Category: Bangalore University B.com Notes

Cash sales refer to sales that incur payment on the spot. A customer can use cash, credit card or cheque to settle their account. Sales that aren’t cash sales are made with the assumption that the client will pay later, either when their goods arrive or in installments over time.

For example

Keeping the cash sales turning over means you are not waiting for payments. It doesn’t have to include only the folding stuff, but can include direct bank to bank transfers.

Cash sales information can be found in the “accounts receivable” column of some financial statements. However, some accounts receivable don’t represent cash sales, but rather cash owed by customers. Most American financial statements track receivables on an accrual basis, meaning that transactions are recorded when the sale is made, not when cash is received. The accrual basis of the statements means credit and not-yet-received accounts receivable must be removed from the accounts receivable column to extract cash sales from the statement. Cash sales may be calculated from balance sheets, income statements and retained earnings statements. For statements of cash flows, cash sales must be figured out to create the statement.

Figuring Out Cash Sales from Balance Sheets, Income Statements or Retained Earnings Statements

Recognize and list payments. The payments may be listed as cash, with the amount received credited on the right side of the appropriate column. Be sure to note any deductions in the payments from coupons or other discounts.

Estimate uncollected accounts by comparing payments received to total revenue for the accounting period. Subtracting payments received from total revenue should give you uncollected payments.

Subtract uncollected payments from your earlier list of payments. The resulting number is an estimate of your cash sales.

Figuring Out Cash Sales for Statements of Cash Flows

List cash inflows from operating activities listed on an income statement. These items include the sales of goods and services, interest received and dividends received.

List cash inflows from investments and long-term assets listed on the balance sheet. These items include sales of equipment or property, sale of investments, sale of debts, sale of equity and collection on loans or other long-term debt.

List cash inflows from changes in long-term liabilities and stockholder equity listed on stockholder equity and other statements. These items include sale of common stock and the issuance of long-term debt such as notes or bonds.

Double check your list, and remove non-cash sale activities, such as directly issued common stock, bonds converted to common stock, debt from purchasing assets and non-cash exchange of assets.

Total the contents of your list, and subtract non-cash sale activities. The result is your total cash sales.

Wage Payment Systems are the different methods adopted by organizations by which they remunerate labour. There exist several systems of employee wage payment and incentives, which can be classified under the following names.

Methods of Wage Payments

There are different methods of wage payments. Wages are paid for work done and this is sometimes measured by the time worked i.e. according to the period of time the worker is employed, and sometimes by output. The former is called “piece wages” and the latter “time wages”.

Under “time wages” or time rates a definite sum is paid for a fixed period of time, that is, wages are paid at a fixed rate per hour, day, week; or other period, and each worker in a given category receives the same payment irrespective of differences in individual output.

Under Piece Wages or Piece Rates, payments depend upon output, each worker is paid according to the quantity of work done by him, and irrespective of the time he takes.

There are also various bonus systems to stimulate production. Piece rates, by which the pay of each worker is proportionate to his output, might be thought more satisfactory than time rates, especially from the point of view of the employer and the national economy and they also seem fair to the workers.

However, they are not suitable for all kinds of work, and also the system is liable to abuse if applied unscrupulously. Earnings are usually higher for workers on piece rates than for those on similar work paid on a time basis, and the danger of excessive speed is not great as the workers are not penalised if they fail to reach a given standard or “target”.

This danger is, however, serious if, as under some bonus system, attractive monetary rewards are paid for attaining high standards of production, and efforts to reach these standards may involve strain resulting in injury to health, increase in accidents, and damage to materials and machines.

Trade unions tend to prefer time rates, though they are parties to many collective agreements which include piece rates where these are suitable for the kind of work done. In addition the risk of speeding and the greater difficulty of regulating piece rates by collective agreements there may be tendency of piece rates to weaken the solidarity of the workers because of considerable differences in earnings.

Many individual workers, especially those who can achieve high output, favor piece rates or bonus payments which, if reasonable fixed, enable them to earn more. Where conditions are suitable employers also prefer piece rates because of their inducement work people to concentrate and to do more work.

There are two principal systems of wage payments:

1. Time wage system, and
2. Piece rate system

Other systems called premium plans or profit sharing schemes are used with either of these two systems to remunerate the employees and to provide them incentive wages for increased productivity.

Method 1. Time Wage System

Under this system, the worker is paid for the amount of time spent on the job. This is the oldest and most common system and the wages are based on a certain period of time during the course of work. The period of time may be an hour, a day, a week, a fortnight or a month and the wage rate will depend upon the period of time. It must be remembered here that wages are paid after the time fixed for work is completed irrespective of output or completion of the work.

Wages can be determined by the following formula:

Wages = Number of Hours worked × Rate per hour

Suppose that a worker is paid at the rate of Rs.8.00 per hour and he has spent 200 hours at work during a particular month. His wages for the month will be Rs. 1.600/.

Under this system, wages are paid on the basis of time spent on the job irrespective of the amount of work done. The unit of time may be a day, a week a fortnight or a month.

In the past, daily wages have been the most common basis and, therefore, it came to be known as the ‘Day Wage System’.

Advantages

(i) This method also avoids wasteful handling of materials and tools. In the absence of rough handling of machinery, repairs and maintenance expenditure is low. Workers can adjust the pace of work so that there is no injury to the health.

(ii) Learners can concentrate on learning the best methods of work and their earnings are not dependent on the amount of work.

(iii) It is the simplest and the oldest method. It is easy to understand and workers can easily compute their own remuneration.

(iv) Unions prefer time wage as it does not differentiate between efficient and inefficient workers. A sense of equality and solidarity is created among them.

