Month: July 2021

Audit tick marks are abbreviated notations used on audit work papers to denote auditing actions taken. These tick marks are useful from the audit manager’s perspective, to see which activities have been completed. They are also useful as evidence, to show which audit steps were completed to support the audit opinion for the financial statements of a client. In addition, the use of tick marks compresses the space required to describe audit actions taken, which improves the usability of the audit documentation. Examples of auditing activities for which tick marks may be used include:

• The totals in the report were manually added and matched to the grand total shown (cross footed).
• The numbers in the column were manually added and matched to the total shown (footed).
• The computation on the report was independently verified.
• Supporting documents were examined.
• A cancelled check was examined.
• The amount was traced to the ledger balance.
• An asset was physically confirmed.

Audit tick marks are not standardized across the industry. Instead, a common set of tick marks is used within each audit firm, with some variation across the industry. Tick marks may just as easily be used within an internal audit department as by outside auditors, and may be unique to each department.

When used, a tick mark should be sufficiently distinct that it cannot be confused with another type of tick mark. Also, an audit firm should internally publish a listing of “official” tick marks used and what each one means, so that they are used by the staff in a consistent manner across all audits.

Customized tick marks were more heavily used when auditing was done primarily on paper documents. When used in that manner, tick marks are more likely to be recorded with a colored pencil, such as in red. Since the advent of auditing software, tick marks can be designated and standardized within the software.

Engagement letter is a sent by an auditor to his client, after the receipt of communication regarding his appointment, but preferably before the commencement of engagement, spewing out the extent of his responsibilities in order to avoid any misunderstanding with respect to his engagement and documents and confirming the acceptance of appointment, the objectives and scope of audit, the extent of responsibilities and the form of reports to be made to the client.

It is in the interest of both client and auditor that the auditor sends an engagement letter, preferably before the commencement of the engagement, to help in avoiding misunderstandings with respect to the engagement. The engagement letter documents and confirms the auditor’s acceptance of the appointment, the objective and scope of the audit, the extent of the auditor’s responsibilities to the client and the form of any reports.

Contents

• The objective of the audit of financial statements;
• Management’s responsibility for the financial statements;
• The scope of the audit, including reference to applicable legislation, regulations, or pronouncements of professional bodies to which the auditor adheres;
• The form of any reports or other communication of results of the engagement;
• The fact that because of the test nature and other inherent limitations of an audit, together with the inherent limitations of internal control, there is an unavoidable risk that even some material misstatement may remain undiscovered;
• Unrestricted access to whatever records, documentation and other information requested in connection with the audit; and
• Management’s responsibility for establishing and maintaining effective internal control.

The auditor may also wish to include the following in the letter:

• Arrangements regarding the planning and performance of the audit.
• Expectation of receiving from management written confirmation concerning representations made in connection with the audit.
• Request for the client to confirm the terms of the engagement by acknowledging receipt of the engagement letter.
• Description of any other letters or reports the auditor expects to issue to the client.
• Basis on which fees are computed and any billing arrangements.

Qualification

According to Provisions of Section 141(1) of the Companies Act, 2013 “a person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant within the meaning of Chartered Accountants Act, 1949 and holds a valid Certificate of Practice.

It has been further provided that the firm shall also considered to appointed by its firm name whereof majority of partners practising in India are qualified for appointment as auditor of a company.

According to Provisions of Section 141(2) of the Companies Act, 2013, a firm including limited liability partnership who are chartered accountants shall be authorised to act as auditor and sign on behalf of the such limited liability partnership or firm.

A person holding a certificate issued by central govt. under restricted state auditors’ rules prior to the enactment of part B state laws 1951 can also be auditor of the co.

The central government in empowered to frame rules relating to granting renewals, suspension or cancellation of such certificates.

Disqualification of Auditor

According to Provisions of Section 141(3) of the Companies Act, 2013 , following persons shall not be eligible as auditor of the company:

a) A body corporate other than LLP registered under the LLP Act, 2008

b) An officer or employee of the company. 

c) A person who is partner or who in the employment, of an officer or employee of the company.

d) A person who or his relative or partner

(i) Is holding any security/interest in the company or its subsidiary or of its holding or associate company or subsidiary of such holding company. It has been further provided that an relative may hold security or interest in the company of face value not exceeding one lac rupees.

