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net/forum/b-com-part-2-auditing-notes/
The work book or books mean books of accounts and keeping implies maintaining in proper form and order. Thus bookkeeping may be defined as the art of recording business transactions in books in aregularand systematic manner. It has been defined by different experts as:

1. 2. 3.

"The science and art of correctly recording in books of accounts all those business transactions that result in the transfer of money's worth." "The art and science of recording business transactions in such a systematic way as a trader may know the result of his trade at the end of a certain period and may also prove the accuracy of such record." "The science and art of correctly recording business dealings in a set of books with a view to having a permanent record of transactions and the financial result thereof."

It should be noted from the above definitions that bookkeepingprimarilydeals in the art of recording transactions in books.

Qualification of an Auditor * Appointment of an Auditor * Removal of an Auditor * Rights Or Power of an Auditor * Qualities of a Professional Auditor Read more: Auditor - Qualification, Appointment, Removal, Rights or Power, Qualities of a professional Auditor http://www.friendsmania.in/forum/showthread.php?t=28433#ixzz221Q9H4vq Qualification of an Auditor (Section 226 (1) and (2) Following persons are qualified to be appointed as auditor of a company. 1. Practicing Chartered Accounts (Sec 226 (1)J) A person shall not be qualified for appointment as auditor of a company unless he is a chartered meaning of the chartered accountant act 1949.

accountant within the

A chartered accountant means a person who is the member of the of Pakistan. He will be Deemed to be in practice. When individually or in partnership with other chartered accountants in practice he for consideration received or to be received. Practice of Accountancy He engages himself in the practice of accountancy. Verification He offers to perform or performs the services involving the auditing or

institute of chartered accountant

accounts or records or the preparation, verification or certification of financial and related statement or holds himself out to the public as an accountant. Professional Services He renders the professional services or assistance in or about matters of principal or detail relating to accounting to the recording, presentation or certification of financial facts or data. Renders the Services Renders the services as, in the opinion of the council are or may be renders by a chartered accountant in practice.

verifications of the financial transactions, books of accounting

procedure

2. Certified Auditor (Sec 226 (2)) A part from practicing chartered accountants, a person holding a certificate under the restricted auditor's certificate rules, 1965 is also qualified to be appointed as auditor of a company. Such certified auditors are subject to the rules framed in this behalf by the central Government. The object of the provisions as to qualified is to ensure that only persons of proven worth and standing and under the discipline of a statutory body, are appointed as auditor. Disqualification {Sec 226 (3)(4)(5)} The following person cannot become the auditor of the company according section 254.

A body corporate An officer or employee of the company A person who is the employment of an officer or employee of the company. A person who is indebted to the company for an amount exceeding Rs. 1000 or who has given any guarantee of any third person to the company for an amount exceeding Rs. 1000. The spouse of a director of the company. A person who was a director other officer or employee of the company at any time during the preceding three years. A person who is a partner of a director, officer or employee of a company

According to Section 226(4) a person shall not be qualified for appointment as auditor of any body corporate. Further if the auditor already holds the appointment as auditor in the specified number of companies as per Section {Section 224(1-13)}, he will be disqualified for further appointment as auditor in any other company. Read more: Auditor - Qualification, Appointment, Removal, Rights or Power, Qualities of a professional Auditor http://www.friendsmania.in/forum/showthread.php?t=28433#ixzz221QJzNfF

Appointment Section 252 throws light upon the appointment of an auditor: Appointment of First Auditor By Directors

First Auditor

The co-operative law authority can appoint the first auditor of a company if the company in the general meeting does not appoint the first auditor within 120 days of the date of incorporation of a company.

Casual Vacancy

The board of directors is empowered to fill any casual vacancy in the office of an auditor except one, which is caused by prior resignation. Appointment By Shareholders In case the board of directors fails to appoint the auditor, the company can appoint the first auditor within 120 days of the date incorporation of the company.
Read more: Auditor - Qualification, Appointment, Removal, Rights or Power, Qualities of a professional Auditor http://www.friendsmania.in/forum/showthread.php?t=28433#ixzz221QQRFjW

Removal of an Auditor According to Section 224(3)of the Companies Act, any auditor may be removed from the office before the expiry of his term but it can be done only by the company in it general meeting and with the previous approval of the control Government. The auditor may be removed in the following cases.