(v) Where work done is of an intangible nature, e.g. mechanics, designer engineers, service, etc. it is difficult to measure output accurately and standards of output cannot be laid down.

(vi) The plan is economical as no detailed records of output are required. Clerical work in the computation of wages is minimum. The employer knows the cost of labour.

(vii) As there is no pressure to speed up production, the quality of work can be kept high. A worker can show his skill.

(viii) Earnings of workers are regular and fixed and they do not suffer from temporary loss of efficiency. This gives them a sense of economic security and self-confidence. The worker is assured of a fixed income and can, therefore, plan his expenses accordingly.

(ix) In continuous or assembly line production, the pace of work is beyond the control of an individual worker. Time wage is, therefore, a better method.

(x) It is an objective method and the employer can calculate the wage bill in advance.

Disadvantages of Time System

(i) This system increases the cost per unit of production. Under this system, the cost per unit of production is uncertain because the quantity differs from time to time.

(ii) Under this system of wage payment, it is very difficult to measure the efficiency of workers because all the workers of equal status are paid the wages at equal rate.

(iii) As this system does not make any difference between efficient and inefficient workers, it kills the efficiency of efficient workers.

(iv) Under this system of wage payment, the workers do not make proper utilisation by their time.

(v) As the production is low and the payment to the workers is more, this system increases the cost of production.

(vi) Under this system of wage payment, the quantity of production decreases because the workers do not get any incentive for increasing the production.

(vii) This system requires intensive supervision over workers. It increases the cost of supervision.

(viii) This system of wage payment makes equal payment to both the efficient and inefficient workers. Therefore, efficient workers do not get any incentive for more production and this system encourages labour unions. Sometimes, these labour unions misuse their powers.

We draw the conclusion that although time workers in the same grade receive the same wages for the day or week for different amounts of work and although the work of each is not measured exactly, they and their foremen have a reasonably clear idea of the amount of work to be done.

In other words, they must approximate to understand standards of output or of steady application to their work, and supervision ensures that this standard is maintained. Those who fail to do so are liable to lose their jobs or be put on to a job with a lower time rate, on the other hand good work can be rewarded by promotion to a higher grade with a better rate of pay.

Thus, although time rates are properly distinguished from incentive system, they have associated with the positive incentives of promotion and the negative of demotion and dismissal. Working at excessive speed is usually more associated with incentives methods than with time rates.

But Richardson also found that during a period of severe unemployment where, because of fear of unemployment, the workers on low time rates and long hours worked at almost intolerable speed and strain imposed by the management, each man knowing that if he failed to keep the pace, there were dozens of men available to take his place.

A foreman or manager who is always forcing the pace and finding fault is responsible for such tension and discontent. Hence, only under exceptional cases time worker is associated with speed.

Method 2. Piece Rates or Piece Wages

Piece rates and bonus systems provide a stimulus to output by varying the payments according to the quantity of work done by each worker or by a team of workers. Thus, workers who produce more receive more. These incentive methods are, therefore, applied when high output is desired, when quality of work is largely controlled by the machines and not by men, or where quality is of secondary importance or can easily be tested by inspection.

As their wages depend upon output the workers in trying to increase production are liable to be careless of quality, and, therefore, somewhat closer inspection of the product for quality is necessary than with time workers, but less supervision of the men to keep them at work is needed.

Incentive methods are suitable where easily defined standardized units are produced in large quantities by repetition work and the output of each worker can easily be counted.

They are effective under these conditions if the quantity produced depends considerably upon the workers efficiency, speed, and concentration on the job.

If overhead costs are high the use of incentives which result in increased output enables such costs to be spread over a larger production and the unit costs are, therefore, reduced.

The work should be regular and continuous so that the worker is not hampered in his efforts to attain a high standard of labour by having to wait for material or because his machine has broken down. Workers on piece rates are likely to protest if their work is interrupted through no fault of their own, and their grievance is legitimate as their power is reduced.

In fairness to the workers, therefore, the management must either organise the work so that interruptions are rare, or where this is not practicable they are agree to reasonable guarantee minimum time payment to cover losses caused by periods of interruption or abandon the piece work system altogether as being unsuitable for such work.

The textile industries provide illustrations of work suitable for piece rates. Thus, in cloth weaving the work is of defined standard and the output is easily measured by a meter on the loom.

The worker can influence the amount produced by quickly repairing breakages in the yarn and by otherwise keeping the looms running well. Quality of work can be controlled by inspection, and where the worker is responsible for defects he can be penalised by a deduction from his earnings, though this should be rarely done, being reserved for repeated carelessness.

Advantages of Piece Rate Wages

(i) This system of wage payment is very easy to understand and very simple to calculate.

(ii) Workers get more wages because they produce more. It increases their efficiency and productivity. It increases their remuneration also which improves their standard of living.

(iii) This system of wage payment increases the mobility of workers because they can change their enterprise easily.

(iv) Under this system, the workers use their machines and equipment with proper care because they feel that if their machine is out of order, their work will be held up and their wages will be low.

(v) This system decreases the cost of production because the maximum production is done by the workers in the minimum time. It decreases the cost per unit of production also.

(vi) The system of wage payment gets more production because all the workers make their best efforts to increase the production.

(vii) As the workers are paid according to their work, they make the best possible utilisation of their time. They do not want to waste their time.

(viii) This system of wage payment minimises the needs of supervision. It reduces the cost of supervision.

(ix) This system provides an opportunity to measure the efficiency of the workers. It makes proper distinction between efficient and inefficient working staff of the enterprise.

(x) This system encourages the workers to do more and more work because they get their wages according to their work.