 (ii) Is indebted to the company or its subsidiary, or its holding or associate company or subsidiary of such holding company, in excess of Rs. 5 lacs rupees

 (iii) Has given guarantee or provide any security in connection with the indebtness of any third person to the company or its subsidiary, or its holding or associate company or a subsidiary of such holding company for value in excess of Rs. 1 lacs.

e) A person or a firm who (whether directly or indirectly) has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company.

Here the business relationship shall be construed as any transactions enter into for a commercial purpose except:

• Commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm by the professional bodies regulated such members.
• Commercial transactions which are in ordinary course of business of the company at arm’s length price as customer.

f) A person who’s relative is a director or is in the employment of the company as director or key managerial personnel.

g) A person

• Who is in full time employment elsewhere.
• A person or a partner holding appointment as its auditor is at the date of such appointment or reappointment holding appointment as auditor for more than 20 companies.

h) A person who has been convicted by a court of an offence involving fraud and a period often years has not elapsed fromthe date ofsuch conviction.

i) Any person whose subsidiary or associate company or any other form of entity is engaged as on the date of appointment in consulting or specialised services in reference to provision of Section 144 of the Companies Act, 2013.

Further According to Provisions of Section 141(4) of the Companies Act, 2013, where a person appointed as auditor of the company incurs any of the disqualification mentioned in Section 141(3) of the Companies Act, 2013 after his appointment, he shall vacate his office as such auditor and such vacancy shall be deemed to be casual vacancy in the officer of the auditor.

It must be noted that the aforesaid provisions are applicable to all types of auditors i.e. cost auditors, statutory auditors and secretarial auditors.

The remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as may be determined therein:

• Provided that the Board may fix remuneration of the first auditor appointed by it.
• The remuneration under sub-section (1) shall, in addition to the fee payable to an auditor, include the expenses, if any, incurred by the auditor in connection with the audit of the company and any facility extended to him but does not include any remuneration paid to him for any other service rendered by him at the request of the company.

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

• As an Auditor
• As an Advisor in the matters of taxation, management and company law
• Another amount as specified.
• Any sum paid by the company to meet the expenses of the auditors will be included in the word ‘remuneration’.
• When an auditor is appointed by the Board of Directors, (First auditors and Casual vacancy), the remuneration is fixed by the board of directors.
• If a retiring auditor is reappointed, his remuneration continues to became unless it is decided otherwise in the general meeting.
• Shareholders also fix the remuneration of an auditor in the following two circumstances.
• When the auditor is appointed in the annual general meeting.
• When the auditor is appointed by Comptroller and Auditor General.
• When an auditor is appointed by the Central Government, the Central government fixes the remuneration.
• In addition to remuneration for audit, an auditor may receive separate remuneration for rendering consultancy services and for attending to cases pertaining to Income-tax. Such fees do not require the approval of the general meeting. To prevent undue influence and dependence on an audit client, Companies (Amendment) Act 2003, prescribes a limit for the remuneration of auditor.

Removal

1. Special notice: The shareholder who intends to remove the auditor, shall give 14 days’ notice (Special notice) to the company, informing his intention to remove the auditor by passing a resolution in the general meeting.
2. Communication to the retiring auditor: The company on receipt of such notice, should send a copy to the retiring auditor.

3. Representation by retiring auditor: The retiring auditor can make a written representation, not exceeding a reasonable length, to the company, regarding his proposed removal. He may also request the company to circulate his representation to the members. The company should send a copy of the representation of the auditor to the shareholders, either along with the notice to meeting or subsequently. The company is required to send the representation to the shareholders only if the representation is made by the auditor within a reasonable time.

4. Representation to be read: If the representation is not circulated to the shareholders, the auditor may require that his representation be read out in the general meeting.
5. Right to attend the meeting: The auditor who is proposed to be removed has an inherent right to attend the general meeting. He can also make an oral statement at the meeting as to his proposed removal.
6. Not to abuse the right: The above privileges are extended to the auditor to protect his independence and to prevent his unjust removal. However, if the Company Law Board is satisfied that his right to make a representation is likely to be abused by him by way of seeking unwarranted publicity for a defamatory matter, the CLB may order that the representation may not be read out or circulated to the shareholders. In this regard, the company or any other aggrieved party may apply to Company Law Board seeking the direction of the Company Law Board.

