should all be noted. Statements from periodicals The royalty calculation and the information received from the publisher should be double- checked. If there is one, any royalty recoupment deductions for the previous period, the records for earlier periods Royalty receipts should be examined to ensure that the amount deducted is accurate and in accordance with the contract. Royalties that were due but had not yet been received should have been properly recorded. Audit of Expenditure Purchase returns If a part or whole of a consignment of goods found to be defective or of a poor quality, the goods sometime are returned to the supplier and his account is debited. The debit is raised in the Purchase Returns Books, on the basis of Debit Note. The supplier, on receiving the Debit Note, issues Credit Note indicating his acceptance of the debit. Thus, on receipt it is attached to Debit Note. All these entries should be verified by reference to the record kept in the Goods Outwards Book or the Stores Record. The original invoices through which the purchases were made also should be referred to for confirming that the nominal account, which was originally debited on the purchases being made, has been subsequently credited on a part or whole of the goods contained in the consignment having been returned. Where the purchase returns are large, either at the beginning or at the close of the year, these might be fictitious, entered to cover bogus purchases recorded earlier. On such a consideration the nature thereof should be ascertained. The rebate in price and allowances granted by the suppliers should be adjusted through the journal on the basis of Credit Notes received from the suppliers. These should be verified by reference to the original invoices SALARIES & WAGES 96 CU IDOL SELF LEARNING MATERIAL (SLM)

Salaries and Wages Payments on account of salaries and wages need to be vouched carefully, since amounts which were either not due or in excess of those due may have been paid by the client. The evidence in support of such payments generally is internal. It can, therefore, be relied upon only if it has been produced in the normal course of business and there exists an efficient system of internal control which could be expected to prevent it from being fabricated. Therefore, before proceeding to verify payment made on account of salaries and wages, the auditor should examine the internal control procedure as regards the following: (a) Appointment, promotion, transfer and discharge of employees. (b) Recording attendance of workers engaged on the time basis, as well as particulars of jobs performed by piece workers. (p) Arrangement for the preparation of wages and salaries bills and their analysis. (d) Sanctioning the disbursement of wages and salaries. (e) Arrangement for disbursement of wages and salaries for workers and employees do not present on the pay day. (/) Custody of the wages records. He should also verify that the system of internal control provides for the following matters: (a) Mechanical recording of attendance of workmen by time recording clocks installed at the factory gate, as well as in each department and the reconciliation of the total labour force with the total of workmen in different departments; also, the recording of attendance of the staff departmental in separate registers. (b) Preparation of wages and salary bills by members of the staff, who are not connected with maintaining a record of engagement of workers, recording of their attendance or fixation of their wages. (c) Rotation of duties of different clerks employed for preparation of wages and salaries bills so that calculations, additions and extensions are not carried out by the same clerk every month. 97 CU IDOL SELF LEARNING MATERIAL (SLM)

Also, signing of the statement by persons who have prepared them and indication by each person so employed of the nature of work carried out by him. (d) Verification of salaries and wages bills in case of newly appointed persons by reference to orders for appointment, promotions or transfer made during each month and of those payable to old employees by reference to old records and on reference to the record of attendance. (e) Verification of the amount of total wages paid with the amount adjusted in costing record. (/) Checking and authorising the overtime and piece work payment by officers who not associated with the Wages Department. (g) Withdrawal by a single cheque from the bank of the exact amount of wages and salaries payable as are entered in the wages and salaries bill, depositing in the bank the undisbursed amounts. (h) Recording of unclaimed wages and salaries immediately in the Unpaid Wages and Salaries Register, and their subsequent payment on the employee's claim to them. (z) Payment of advances in lieu of wages and salaries to persons who go on leave on short notice before the end of the month through the Petty Cash. (/) Disbursement of wages in the presence of an official who is in a position to identify the worker and ensure that wages are not being paid to persons other than the workmen except under a proper authority. Petty Cash Expenses 1. Identify the persons who handle Petty Cash. 2. Verify the ceiling limit of disbursement through Petty Cash. 3. Note the limit of Imp rest System. 4. See whether petty cash payments are regularly checked by a responsible official. 5. Examine Reconciliation Statements prepared regularly for Petty Cash, based on vouchers. 6. Verify the Cashbook for the transfer of Cash under Imp rest system to Petty Cash 7. Scrutinise the Petty Cash Vouchers along with Invoices, Bills, Receipts signed by the recipients. 98 CU IDOL SELF LEARNING MATERIAL (SLM)

8. Trace the postage expenses along with entries in Mail Outward Register. Compare with previous periods and obtain satisfactory explanations for abnormal movements. 9. Check the castings of columns, totals and main totals. 10. Trace the postings from the Petty Cash Book into the Nominal Ledger Head of Account. 11. Verify the petty cash physically available on a certain date, by way of surprise check. 12. Examine the Suspense Vouchers / lOU's and ensure that they are reversed within a reasonable time. 13. Conduct a Surprise Check of Petty Cash balance and compare the same with the Petty Cash Book. Travelling Commission Advertisement Demanded for all items of expenses incurred, except those which are capable of independent verification. As regards traveling expenses claimed by directors the auditor should satisfy himself that these were incurred by them in the interest of the business and that the directors were entitled to receive the amount from the business. The voucher for travelling expenses should normally contain the undermentioned information: (i) Name and designation of the person claiming the amount. (ii) Particulars of the journey. (iii) Amount of railway or air fare. (iv) Amount of boarding or lodging expenses or daily allowance along with the dates and times of arrival and departure from each station. (v) Other expenses claimed, e.g., porter age, tips, conveyance, etc. If the journey was undertaken by air, the counterfoil of the air ticket should be attached to the voucher; this should be inspected. For travel by rail or road, the amount of the fare claimed should be checked from some independent source. Particulars of boarding and lodging expenses and in the case of halting allowance the rates thereof should be verified. The evidence in regard to sundry expenses claimed is generally not attached to T.A. bills. So long as the amount appears to be reasonable it is usually not 99 CU IDOL SELF LEARNING MATERIAL (SLM)

questioned. All vouchers for travelling expenses should be authorised by some responsible official. In the case of foreign travel or any. 5.4VERIFICATION Spicer and Pegler have defined verification as, “it implies an inquiry into the value, ownership and title, existence and possession and the presence of any charge on the assets”. Verification is a method in which an auditor inspects the documentary documentation available to satisfy himself regarding the quality of the assets and liabilities appearing in the Balance Sheet. The term \"verification\" refers to proving or confirming the accuracy of the assets and liabilities listed on the Balance Sheet. Thus, verification includes verifying:- • The fact that the assets exist • Legal possession and control of the estate • Confirming that the asset is free of any debts, and • Accurate estimation According to the ‘statement of auditing practices’ issued by the ICAI, “the auditor’s object in regard to assets generally is to satisfy that: • They exist, • They belong to the client, • They are in the client's or his designated persons' hands, • They are free of encumbrances or liens that have not been disclosed. • They are properly reported in the balance sheet in compliance with sound accounting standards, and • They're recorded in the books. Objects of Verification • To demonstrate proper asset and liability valuation. 100 CU IDOL SELF LEARNING MATERIAL (SLM)