(xi) This system of wage payment justified also because the workers are paid the wages according to the work performed by them.

(xii) This system brings industrial peace also because it satisfies both the workers and the employer.

Limitations of Piece Rate Wage

Piece wage system is, however, subject to the following drawbacks:

(i) The earnings of workers are not stable and they may suffer due to temporary delays or difficulties. They feel insecure and dissatisfied.

(ii) In order to maximise their earnings, workers work with excessive speed. This may affect their health. It also increases the wastage of materials and wear and tear of machinery. The method is not suitable for work of artistic and delicate nature.

(iii) It is very difficult to fix piece wage rates. Employers often cut the piece rate when they find workers are producing large quantities.

(iv) Employees may not stress quality so that rigid quality control becomes necessary.

(v) This system may create jealousy between efficient and inefficient workers. Trade unions do not like it as it affects their solidarity.

(vi) Detailed records of production have to be kept so that the clerical work is increased. The method is not practicable when contribution of individual workers cannot be calculated i.e. construction work.

(vii) The method may lead to industrial disputes. Fixation of piece rates may create controversy. Workers resent loss of output and earnings due to breakdown of machinery or power, non-availability of materials and such other factors beyond their control. Trade unions dislike piece wage system.

It can be concluded that piece rates and other incentive system are satisfactory if applied to suitable kinds of work on the basis of fair time studies, but they are liable to misuse. They have been abused by fixing rates in such a way, that workers could only attain a reasonable level of earning by working at excessive speeds.

Also much discontent has been caused by the practice of fixing a rate on the basis of a time study, and later cutting the rate, which has the effect of lowering earnings or of makings the workers speed up in order to secure a level of earnings equal to that before the rate was cut.

If this is done the system seems to the workers merely a device for speeding, and they may come to the conclusion that however hard they work their earnings will not be allowed to increase much.

Therefore, a fair relationship must be maintained between the earning of the workers different occupations in an undertaking and those in one occupation must not be able, except by working harder, to earn much more than workers in another occupation of similar difficulty, but this should be avoided, not by cutting rates, but by fixing proper rates at the outset on the basis of reliable time studies.

It should, however, be noted that piece rates should generally remain unchanged, except:

1. Where a mistake has been made in setting the rate.
2. When the price level and as a result of which purchasing power of money has changed.
3. Where the conditions of the work have changed making it easier or more difficult.
4. Where the basic rate of pay is increased or decreased, whether by collective or individual agreement.

Thus, if an employer buys new costly machines which enable the workers to double their output with no greater effort than before, it would be unfair that the piece rates should remain unchanged and workers gain double earnings.

These high earnings would be badly out of line with those of other work people in the undertaking for whom no improved equipment was available; also if almost the whole benefit from improved methods went to the workers, there would be no increase for the employer to spend money on better machinery and organisation.

If other things being the same, general price level have increased, the purchasing power of the workers would be reduced and, therefore, the workers real earning would be reduced in the same proportion. Hence, the piece rates should change in favour of workers.

Suitability of Piece Rate System:

Piece rate system is suitable in the following situations:

(i) When productivity of the workers is to be increased.

(ii) Where the degree of physical worn is more than the mental work.

(iii) Where output can be measured and quality control system exists to discourage low quality production.

(iv) When methods of production are standardised and the job is of repetitive nature.

(v) Where work does not require personal skills of higher order.

Time wage system is suitable under following conditions:

(i) Where units of output are non-measurable as in case of office work and mental work is involved as in policy working.

(ii) When delays in work are frequent and beyond the control of employees, i.e. where output is uncertain and irregular.

(iii) When quality of work is especially important, e.g. artistic furniture, fine jewellery, etc.

(iv) When supervision is good and supervisors know what constitutes a “fair day’s work”.

(v) When employees have little control over the quantity of output or there is no clear-cut relation between effort and output as in some machine-paced or assembly line jobs.

(vi) When competitive conditions and cost control do not require in advance the precise knowledge of labour costs per unit of output.

(vii) Where machinery and materials used are very sophisticated and expensive.

(viii) Work is of a highly varied nature and standards of performance cannot be established.

(ix) Employees and trade unions strongly oppose incentive payments.

(x) When workers are new and learning the job.

(xi) When collective efforts of a group of persons are essential for completing the job.

An internal check is a part of internal control. It is concerned with staff duties so that a single person is not allowed to record every aspect of a transaction. The purpose is to prevent or disclose. errors and frauds/ One person automatically check the work of another person without duplication of work. It is a built-in-device to facilitate the work of business concern. There is no additional duty for an internal check.

The work of one employee becomes dependent on another. The senior employee has powers to check the work of others. There is a need for complete harmony among the employees for doing their duties. The top-level management must be honest otherwise. Internal check cannot work properly, The effective internal check is desirable for large-scale business. In small business concern, it has no popularity due to less number of employees. There may be conflict among the workers. In this case, it has no utility at all. Anyhow it is essential for large concerns but it is a burden on small business.

Definition of Internal Check

Ronald A. Irish says that It refers to the organization of office duties in such a way as to prevent or disclose both errors and frauds.

L.R. Dickness says that It is an arrangement of book that error and frauds are likely to be prevented by the operation of the bookkeeping itself.

De Paula says that It means practically a continues internal audit carried on by the staff itself by means of which the work of each individual is independently checked by other members of the staff.

The internal check is an arrangement of the duties of the staff members of the accounting functions in such a way that the work performed by a person is automatically checked by another.

In the opinion of Spicer and Pegler, “A system of internal check is an arrangement of staff duties, whereby no one person is allowed to carry through and to record every aspect of a transaction, so that without collusion between two or more persons, fraud is activated and at the same time the possibilities of errors are reduced to the minimum.”