Removal of Auditor after expiry of term

After the expiry of the term of office, an auditor, is usually automatically reappointed. However, if the company decides not to re-appoint the existing auditor, the following procedure has to be followed.

Removal of other Statutory auditors

The auditors can be removed, before the expiry of their term, by the company in a general meeting only with the prior approval of the Central Government. This provision prevents unjust removal of auditors.

Removal of first auditors

We know that the first auditors are appointed by the Board of Directors. To remove the first auditors, an ordinary resolution is to be passed at the shareholders meeting. If another person is proposed to be appointed in his place, at least 14 days notice is required.

Auditor Rights

An auditor is a party that examines a client’s financial statements with the objective of presenting their opinion. Auditors are financial professionals qualified to conduct an entity’s audit. Usually, they are a member or associate of an accounting body. Auditors evaluate the validity of an entity’s financial statements and the information provided within them.

Right to have Legal and Technical Advice:

He has a right to seek the opinion of the experts and, thus, take legal and technical advice. This is necessary to give his opinion in his report. He has a right to receive his remuneration provided he has completed the work which he undertook to do.

Right to receive Notice and other Communications relating to General Meeting and attend them:

Under section 231 an auditor of a company has a right to receive notices and other communications relating to General Meeting in the same way as a member of the company. He is also entitled to attend any General Meeting which he attends or any part of the business which concerns him as an auditor.

According to the power of the auditor, he may make any statement or explanation with regard to the accounts as he may desire. He need not, however, answer any questions.

Ordinarily, it is not necessary for the auditor to attend every General Meeting, but it will be good for him to attend meetings in the following circumstances:

(a) When his report contains important qualifications directly affecting the management, so that his remarks may not be misunderstood or misinterpreted.

(b) When he has received a notice from the company that someone else is going to be proposed for appointment as auditor of the company at the Annual General Meeting.

(c) When he has been specially asked by the management to be present.

Right to visit Branches:

According to section 228, if a company has a branch office, the accounts of the office shall be audited by the company’s auditor appointed under section 224 or by a person qualified for appointment as auditor of the company under section 226.

Where the Branch Accounts are not audited by a duly qualified auditor, the auditor has a right of access at all time to the books, accounts and vouchers of the company and thus, may visit the branch, if he deems it necessary.

Right to obtain Information and Explanations:

He has a right to obtain from the Directors and officers of the company any information and explanation as he thinks necessary for the performance of his duties as an auditor.

This is another important power in the hands of the auditor. He will, however, decide as to which information or explanations he thinks necessary to obtain. It the Directors or officers of the company refuse to supply some information on the ground that in their opinion it is not necessary to furnish it, he has a right to mention the fact in his report.

Right of being indemnified:

Under section 633, an auditor (being an officer of a company), has a right to be indemnified out of the assets of the company against any liability incurred by him defending himself against any civil and criminal proceedings by the company if it is proved that the auditor has acted honestly or the judgement delivered is in his favour.

Right to Signature on Audit Report:

Under section 229, only the person appointed as auditor of the company, or where a firm is so appointed, only a partner in the firm practicing in India, may sign the auditor’s report, or sign or authenticate any other document of the company required by law to be signed or authenticated by the auditor.

Right to Correct any Wrong Statement:

The auditor is required to make a report to the members of the company on the accounts examined by him and on every Balance Sheet and Profit and Loss Account and on every other document declared by this Act to be part of or annexed to the Balance Sheet or Profit and Loss Account which are laid before the company in General Meeting during his tenure of office. The Directors have a duty to prepare them and present them to the auditor.

The auditor cannot require but advise the Directors to amend their system of maintaining accounts if it is faulty. If his suggestions are not carried out, he has a right to refer the matter to the members. If the method of accounting is inadequate, he must state the fact in his report that proper books of accounts have not been kept by the company.

Right of Access to Books of Accounts:

Every auditor of a Company has a right of access at all times to the books of accounts and vouchers of the company whether kept at the head office of the company or elsewhere.