1. Removal of First Auditor The first auditor can be removed by the members in the general meeting of the company. It is immaterial whether the auditor has completed his term of appointment or not. Another person can be appointed in place of first auditor in the general meeting. Notice of nomination of such other person to be appointed, as auditor must be given at least 14 days prior to the general meeting. 2. Removal of Other Auditor Other than the member in the general meeting of the company prior approval of the central Government to remove can remove the first auditor the auditor must be obtained in that behalf.
Read more: Auditor - Qualification, Appointment, Removal, Rights or Power, Qualities of a professional Auditor http://www.friendsmania.in/forum/showthread.php?t=28433#ixzz221QVUkk2

Rights Or Power of an Auditor Following are the important rights of the auditor Access To Books According to Section 227(1) the auditor of a company has a right of access, at all items to the books and accounts and voucher of the company, whether kept at the head office of the right of access to books etc is an absolute right and is not subject to any restriction exception or qualification. This means that the auditor can examine the books vouchers etc at any time during normal working hours. Right of Inspection It is a right of the auditor that he can inspect the record of the company at any time. He can visit without any notice and verify the cash or any document. Right of Information According to Section 227(1) the auditor has the right to obtain any information and explanation from the officers or directors of the company as he may think necessary for the performance of his duties as an auditor. If any information or explanation is refused on the ground that it is not necessary for the performance of his duties as auditor. He may report to the members accordingly. Access to Branches According to Section 228(2) the auditor has aright to visit the branch office of the company if any, if a duly qualified auditor has not audited the accounts of company branch and if he deems it necessary to do so for the performance of his duties as auditor. Receiving Notices According to Section 231 a company auditor has a right to receive all notices and other communications relating to any general meeting of the company, which any member of the company is either to have sent to him. Right of Attending the Meeting According to Section 231 the auditor has a right to attend any general meeting and to be heard there at any part of the business, which concerns him as auditor, however, the right to attend a general meeting and to speak there at in not mandatory. Report to Member According to Section 227(2) the auditor has a right to make a report to the members on the account examined by him and

to

state whether the said account give the information required by the companies act in the manner which is required.
Sign Audit Report According to Section 229, the auditor has a right to sign the auditor's report or authenticate any other document of the company. Seek Legal and Technical Advice The auditor has a right to seek opinions of experts in different fields whenever he feels it necessary as he is not expert in all the areas. Receive Remuneration According to Section 224(8) the auditor has a right to receive remuneration for auditing the accounts of the company after he has completed the work of audit even if he is dismissed in the middle he has a right to get full remuneration of the year.

Speak The auditor has a right that he can speak in the annual general meeting for the explanation of some matters, which are related, with the accounts of business. Present in Meeting For the safeguard of his right the auditor has a right to remain present in the meetings of the company. Sometimes the business accounts may not be presented before the shareholders for the approval. In this time the auditor can protect himself. Opinion The auditor has also a right to consult the experts for some matters. In order to clear the doubt he may get the help of the technical services. So the auditor has also a right of seek the opinion. Correction The auditor has also a right of correction. He can make correction in the written or spoken matters. Even that he can make a revised statement if he founds any written mistake in it. Representation The auditor has also a right to defend himself if he is asked to leave the office in the meeting. So he can make the representation in meeting. He has a right to remain in business for the full tenure. Important Note It is clear that the right of an auditor cannot be limited either by the articles of association or by the resolution of the members Read more: Auditor - Qualification, Appointment, Removal, Rights or Power, Qualities of a professional Auditor http://www.friendsmania.in/forum/showthread.php?t=28433#ixzz221WbCuCP

Definition Audit programme is a list of work to be done by an auditor. The time period is started for completing the work. The duties are assigned to audit staff. The procedure that will help to verify each time of financial

statements. The duplication of work is financial

avoided and an pace of audit work. The auditor is able to have control over the audit staff and their work. The cost of audit remains in line with the audit fee. The auditor can handle audit of many concerns at the same time. Every aspect of

activities require audit program. The combination of all such programs is considered as master audit programme. The
auditor can make changes from time to time in order to meet the requirements of nature and size of business.