L.R. Dicksee defines internal check as “such an arrangement of book-keeping routine that errors and frauds are likely to be prevented or discovered by the very operation of the book-keeping itself.”

Internal check means practically a continuous internal audit carried on by the staff itself, using which the work of each individual is independently checked by other members of the staff.

Internal check has been defined by The Institute of Chartered Accountants of England and Wales (ICAEW) as; “the checks on -day to day transactions which operate continuously as part of the routine system, where the work of one person is proved independently or in complementary to the work of another, the object is the prevention or early detection of errors or frauds.”

An internal check is a continuous process and is part of the day-to-day routine. It relates to all the transactions that take place every day. An internal check is achieved by a complimentary allocation of duties and by independent verification of the work of one person by another.

Objectives of Internal Check

1. Fraud Prevention

The purpose of the internal check is to frauds. The management can achieve this objective through the distribution of duties. One employee is allowed to perform one part of the others complete the other parts. In this way, many hands complete the work

2. Assets Protection

The purpose of the internal check is to protect the assets. The management can take steps to safeguard the resources one person maintains the record and the custody are given to another officer. Top-level management makes the purchase and disposal. The assets are used for business purpose the periodical inspection of resources is necessary to avoid misuse of the resource.

3. Error Prevention

The purpose of the internal check is to prevent errors. The management can devise such a system of internal that mistakes are prevented altogether. If there is negligence on the pan of one employee, it is pointed out by another employee who can check the person of the first person.

4. Fixing Responsibility

The purpose of the internal check is to fix the responsibility of employees. The division of duties helps the management to locate the inefficient employees.’ The pending work provides chances of errors and frauds. The management can replace employees who are negligent in their duties,

5. Moral Check

The purpose of the internal check is to develop high moral values. The work of one employee is supervised and checked by another employee. Alt employees feel the sense of responsibility, They complete their work on daily basis. Thus the efficiency of workers increases.

6. Recording Facts

The purpose of the internal check is to record facts and figures in the books of accounts. The work of recording facts is divided among many employees, In this way, it is possible to prepare books of accounts, which can reflect the true and fair view of business work.

7. Accounting System

The purpose of the internal check is to devise proper accounting system, It consists of personnel, procedure, records, form and used by an organization in developing and communicating accounting information.

Principles of Internal Check                     

1. Sufficient Staff

The principle of internal check is sufficient staff, The employees can be appointed according to workload, The management can determine the amount of ‘work, which distributed among the departments. The persons are hired to perform their duties the overloading can create trouble for management.

2. Division of Work

Division of work is a principle of internal check. The management can determine the total amount of work. The whole work is divided among departments. The heads of such departments are responsible for completion of work according to a timetable.

3. Co-Ordination

Co-ordination is a principle of internal check. All departmental managers are bound to coordinate with each other in order to achieve the objectives of the organization. When there is a fault in one department, the work other departments suffers and the objectives cannot be achieved. It determines the degree of coordination among the managers.

4. Rotation of Duties

Rotation of duties is a principle of internal check/ the workers bored by doing the same work from year to year. There is a need for rotation of duties. It is in the interest of the concern as well as the employee. The efficiency improves due to change in duties.

5. Recreation Leave

The recreation leave is a principle of internal check. The employee can enjoy the recreation leave, It is necessary for the mental health of the employee, He cannot commit frauds as the new employee in his place can disclose the matter. The internal check system can work in the interest of the business, The weaknesses of one person are disclosed due to leave.

6. Automatic Machines

The principle of internal check is that machines must be used to do accounting work if permissible. The machines can do a lot of work without delay, The chances of frauds and errors are reduced to a minimum. The working of machines improves the efficiency of the accounting staff,

7. Checking

The principle of an internal check to check the work of other employees. Many’ persons perform the work. The officer can put his Signature to verify the work done by his subordinate. In this way one Work passes many hands, the chances of errors and frauds are minimized due to checking and counter-checking.

8. Simple

The principle of internal check is simple working: The employee can understand the working of the internal check system. A person can work under the supervision of other employees. The line of authority moves from top to bottom level. Alt workers can understand their duties in the organization.

9. Documents Classification

The classification of documents the principle of internal check. The business documents are prepared, collected recorded and placed in proper files. The index is prepared to compile data. The filing system as useful to place letters. In case of need, the documents can be traced quickly.

10. Dependent Work

Dependent work is a principle of internal check. The work of one employee is dependent upon the others. One work passes through the hand of two or three persons till it is completed. The senior person checks the work of junior person, No person is, all In all, to start and complete the transaction,

11. Harmony

The principle of internal check is harmony among the employees and departments, the understanding is essential for business goals. The management is to achieve other social and national objectives. The harmony is the basis for the successful internal check.

A management audit is an independent and systematic analysis and evaluation of a company’s overall activities and performances. It is a valuable tool used to determine the efficiency, functions, accomplishments and achievements of the company.

The primary objective of the management audit is to identify errors in management activities and suggest possible changes. It guides the management to manage the operations most effectively and productively.

In other words, a management audit is involved in evaluation and assessment of the management system and information in the various departments or the entire company. Its reach has been extended to review system and subsystem, authorisation, procedure, accountability, quality of data generated, quality of personnel, etc.,

The Scope of Management Audit:

A management audit is vast as compared to financial review because it not only evaluates finance but also other features of a company. It has an efficiency for assessing management from top to lower level. Few main scopes of management audit are described below:

• Calculate the Effectiveness of the Management: It audits the entire level of management of a company.
• Execution of Principals and Policies: It reviews whether the policies and the principals deployed by the company is effective and successful.
• Locate and Examine the Differences: It helps to identify the differences in productivity and if the pattern set by the company is not fulfilled.
• Suggest for Improvement: The management audit suggests improvement in areas, e.g. purchase, sale, finance, administration, human resources, etc.