Thus, the auditor may consult all the books, vouchers and documents whenever he so likes. This is his statutory right. He may pay a surprise visit without informing the Directors in advance but in practice, the auditors inform the Directors before they pay their visits.

Duties

Duties towards Government:

• Assist the Investigation u/s 237: It is duty of auditor to assist the investigation ordered by the CG u/s 237.
• CARO-2003: The auditor has to report para-wise that the company has fulfilled all the requirements of CARO-2003.

Duties towards Company:

• Statutory Report: Section 165 requires that the auditor has to certify the statutory report.
• Prospectus: According to Sec 56, the auditor is required to certify profits or losses, assets & Liabilities and dividend paid etc in the prospectus.
• Public Deposits: Section 58AA requires the auditor to report about whether the company has followed all rules and guideline of RBI in regard to public deposits or not.
• Insolvency (Section 488): If the company wants itself to be declared insolvent, it is duty of auditor to prepare profit and loss a/c for the current period.
• Signature on Audit Report: Section 229: It is duty of auditor to sign on his report.

Duties towards General Public:

• He should reveal all material information regarding the state of affairs of the company to the company as well as to the general public.
• His office is of confidence and faith. He must be reliable in all respects.
• While issuing prospectus u/s 56, he should see that the prospectus does not include any misleading information or material.

Duties towards the shareholders:

• State that balance sheet and profit and loss a/c give all information required by law.
• Report shareholders about true and fair state of affairs of the company.
• State that balance sheet and profit and loss a/c agree with the books of account.
• State that he has obtained all the necessary information.
• State that balance sheet and profit and loss a/c agree with accounting standards.
• State whether the company has maintained all books as required by law
• State the reasons of qualification in his report.
• State that he has received the audit report on the branch accounts audited by other auditor and how he has dealt with the same in preparing his report
• Auditor shall state in his report whether:

a) The loans taken are properly secured and the terms of loans are not against the interests of the company.

b) Loans given are shown as fixed deposits and the terms of loans are not against the interests of the company.

• Transactions recorded as book entry are not against the interests of the company
• Personal expenses of directors have not been charged to revenue a/c of company;
• The company fulfills the requirements of CARO 2003.

Civil Liabilities

Liability For Negligence of Assistants

An auditor is entitled to rely on the work performed by the assistants. But he should ensure that his assistants are not negligent and the audit is conducted with due care and skill. However, he will continue to be responsible for forming and expressing his opinion on the financial information.

Liability for Unaudited Statements

A chartered accountant may accept assignments other than his audit work. For example, a chartered accountant may accept to write the books of accounts and prepare the financial statements for a client. He may not have actually audited the client’s accounts.

However, since he has associated himself in the preparation of financial statements, there is every possibility of a third party to presume that he is the auditor of the company to which he had prepared financial statements and that the books of accounts were duly audited.

Liability under Consumer Protection Act

The following points should be borne in mind:

• The auditor gives his opinion or advice on payment of fees. Therefore, they come under the purview of Consumer Protection Act.
• If any chartered accountant gives opinion or advice contrary to the provisions of law or any opinion not supported by any judicial decisions, he may be called upon to compensate by paying damages for the loss suffered as a result of his opinion or advice.

Liability Under Companies Act

Under Section 477, the court may summon and examine the auditor (or any officer of the company) and order him to produce books or documents of the company that are kept under his custody. This power is enforceable only after the appointment of liquidator or passing of winding up order of the company.

When a company is wound up by the order of the court and if the Official Liquidator is of the opinion that a fraud has been committed and has made a report thereon, the court may examine the auditor (or any officer of the company) in public on an appointed day.

Misfeasance

Misfeasance implies breach of duty or negligence in the performance of duties.

The liability for misfeasance arises only if any loss is suffered due to negligence or breach of duty. If no loss is suffered due to misfeasance, liability does not arise. Action for misfeasance can be initiated within 5 years:

• From the date of order of winding up.
• From the first appointment of the liquidator or
• Of the cause of action having arisen, whichever is longer.

Liability for Negligence

An auditor is expected to perform his duties with reasonable care and skill. Of course, no person can promise to always use highest degree of skill and display extraordinary knowledge while discharging their duties.