Kinds of Audit Programme 1. Standard Audit Programme This type of audit programme is preprinted and suitable for all purposes. It saves time and gives added assurance that no important procedure will be overlooked while in the opinion of some others, this type of audit programme is too much mechanical. Due to complexities in the business conditions possible to follow a standard audit programme.

system of accounting and internal controlsystem, it is not

2. Modified Standard Audit Programme These type of audit programme contain the usual audit procedures, common to most business and provide space for other specific procedures applicable to the business under

examination. This modification of the audit steps and the insertion of

the steps that are peculiar to the audit in questions, make the audit programme a modified standard audit programme.

3. Tailor-Made Audit Programme This is individually written programme prepared specially for each audit. It is known as tailor made because a tailor cuts the cloth according to the body of every person. The auditor should take care of such a programme so that no important steps is overlooked or missed. It lists the procedures to be followed on any specific engagement indication any departure from normal practices and specifying the extent of the test of transaction. Read more: Audit Programmes and Procedures http://www.friendsmania.in/forum/showthread.php?t=28431#ixzz221sITzPB Contents of Audit Programme

1. Name The audit programme contains the name of client. The auditor can write the name of business. There is a need of complete address of the concern in case of public limited company. 2. Objects The audit programme contains the objects of the business enterprise. There are various objects of any business unit. A small business has few objects while large companies have many objects. 3. Date The audit programme contains the date of start of an audit. The auditor can consult the client before fixing the audit date. It must be convenient to the management. The audit programme can show the details of audit work date wise. 4. Duration The audit programme contains the time limit of starting and completing the work. The duration of audit period may be one month. The size of audit work becomes the basis of duration. 5. Accounting System The audit programme contains the

information about accounting system. The auditor can examine

accounting system and procedure in operation. The understanding of accounting system helps to develop the audit

programme. 6. Internal Check The audit programme contains the effectiveness of internal check system. The effective internal check is helpful for auditors. He can apply test checking due to proper internal check system. If the system is not good it increases the duties of audit staff. 7. Old Reports The audit programme keeps the contents of old audit report. The auditor can pay attention to old reports. The weakness reported in previous reports must not be repeated in present accounting records. It is the duty of the audit staff to note the performance of management. 8. Checking Books The audit programme contains the details of checking accounting books. The number of books kept is stated in the programme. The books are distributed among audit clerks so that whole data may be examined. Read more: Audit Programmes and Procedures http://www.friendsmania.in/forum/showthread.php?t=28431#ixzz221sgT6rG Advantages of Audit Programme 1. Supervision of Work The editor can judge the efficiency of his audit team with the held of an audit program. He is in a position to know the progress of the work. He can see at any time that what part of the work has been completed and what remains to be done. 2. Division / Distribution of Audit Work The division of audit works is very useful for the audit staff for maintaining the difference of works among senior or junior clerks according to their ability and skill so that the work is divided to get better results. 3. Systematic and Uniformity of Work Audit program helps in setting all the things in advance. So the systematic and uniformity of work is necessary to achieved the desire. 4. Basic Instrument of Training Audit program is infact a training instruments for the audit staff and also very useful for the new auditors. It provides training and guidance to him. So, it is rightly called the basic instrument for training for the staff at the right time of need. 5. Fixation of Responsibility Audit programmes fixed the responsibilities of the staff. If any error or fraud remains undetected the responsibility of negligence will fall on that particular assistant who has performed that job and no one can blame on each other. 6. Several Audit May be Controlled The auditor controls the audit of various companies at the same time. In the absence of audit program he cannot supervise them effectively. 7. Easy Transfer The principle auditor can transfer to any other person easily. If one assistant is unable to continue the work given to him it can be given to another person. Audit program guides him that what is done and what is remaining. 8. Final Review Before signing the report, Final Review is made and for this purpose also auditing program is very useful and any deficiency or missing in steps can be identified and completed. 9. Useful For Future The audit programme is very useful in the future. On completion of an audit. It serves the purpose of audit record that may be useful for future reference. In case of auditor is appointed for the same concern in any future time the auditor can use the same audit programmes with some changes. 10. Progress of Audit Work Audit programme is useful to note the progress of work. Audit programme is a