Scope of Management Audit

The scope of Management Audit has no limitations. The areas of review depend on the objectives of the business.

Accordingly, the scope of Management Audit may include:

(a) The suitability, practicability and present compliance or otherwise of the organization with its designated objects and aims.

(b) The current reputation of the organization in relation to the general public and within its own particular industrial or commercial field.

(c) The rate of return on investors’ capital whether poor, adequate or above average.

(d) Relationship of the business with its own shareholders and the investing public in general.

(e) The ratios of operating returns and the rate of return on capital projects.

(f) The relationship between management and staff within the business.

(g) The aims and effectiveness of management at its various levels such as top level, middle level and operational level.

(h) Financial policies and control relating to production, sales and distribution and in other functions of the organization.

Weaknesses Revealed by Management Audit

The weaknesses that a Management Audit might reveal may include:

(a) Weaknesses among the members of the Board of Directors.

(b) A lack of awareness among directors and managers of the objectives of the organization and the extent to which these are being achieved, failure to define clearly the objectives and responsibilities of individual managers.

(c) Inadequate steps taken to provide adequate finance.

(d) Lack of technical competence of managers.

(e) Retaining authority by managers for matters which ought to have been delegated.

(f) Lack of clear and identifiable management style in the organization.

(g) Lack of proper staff/management training.

(h) Failure on the part of managers to measure and assess the performance of their subordi­nates.

(i) Inadequacy of the management information system.

(j) Lack of enforcement of procedures and too much wastage of time in enforcing such procedures.

Weaknesses revealed by Management Audit should be studied in detail to ascertain the real causes and proper remedial action may be taken by the top management to eliminate such weaknesses.

Cost audit may be defined as “the verification of cost records and accounts and a check on the adherence to the prescribed cost accounting procedures and the continuing relevance of such procedures.”

Smith and Day in their book ‘Advanced Cost Accountancy’ define it, “the term ‘Cost Audit’ is meant the detailed checking of the costing system, technique and accounts to verify their correctness and to ensure adherence to the objective of cost accountancy.”

R.W. Dobson Smith and Day in their book Introduction to Cost Accountancy’ defines it, “Cost audit is the verification of the correctness of cost accounts and the adherence to the cost accountancy plan.”

Cost audit is the verification of the correctness of cost accounts and a check on the adherence to the cost accounting plan.

This is, it not only involves the examination of cost accounts but also the fact that the plan prepared in this connection has been duly executed. Cost audit as an audit of the efficiency of minute details of expenditure in which the work is in progress and not a post-mortem examination.

The first function of cost audit is the verification of cost accounting records according to the cost accounting system and the second function is the checking on the adherence to the cost accounting plan.

A cost audit, therefore, includes verification of correctness of the cost accounts, cost statements, cost reports, cost data and costing techniques applied and finally checking these data to see that they adhere to cost accounting principles, plans, procedures and objectives.

Objectives of Cost Audit

The following are some of the objectives for which cost audit is undertaken:

1. To establish the accuracy of costing data. This is done by verifying the arithmetical accuracy of cost accounting entries in the books of accounts.
2. To ensure that cost accounting principles are governed by the management objectives and these are strictly adhered to in preparing cost accounts.
3. To ensure that cost accounts are correct and also to detect errors, frauds and wrong practice in the existing system.
4. To check up the general working of the cost department of the organization and to make suggestions for improvement.
5. To help the management in taking correct decisions on certain important matters
6. To determine the actual cost of production when the goods are ready.
7. To reduce the amount of detailed checking by the external auditor its effective internal cost audit system is in operation.
8. To find out whether each item of expenditure involved in the relevant components of the goods manufactured or produced has been properly incurred or not.

Advantages of Cost Audit

The important advantages of cost audit are briefly discussed as follows:

1. Advantages to the Management

• It provides necessary information for prompt decision decisions.
• It helps management to regulate production.
• Errors, omission, fraud, and mistakes can be detected and prevented due to the effective auditing of cost accounts.
• It reduces the cost of production through plugging loopholes relating to wastage of material, labor, and overheads.
• It can fix the responsibility of an individual wherever irregularities or wastage are found.
• It improves the efficiency of the organization as a whole and costing system in particular by constant review, revision and checking or routine procedures and methods.
• It helps in comparing actual results with budgeted results and points out the areas where management action is more needed.
• It also enables comparison among different units of the factory to find out the profitability of the different units.
• It exercises a moral influence on employees which keeps them efficient and alert.
• It ensures that the cost accounts have been maintained under the principles of costing employed in the industry concerned.
• It ensures effective internal contr
• It helps to increase the overall efficiency of productivity.
• Inefficiency can be eliminated by suitable corrective actions.
• It facilitates cost control and cost reduction
• It assists in the valuation of stock of materials, works in progress and finished goods.
• It ensures maximum utilization of available resources,
• It enables the management to choose economic methods of operations and thus earn profits to satisfy the shareholders and the investing public.
• It enables the management to chalk out the future policy based on the report by the cost auditor especially regarding labor, raw material, plant, etc. to maximize production and reduce the cost of production.
• It tests the effectiveness of cost control techniques and to evaluate their advantages to the enterprise.