An auditor is liable to the following persons for negligence while discharging his duties.

• To Third parties, if the auditor knows or had reasonable opportunity to know that he (the third party) is relying on the skill and judgement of the auditor.
• To his client, with whom he has contractual relationship.
• In case of Fraud, the auditor is liable to all persons

Criminal Liabilities of Auditors

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

Penalty for deliberate act of commission or omission section 448:

If any officer including auditor of the company deliberately make a statement in any return, report, certificate, balance sheet, prospectus etc. which false or which contains omission of material facts he shall be punishable with imprisonment for a  term not less than 6 months extendable to 10 years and fine not less than amount involved in fraud extendable to 3 times of such amount.

Penalty for falsification of books section 336: Any officer including auditor of a company which is being wound up, with an intention to defraud or deceive any person, destroys, mutilates, alters, falsifies any books, papers or securities. He shall be punishable with imprisonment for a term not less than 3 years extendable to 5 years and with fine not less than 1 lakh extendable to three lakhs.

Failure to assist in the investigation section 217 (6):

Where the central Government appoints an inspector to investigate the affairs of the company, it is the duty of the auditor to preserve and produce to the inspector all books and papers relating to the company. If an auditor fails to assist the inspector in investigation, he shall be punishable with imprisonment up to 1 year and with fine not less than twenty-five thousand extendable to 1 lakh.

Noncompliance by auditor with section 143 and 145:

If the auditor does not comply with section 143 and 145 regarding making his report or signing or authentication of any document and makes willful neglect on his part, he shall be punishable with imprisonment up to 1 year and with fine not less than twenty thousand extendable to five lakhs. In case an auditor knowingly or willfully with the intension to deceive the company or Shareholders or creditors or tax authorities, he shall be punishable with imprisonment up to 1 year and fine not less than 1 lakh extendable up to twenty-five lakhs.

Mis-statement in prospectus section 34:

Where an auditor makes false statement with material particulars in returns, reports, prospectus or other statements knowingly it to be false or omits any material facts knowing them to be false, he shall be punishable with imprisonment for a minimum term of 6 months extendable to 10 years

There are two terms ‘Procedure and techniques’, which are often used interchangeably, in fact, however a distinction does exist. “Procedure may comprise a number of techniques and represents the broad frame of the manner of handling the audit work. Techniques stands for the methods employed for carrying out the procedure.” For example procedure Known as vouching which would involve techniques of inspection and checking computation of documentary evidence.

Audit Procedures:

As per AAS-1 on basic principles governing an audit states, the auditor should obtain sufficient appropriate audit evidence through the performance of compliance and substantive procedure to enable him to draw reasonable conclusions there from on which to base his opinion on the financial information. Therefore, audit procedure is broadly classified in two categories compliance; procedure and substantive procedure.

1) Compliance procedure are tests designed to obtain reasonable assurance that those internal controls on which audit reliance is to be placed are in effect. In obtaining audit evidence from compliance. Procedures, the auditor is concerned with assertions that the control exists, the control is operating effectively and the control has so operated through the period of intended reliance. So the auditor is concerned with the existence effective and continuity of the control system.

2) Substantive procedure are tests designed to obtain evidence as to the competences, accuracy and validity of the data produced by accounting system. They are of two types:

a) Tests of details of transactions and balances.

b) Analysis of significant ratios and trends including the resulting investigation of unusual fluctuations and items.

Audit Techniques:

Audit techniques on the other hand refers to collection and accumulation of audit evidence some of the techniques commonly adopted by the auditors are the following:

• Posting checking
• Casting checking
• Physical examination and count
• Confirmation
• Inquiry
• Year-end scrutiny
• Re-computation
• Tracing in subsequent period bank reconciliation.

Special Audit Techniques:

In an absence of audit trail, the auditor needs the assurance that the programmes are functioning correctly in respect of specific items by using special audit techniques. The absence of input documents or the lack of visible audit trail may require the use of computer assisted audit techniques (CAATs) i.e. using the computers an audit tool. The auditor can use the computer to test.

• The logic and controls existing within the system.
• The records produced by the system.