timetable, which can show the work done on

any particular date. The pace of work is going on with the passage of time. The adjustment can be made if there is more work and less time and vice versa. In this way work can be completed in time. 11. Supervision of Audit Staff Audit programme is beneficial for auditor. He can supervise the activities of audit staff. He can use the audit programme as basic of supervision. Every part of audit work can be complete as per

schedule. He can control the activities of audit staff

through observation and direction when the audit work can be complete in time. 12. Audit Staff Needed Audit programme is helpful to determine the number of persons needed to do the work. The staff requirement is essential for every auditor. The shortage of staff means slow progress. The exact number of senior and junior audit clerk can be determined. In this way an auditor is able to handle the audit work properly. 13. Same Work The benefit of audit programme is that new instructions are not issued due to change in staff. The nature of work remains the same. The audit clerks can know their job just by reading the written programme. The time is saved due to written instructions. 14. Time Table The benefit of audit programme is that work is complete with in stated time period, the saving of time means saving of labour. The saving of time means saving can control the cost of audit due to fixed time. He can arrange audit work of other business concerns. 15. Responsibility for Poor Work The benefit of audit programme is that auditor can fix responsibility for negligence. Audit programme is a timetable of whole audit work to be done by auditors. Every staff member is given some sort of duty to do the audit work. The staff is responsible for completing of work. The performance is noted and responsibility if fixed poor work. 16. Guide To Audit Assistants The merit of audit programme is that it serves as a guide to audit assistants. The junior audit staff can start and complete the audit work with the help of audit programme. There is no need to repeat the instructions every time. Moreover it serves as a guide for future. The new audit programme can be developed can be developed on the basis of old work. 17. Dealing with New Clients The merit of audit programme is that it helps to deal with client. The spare time of audit staff can be used for doing with new clients. The whole year time can be divided. The auditor can audit the accounts if various concerns under audit programme. 18. Proof for Audit Work Done The merit of audit programme is that auditor can use it as proof for work done. In court of law the auditor can avoid liability for negligence. Audit programme is a permanent record of an audit process. The audit programme shows the work performed date-wise. In this way he cannot be held responsible for carelessness. Read more: Audit Programmes and Procedures http://www.friendsmania.in/forum/showthread.php?t=28431#ixzz221sokETN Disadvantages of Audit Programme 1. Not Comprehensive Auditors may have covered the whole fie but I cannot be said with certainty that all the necessary work has been done. 2. Rigidness Audit program looses its flexibility. While each business have a separate problems. So audit program cannot be laid down for each type of business. 3. No Initiative It kills the initiative of capable persons. The assistant cannot suggest any improvement in the plan. 4. Too Mechanical Such audit program is too mechanical that it ignores many other aspects like internal control. 5. Large Concerns / Not Suitable for Small Concerns Audit programme is helpful in large business concerns. It has been proved that audit program is not suitable for small business concerns. 6. New Problems Over Looked In the audit programme there is no chances to accept the changes with the passage of time new problems arise that may be over looked. 7. Changes The drawback of audit programme is that changes in it are not acceptable. The nature of activities of concern may change. There is a need to adjust the changes in the programme. A master programme cannot be drafted. 8. Revision The demerit of audit programme is that there is no revision in it. The business changes from year to year. The working may expand or contract. The audit programme requires adjusting itself to the changing circumstances. 9. Types The demerit of audit programme is that is not suitable for all types of business concerns. A small business may have few books of accounts. It is not necessary to prepare audit programming for small concerns.