2. Advantages to the Shareholders

• It ensures that proper records are maintained as to purchases, utilization of materials and expenses incurred on various items i.e. wages and overheads, etc. It also makes sure that the industrial unit has been working efficiently and economically.
• It enables shareholders to determine whether or not they are getting a fair return on their investments. It reflects managerial efficiency or inefficiency.
• It ensures true picture of the company’s state of affairs. It reveals whether resources like plant and machinery are being properly utilized or not.
• It creates an image of the creditworthiness of the concern.
• Advantages to the Society
• It tells the true cost of production. From this, the consumer may know whether the market price of the article is fair or not. The consumer is saved from exploitation.
• It improves the efficiency of industrial units and thereby assists in the economic progress of the nation.
• Since the price increase by the industry is not allowed without justification as to an increase in the cost of production, consumers can maintain their standard of living.

3. Advantages to the Government

• It assists the tariff board in deciding whether tariff protection should be extended to a particular industry or not.
• It helps to ascertain whether any particular industry should be given any subsidy to develop that industry.
• It provides reliable data to the government for fixing up the selling prices of the various commodities.
• It helps in fixing contract prices in a cost-plus contract.
• It determines whether differential pricing within the industry is desirable.
• It helps the government to take necessary measures to improve the efficiency of sick industrial units.
• It can reveal the fraudulent intentions of the management.
• Cost statements may be helpful to authorities in imposing tax or duty at the cost of finished products.
• It facilitates settlement of trade disputes of the companies.
• It imposes an automatic check on inflation.
• It assists the Tariff Board to consider the extension or removal of protection.

Disadvantages of Cost Audit

Cost audits verify expense records and accounts. Audit also ensures that accounts and bookkeepers comply with ethical practices.

Effective cost audits provide a complete breakdown of expense that gives a company financial clarity about accounts. Although they provide such transparency “there are many disadvantages to conducting cost audits.

1. Expensive

One primary disadvantage associated with cost audits is the excessive fees. Auditors are typically independent contractors who can charge relatively high prices for services rendered.

In addition to initial charges, auditors may increase fees in the middle of the project if companies fail to prohibit such action in the contract. A person or corporation can essentially go from paying $4,000 to $6,000 for an audit.

2. Lengthy

Cost audits are also lengthy processes that require employee devotion.

Although the auditor may be an outside contractor, employees must provide requested information and be accessible in case further explanation of documents is necessary.

3. Lost Time

Although thorough an auditor’s report is usually given three to five weeks after the balance sheet is released. This means people who have been stealing from an establishment have nearly a month to form an excuse or leave the company.

4. Uncertainty

Because a major part of the process involves estimating there’s the possibility of numerical figures being wrong.

Besides, if receipts and other forms of record-keeping are skewed an auditor relying on such documents may produce an inaccurate report.

Types of Cost Audit

The main types of Cost audit are the following:

1. Cost Audit as an Aid to Management

The aim is to see that all information placed before management is relevant, reliable and prompt so that management can discharge its duties well. It must also be seen that no relevant or pertinent information is suppressed.

2. Cost Audit on Behalf of a Customer

Often contracts are placed on “Cost Plus” basis. In other words, the customer will determine the final price to be paid on the basis of exact cost plus an agreed margin of profit. The customer, in such a case, usually gets cost accounts of the product concerned audited to establish correct cost and, therefore, price.

3. Cost Audit on Behalf of Government

Sometimes the Government is approached with request for financial help or protection. Before taking a decision on the request, the Government may choose to get cost accounts of the applicant audited to establish whether the need for help is genuine or is a result of mere inefficiency.

4. Cost Audit under Statute

The Amendment Act of 1965 has inserted a new section, 233B, in the Companies Act, 1956 whereby the Central Government may order that certain classes of companies will get their cost accounts audited by a member of the Institute of Cost and Works Accounts of India. Only such companies as are required to maintain proper records regarding materials consumed, labour and other expenses under Section 209 (as amended to date) and may be required to get their cost accounts audited.

The powers and duties and manner of appointment of the cost auditor are the same as that of external financial auditor and the same disqualifications will apply. The cost auditor will submit his report to the Company Law Board with a copy to the company. The right to investigate all aspects of cost accounts is presumably granted to the cost auditor.

The aim of cost audit under statute seems to be that the Government wishes to know, as an instrument of control, the costs of various goods. Government has the power to prescribe the forms in which cost audit reports are to be made out. These are designed not only to verify information, but also to convey good deal of information to Government.

5. Cost Audit on Behalf of the Trade Association

Sometimes trade associations seek to maintain prices at a certain level. For this purpose, the accuracy of costing information submitted by various concerns has to be checked. The trade associations may seek to have full information about production capacity and the relative efficiency of productive processes.

The tax audit is a technique through which the facts related to acts of a tax nature are verified and analyzed. It is a method used to inspect both companies and individuals, that is, all those subjects who are taxpayers and have tax obligations for the Public Administration or the State.

Through the fiscal audit, the accounting records, monetary movements, as well as all the documentation that contains information related to the operations carried out by the subject during a determined period of time are analyzed and analyzed (the periods in fiscal terms go from year to year).

The tax audit is a method through which it is analyzed if the taxpayer, whether company or person, fulfills its tax obligations.

The function of the fiscal auditor goes through the verification of the declarations made by the taxpayer before the Public Treasury and the tax payments and determining whether or not everything is in order and according to reality.

Once the auditor has obtained and analyzed sufficient information (whether from a corporate entity or from an individual), he will make an opinion, called an audit report , where, on the one hand, he will detail all the information gathered; On the other hand, there will be a section of comments and opinion of the auditor.