Depending upon the complexity of the application system being audited, the approach may be fairly simple or require extensive technical competence on the part of the auditor. The effectiveness and efficiency of auditing. Procedure may be enhanced through the use of CAATs. Properly two common types of CAATs are in vogue, viz, test pack or test data and audit software or computer audit programmes.

EDP means (Electronic Data Processing) for the audit or a computer-based systems. For audit process of enterprise.

General EDP Controls: The purpose of general EDP controls is to establish a framework of overall control over the EDP activities and to provide a reasonable level of assurance that the overall objectives of internal control are achieved.

Organization and management control are designed to establish an organizational framework over EDP activities, including:

• Policies and procedures relating to control functional.
• Appropriate segregation of incompatible functions.

Application systems development and maintenance controls are designed to establish control over:

• Testing, conversion, implementation and documentation of new or revised system.
• Changes to application systems.
• Access to system documentation
• Acquisition of application systems from third parties

Computer operation controls are designed to control the operation of the systems and to provide reasonable assurance that:

• The systems are used for authorized purposes only
• Access to computer operations is restricted to authorized personnel.
• Only authorized programs are used.
• Processing errors are detected and corrected.

Systems Software Controls include:

• Authorization, approval, testing, implementation and documentation of new systems software and systems software modifications.
• Restrictions of access to systems software and documentation to authorize.

Data entry and program controls are designed to provide reasonable assurance that:

• An authorization structure is established over transactions being entered into the system.
• Access to data and programmes is restricted to authorized personal.
• Offsite back-up of data and computer programmes.
• Recovery procedures for use in the event of theft, loss or international or accidental destruction.
• Provision for offsite forecasting in the event of disaster.

Vouching of cash receipts (debit side of cash book)

(i) Opening Balance of Cash Book

Opening balance of cash book represents cash in hand at the start of the year and should verified from the balance sheet of last financial year.

(ii) Cash Received from Debtors

Consider the following points for verification of cash received from debtors:

• The carbon copies or counterfoils of cash receipt book should be verified.
• Cash receipt should be serially numbered.
• Cash received should be entered on the same date when the cash is actually received.
• The discount allowed to customers should be properly authorized by a responsible officer.
• Correspondence with customer and ledger account should be tallied.

Following are the different ways used for misappropriation of cash:

• Cash received from customer not recorded in books and no cash receipt may be issued.
• Issuance of receipt for lesser amounts than amount actually received.
• Using teeming and lading method; it is a very common method to misappropriate the money, in which the cash received from any customer not recorded in the books and the cash received from same customer at a later instance or another customer recorded in the books and so on.

(iii) Repayment of Loan by Others

Repayment of loan by others may be verified in the following ways:

• Calculation of interest received and interest should be credited to interest received account.
• Verification from bank statement if directly deposited by party into bank.
• Checking of carbon copies or counterfoils of cash receipts.
• To ensure that there should be no violation of Income Tax rules as payment of loan exceeding Rs. 20,000/- cannot be repaid in cash. It should be through Cheques, Demand Draft, NEFT, RTGS or any other available banking channels.

(iv) Rent Received

• To check rental agreement or lease deed
• In case where the rental income is received from more than one property, separate account for each property should be maintained.
• The Auditor should verify that the rent for all the twelve month is received or not.
• The amount of rent should be verified from the rent deed or the lease deed.
• If TDS (Tax Deducted at Source) is deducted by the party, there should be proper accounting of TDS.

(v) Sale of Investments

• To check bank statement if the sales proceeds have reached the bank account.
• To verify broker commission, note or debit note, if investments are sold through broker.
• To ensure separate accounting is being done for capital receipts and revenue receipts. Dividend or profit or loss on sale of investment is a revenue receipt and the sales proceeds of the investment cost should be booked as capital receipt.

(vi) Subscription

Subscriptions are received from the members of a club and the following points need to be considered by the Auditor while vouching subscription:

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

(vii) Sale of Fixed Assets

• To check minutes of the meetings of the Board of Directors.
• Sale agreement or sale contract.
• Verification of agent account if sale is made through an agent.
• Profit or Loss on sale of fixed assets should be booked to revenue account.
• Authorization of sale of fixed assets.
• Sale proceed of fixed assets should be credited to fixed assets account after deducting expenses on sale of fixed assets if any.