10. Staff The accounting staff can know the working of audit. The auditor applies various methods for checking the accounting books. Having knowledge of auditing the accounting staff can devise means to record the transaction. In this way they can avoid their responsibility. 11. Negligence The demerit of audit programme is that it provides protection to inefficient audit assistant. The junior auditors can protect themselves due to weakness of audit programme. The clerks feel responsibility for the duties stated in the programme. 12. Errors The drawback of audit programme is that it may fail to located error. The errors of principles cannot be detected, as the double entry is complete in such case. No doubt the location of errors and fraud is the responsibility of management. But owner depends upon auditors to protect their rights. Read more: Audit Programmes and Procedures http://www.friendsmania.in/forum/showthread.php?t=28431#ixzz221syADDU

EVOLUTION OF AUDITING In the early days of commerce and business there was no existence of the concept of auditing. This was, may be due to the small nature of business and day to day personal control of the proprietor. Audit can be traced back in the period 3600-3200 B.C. Initially, the audit was mainly done that of public accounts only. From historical records it appears that the ancient Egyptians, Greeks and Romans were used to the government accounts audit. The accounts of the corporation of the city of London were audited in 12th Century. Later in Shakespeares Timon of Athens the steward Flavins makes the remark If you suspect my husbandry or falsehood, call me before the exactest auditor, and set me on the proof which indicates the existence of an audit in the 14th century also. In 1314, auditors were officially appointed to check the public accounts in England. In 1494, Luca Pacioli, a French celebrated mathematician, brought the concept of Double Entry book-keeping and auditing in practice. Gradually and especially after the Industrial Revolution in the 18th century, the nature, type and size of business organizations

changed. The large scale business came into existence causing dilution in the regular and direct control of the proprietor. This made it necessary to get the transactions made by the staff and representatives of owners, checked and verified by an independent person and this has given rise to concept of auditing.In 1866, the Englands Exchequer and Audit Department was created by Act of Parliament. In 1870, The Institute of Accountants in the form of a society was formed in England. It got a Royal Charter in 1880 and was turned into The Institute of Chartered Accountants in England and Wales, but before that in 1854, with a Royal Charter, The Institute of Accountants and Actuaries in Glasgow. In India, the auditing can be traced long back in Ramayana, Mahabharata and even in the Vedas. Lord Ram asked Bharat about whether his income was more than his expenditure and vice versa. Likewise, King Yudhisthira ordered Nakula to look after the armys accounts. The system of land revenue, currency, trade and control etc. can be traced in Vedas and even in Manu Smruti. This indicates that the roots of auditing in India were rooted long back in Satya-Yuga. The sophisticated system of accounting and auditing can be found in the reign of Mauryas, Guptas and Moughals too. This first legislation relating to companies in India that is the Joint Stock Companies Act, 1857 introduced the provisions of annual audit but was made optional. Latter, The Companies Act, 1913, made it compulsory. This Act was replaced in 1956 by the Indian Companies Act, 1956, the act and the subsequent amendments not only made the audit compulsory but sought to ensure that only the independent professionals with requisites qualifications are appointed as statutory auditors of Companies. In 1965, the amendment in the Act took place and concept of Cost Audit was introduced, while the amendment in the Income Tax Act, 1961, took place in 1984 introduced the concept.

Book-Keeping
Book-keeping is that branch of knowledge which tells us how to keep a record of business transactions. It is often routine and clerical in nature. It is important to note that only those transactions related to business which can be expressed in terms of money are recorded. The activities of book-keeping include recording in the journal, posting to the ledger and balancing of accounts.It has been defined by different experts as:

1. 2. 3.

"The science and art of correctly recording in books of accounts all those business transactions that result in the transfer of money's worth." "The art and science of recording business transactions in such a systematic way as a trader may know the result of his trade at the end of a certain period and may also prove the accuracy of such record." "The science and art of correctly recording business dealings in a set of books with a view to having a permanent record of transactions and the financial result thereof."