Objectives of Tax Audit of a Company

Next, we highlight the main objectives of the tax audit, focusing especially on the scope of a corporate entity:

• That the balances of the liabilities of the balance correspond to outstanding debts to the Public Treasury at the closing date of the fiscal year
• That the debit balances to the Public Treasury have been valued according to the Accounting Principles and the pertinent fiscal regulations.
• Evaluate that the accounts are correctly classified in the balance sheet, between assets and liabilities.
• Check that, if there are claims raised by the Public Administration that are not resolved at the closing date, they are correctly accounted for.
• Evaluate that the procedures have been carried out in accordance with good faith, ensuring that the established legal regulations have been complied with.

Income Tax Audit in India

There are various laws in India that govern different kinds of audit like income tax audit, stock audit, cost audit, company or statutory audit as per company law, to name a few. Section 44AB of the Income Tax Act, 1961, lays down the provisions for income tax audit.

Income Tax audit, as evident from the name, is aimed at evaluating whether an individual or company has accurately filed the income tax returns of an assessment year. An external agency is mandated to assess returns filed from income, deductions and expenditures and other rules as mentioned by the Income Tax Act, 1961. The tax audit process simplifies the computation of tax returns. The Chartered Accountant of the concerned agency performing the tax audit has to submit Form 3CA or Form 3CB, and Form 3CD, as an audit report comprising of the observations.

Income Tax Audit for companies whose tax audit is not conducted under Section 44AB of the Income Tax Act, 1961

Taxpayers who have to get their accounts audited under any law other than Section 44AB of the Income Tax Act, 1961, (for instance, stock audit or statutory audit) do not have to get their accounts audited again for the purpose of income tax audit. In such cases, accounts audited under other laws can be presented as a tax audit report for income tax filing, provided it is submitted before the stipulated due date.

The following are the other sections under Income Tax Act, 1961, which also lay down regulations related to income tax audit in India. These are presumptive taxation schemes, wherein a pre-determined percentage of income is assumed to be the gain or profit meant for taxation.

• Section 44BB: For Non-Resident Indians (NRIs) involved in business specialising in the mineral oils industry, like exploration
• Section 44BBB: International company involved in the business of civil construction etc. in certain power projects
• Section 44AD: Any business except those businesses mentioned under Section 44AE
• Section 44ADA: This section focuses on the regulations regarding income tax audits for eligible professionals
• Section 44AE: Businesses specialising in leasing, hiring and plying of goods carriages

Rules Governing Tax Audit

The following is the procedure for filing tax audit report:

• The Chartered Accountant assigned for conducting tax audit of an individual or an organisation has to present the tax audit report online, using his/her official login credentials.
• The taxpayer also has to mention the relevant information about their Chartered Accountant in their login platform.
• Once the tax audit report is uploaded by the auditor, it has to be either accepted or rejected by the taxpayer on their login portal. If the taxpayer rejects the tax audit report, the entire process has to be repeated until the tax audit report is accepted by him/her.
• Tax audit report has to be filed on or before the pre-determined due date of filing income return, i.e., 30th November of the subsequent assessment year for taxpayers who have engaged in an international transaction and 30th September of the subsequent assessment year for other taxpayers. Rules Governing Tax Audit

The following points are to be noted with regards to Tax Audit:

• If you are involved in more than 1 business, you will be liable to audit your accounts if the total turnover of all your businesses is more than Rs. 1 crore.
• If you operate more than 1 profession, you have to audit your account books in case the gross receipts of all the professions cumulatively cross Rs. 50 lakhs.
• If you run a business as well as a profession, then tax audit is not based on total turnover from both. If your business turnover is more than Rs. 1 crore then an audit is required for the business accounts, and if the gross receipts from your profession is more than Rs. 50 lakhs then an audit of the profession accounts is needed. But if your business turnover is Rs. 90 lakhs and your profession receipts are Rs. 40 lakhs, then no audit is required for either accounts.
• If the turnover of your business or profession is below Rs. 1 crore or Rs. 50 lakhs, but you have sold a fixed asset (such as vehicle or immovable property), the amount you gain from the sale will not be considered as part of your business or professional profits. Sale of the following items are excluded from calculation into total turnover/gross receipts of a businessperson or professional:
• Assets held as investment (e.g. shares, stocks, securities)
• Fixed assets
• Rental income
• Income from interest that is not part of the business income
• Any expense reimbursed by the client
• Once the tax audit report is filed online, it cannot be revised. But if the accounts have been revised – for example, a company account revision after acceptance at the Annual General Meeting, change in law or change in interpretation of law – then the audit report that has been filed can also be changed. The reasons for change in audit report have to be explicitly mentioned while filing the revised report.

Technology never fails to change the way we do things. It has transformed how we think, how we interact, and how we do business. No one can deny that technology has made a remarkable impact in the finance and accounting industry. Accounting and finance professionals can now perform tasks faster and with greater precision. With these developments in the industry, auditors have also utilized the latest technological advancements to improve their service offerings.

As we begin the second half of 2020, here are the audit trends that are continuously shaping the audit industry.

1. Artificial Intelligence and Robotic Process Automation

The adoption of smart automation and machine-learning artificial intelligence in accounting has led to a tremendous overall improvement in the accounting process. Accountants can now shift to more complex tasks by automating time-consuming tasks, tighten controls with the aid of advanced software, and eventually produce high-end results. As more tasks are performed with these innovative tools, internal audit should be able to identify, monitor, and evaluate the risks that come with these tools.

Audit professionals need to have an understanding of how these systems are designed and how they affect business operations, administration, and the structure of the organization as a whole.