(viii) Interest and Dividend Received

• Verification of the dividend warrant letter along with the covering letter for verification of dividends in case of dividends received through cheque.
• Verification of bank statement, if the dividend is directly credited to the bank account
• Interest on security can be vouched from the securities schedule.
• Interest on fixed deposit can be verified from bank statement and TDS certificates
• Interest received from outsiders to whom company has granted loan could be verified from statement of account of party along with TDS certificates.
• Provision should be made for interest accrued but not due
• All interest received and accrued should be properly accounted for in the books of accounts

(ix) Commission Received

• Verification of agreement on the basis of which the commission is received
• Calculation of the commission receivable
• The commission received should be verified from counterfoils, bank statements, cash receipts, etc. and the provision for commission receivable should be rightly accounted for in the books of accounts
• Commission receivable on “sale of goods sent on consignment” should be verified from sale account

(x) Installments Received on Hire-Purchase Sale

• Study of the Hire-Purchase agreement for hire-purchase-sale price, number of installment, rate of interest etc.
• Segregation of principle amount and interest amount should be done and both should separately account for
• Profit on sale on hire-purchase should be duly calculated on the basis of installment received during the year

Vouching of cash payments (credit side of cash book)

All the payment made to creditors, expenses incurred in cash and all other payments done appear on the credit side of cash book and the Auditor is required to vouch cash payments because chances of cash misappropriation are very high.

Following points need to be considered for different types of cash payment:

(i) Opening Balance

The opening balance of cash book can never be credited because cash of company cannot be in negative but the credit bank balance represents the overdraft account from bank or utilization of cash credit limit as sanctioned from bank.

(ii) Payment to Creditors

Payment to creditors may be examined by the following:

• Receipt issued by the creditors
• If the creditor is paid amount as full and final settlement, the balance amount, if any stands in the ledger account of the creditor; this amount should be credited to discount received
• If any advance payment is made to creditor that should be clearly mention
• Statement of account of creditor

(iii) Payment of Salaries

Depending upon the adequacy of internal control system in an organization Auditor will decide his audit Program. It is very important for Auditor to check the following:

• Attendance record of employee and salary register
• Appointment letter of new employees
• Comparison of current month salary with last month’s salary and if there is any abnormal change in amount, Auditor should verify the same
• Alteration in amount of deductions on account of advance, loan, fine, funds, insurance, TDS, etc.

(iv) Payment of Wages

At the time of vouching of wages paid, the Auditor should verify the following points to avoid misappropriation of cash:

• Adequacy of Internal Control System
• Payment of wages at higher rate than allowed
• Payment shown to ex-workers in the current month
• Lower or non-deduction of advance or other deductions due
• Payment to fictitious workers
• Payment to workers who were absent from duty
• Wages sheet should compare with wages register
• Comparison of current month wages with last month’s wages and proper verification should be there for extra ordinary changes
• Detailed verification for payment to casual workers
• Vouching and verification of treatment accounting treatment for unpaid wages

(v) Purchase of Plant and Machinery

The Auditor should pay attention to the following:

• Purchase invoice of machinery
• Freight inward charges, installation charges, erection and commissioning charges should be capitalized
• Treatment of Excise duty according to the excise rules

(vi) Purchase of Land & Building

Purchase of Land and Building can be vouched as follows:

• Study of Lease hold agreement, if land is purchased on lease hold basis
• Payment should be as per lease term
• All the expenses incurred to acquire lease hold property should be debited to respective property account
• Auditor should study the conveyance deeds in case property is purchased under free hold basis
• For verification of payment, the Auditor can check the payment receipt and the conveyance deed

(vii) Rent Paid                   

Consider the following points for the verification of rent by the auditor:

• Rent Deed
• Rent receipt from Land lord
• Provision for unpaid rent at the end of the year

(viii) Insurance Premium

Consider the following points for the verification of Insurance Premium:

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

(ix) Income Tax

Consider the following for the verification of Income:

• Advance Tax Challan
• Self-Assessment Tax challan
• Income Tax demand notice
• Assessment order

(x) Excise Duty

Consider the following for the verification of Excise Duty:

• Rate of Excise Duty
• Excise records and sale invoice for verification of excise duty