It should be noted from the above definitions that book keeping primarily deals in the art of recording transactions in books.

R.N. Carter says, Book-keeping is the science and art of correctly recording in the books of account all those business transactions that result in the transfer of money or moneys worth.
Objectives

The objectives of book-keeping are i. to have permanent record of all the business transactions. ii. to keep records of income and expenses in such a way that the net profit or net loss may be calculated.

iii. to keep records of assets and liabilities in such a way that the financial position of the business may be ascertained. iv. to keep control on expenses with a view to minimise the same in order to maximise profit. v. to know the names of the customers and the amount due from them. vi. to know the names of suppliers and the amount due to them. vii. to have important information for legal and tax purposes.

LIMITATIONS OF AUDITING At this stage, it must be clear that the objective of an audit offinancial statements is to enable an auditor to express an opinionon such financial statements. In fact, it is the auditors opinion whichhelps determination of the true and fair view of the financial positionand operating results of an enterprise. It is very significant to notethat the AAS-2 makes it a subtle point that such an opinionexpresses by the auditor is neither an assurance as to the futureviability of the enterprise nor the efficiency or effectiveness withwhich management has conducted affairs of the enterprise. Further,the process of auditing is such that it suffers from certain inherent limitations, i.e., the limitation which cannot be overcome irrespective of the nature and extent of an audit procedure. It is very important to understand these inherent limitations of an audit since understanding of the same would only provide clarity as to the overall objectives of an audit. The inherent limitations are: I. First of all, auditors work involve exercise of judgment, for example, in deciding the extent of audit procedures and in assessing the reasonableness of the judgment and estimates made by the management in preparing the financial statements. Further much of the evidence available to the auditor can enable him to draw only reasonable conclusions there from. The audit evidence obtained by an auditor is generally persuasive in nature rather than conclusive in nature. Because of these factors, the auditor can only express an opinion. Therefore, absolute certainty in auditing is rarely attainable. There is also likelihood that some material misstatements of the financial information resulting from fraud or error, if either exists, may not be detected. II. The entire audit process is generally dependent upon the existence of an effective system of internal control. Further, itis clearly evident that there always be some risk of an internal control system failing to operate as designed. No doubt, internal control system also suffers from certain inherent limitations. Any system of internal control may be ineffective against fraud involving collusion among employees or fraud committed by management. Certain levels of management may be in a position to over ride controls; for example, by directing subordinates to records transactions incorrectly or to conceal them, or by suppressing information relating to transactions. Such inherent limitations of internal controls system also contribute to inherent limitations of an audit.
Generally following are the Limitations of auditing 1. Non-detection of errors/frauds: - Auditor may not be able to detect certain frauds which are committed with malafide intentions. 2. Dependence on explanation by others: - Auditor has to depend on the explanation and information given by the responsible officers of the company. Audit report is affected adversely if the explanation and information prove to be false. 3. Dependence on opinions of others: - Auditor has to rely on the views or opinions given by different experts viz Lawyers, Solicitors, Engineers, Architects etc. he cannot be an expert in all the fields 4. Conflict with others: - Auditor may have differences of opinion with the accountants, management, engineers etc. In such a case personal judgement plays an important role. It differs from person to person.

5. Effect of inflation: - Financial statements may not disclose true picture even after audit due to inflationary trends. 6. Corrupt practices to influence the auditors: - The management may use corrupt practices to influence the auditors and get a favourable report about the state of affairs of the organisation. 7. No assurance :- Auditor cannot give any assurance about future profitability and prospects of the company. 8. Inherent limitations of the financial statements :- Financial statements do not reflect current values of the assets and liabilities. Many items are based on personal judgement of the owners. Certain non-monetary facts cannot be measured. Audited statements due to these limitations cannot exhibit true position. 9. Detailed checking not possible :- Auditor cannot check each and every transaction. He may be required to do test checking.