2. Cyber and data security

Even before the Facebook-Cambridge Analytica Scandal, the world has been moving towards better data and cybersecurity. Businesses have been working on regulatory compliance with different countries on varying cybersecurity requirements and data management directives. The roll-out of the European Union’s GDPR has signaled sweeping changes in the way businesses handle data and information.

Auditors must keep up with these updates to ensure that the company’s cyber data are well protected and secure, at the same time, monitor that data collection, processing, and management by the company are in accordance with data privacy regulations such as the EU’s GDPR.

3. Data Analytics

Modern business operations are now heavily relying on data to optimize product and/or service lines. From time to time, data are collected by companies to identify process bottlenecks and reduce unnecessary costs. To help them in the audit process, audit professionals also harness the capabilities of data analytics software. Data analysis helps auditors to check irregularities in data trends or patterns and identify errors that the company may have made during their processes.

Data analytics tools are also of tremendous help for auditors, especially when it is necessary for them to look at the bulk of data collected and processed by their organization. Finally, like other professionals in different industries, auditors have been able to produce smarter, faster, and better results.

4. Technology and Talent Development

All these technological trends have led to the necessity for professionals to develop proficiency and have a keen understanding of the latest technological tools and software. The top audit firms have invested in the skills development of their people to catch up with the new trends in auditing, with new but competitive audit players following this practice

As we continue with the second stretch of 2018, we can only expect to see more technological trends dictating the future of the audit industry. Audit firms around the world are innovating on how the practice adjusts to the adoption of sophisticated business processes such as robotic process automation, artificial intelligence, and blockchain technology. If anything, the recent audit trends above only show the increasing importance of technology in audit and the necessity for firms to ensure that their people are up to the tasks.

5. Organizational structure for accountability and transparency

Today’s environment calls for greater collaboration and strong relationship between the auditor and the auditee at all levels. The trend therefore is moving towards developing a structure that facilitates healthy environment. This will encourage free flow of information regarding any issues or concern between the auditee and the auditor. The organization has to be structured in a way that facilitates accountability i.e. not limited to only the Audit Committee.

6. Shift away from SOX compliance towards risk-based auditing

Out of necessity, internal auditors have been devoting their time, energy and resources in recent years primarily to SOX compliance activities. Now, it is time for internal auditors to reevaluate its activities and sharpen its focus on stakeholder expectations and risk-based auditing. Enterprise-wide risk management and fraud are also gaining precedence. Moreover, the modern day, technology savvy companies require additional focus on risk assessment, particularly because these risks have the potential to impact organizations more rapidly. Activities relating to fraud detection and auditing IT security are also generating more responsibility for internal audit.

7. Upgrading audit infrastructure and technological advancement

Large companies, specially with complex auditing requirements that span not just financial audits but also audits, assessments and inspections related to operations, quality, safety, suppliers and IT are upgrading the technology infrastructure used to carry out auditing from risk assessments and audit universe creating and planning to audit data collection, reporting and remediation. Companies are migrating from their legacy systems, point applications and paper-based procedures to a web-based integrated audit management system. The technological advancement allows the CAE to streamline and strengthen the internal audit function enabling it to deliver more strategic value while lowering its costs of operation. Expected benefits are better enterprise wide visibility, a transparent and collaborative environment and data-driven decision making. Solution and tools available today provide a reliable means to monitor access controls, observe the closed-loop processes and analyze important data and KRIs.

An audit program is a set of directions that the auditor and its team members need to follow for the proper execution of the audit. After preparing an audit plan, the auditor allocates the work and prepares a program which contains steps that the audit team needs to follow while conducting an audit. Thus, an auditor prepares a program that contains detailed information about various steps and audit procedures to be followed by the audit.

Audit Program

An audit program provides a basic plan for the audit team regarding the entity’s business, its size, how to conduct the audit, allocation of work among team members and the estimation of time within which it should complete the work.

It contains details regarding the relevancy of evidence, materiality level, risk tolerance, measure of the sufficiency of the evidence. Thus, programs enhance the accountability of the audit team and its members for the work performed by them.

An auditor may revise the audit program if he considers it necessary due to prevailing circumstances. The size of the entity, type of business or services in which entity deals, applicable laws, the effectiveness of internal controls, and various other relevant factors, also affect an audit program.

Thus, an auditor prepares an audit program according to its scope of work. The minimum essential work to be performed is the Standard Program. However, there is no set audit standard program applicable in all the circumstances.

Audit working papers document the activities that the audit program performs. Audit working papers support the work performed by the auditor for providing assurance that the audit was performed in accordance with all the applicable standards on auditing (SA’s). It helps the auditor in the proper execution of audit work.

An audit program covers various steps of auditing in an audit program like the assessment of internal control, ascertaining accuracy and reliability of books of accounts, inspection, vouching and verification, valuation of assets and liabilities, scrutiny of accounts, presentation of financial statements, and submission of reports and related disclosures.

Definition

Prof. Meigs defines an audit program as, “an audit program is a detailed plan of the auditing work to be performed, specifying the procedures to be followed in verification of each item and the financial statements and giving the estimated time required.”

Features (or) Characteristics of an Audit Programme

The features of an audit programme may be of the following:

1. It is a set of procedures to be adopted to conduct the audit more efficiently.
2. It is a written scheme designed by the auditor.
3. It is a blue print of the audit work.
4. It facilitates delegation of work, based on the capabilities of audit staff.
5. It acts as evidence in future for the audit work being performed.
6. It specifies the work to be done by the audit staff, the manner and time limit for completion of the work.

Objectives of Audit Program

The following are the objectives of audit programme:

1. To provide clear instructions to the audit assistants specifying the nature of work to be performed and fixing the time span for completion of each work.
2. To facilitate coordination among various parts of audit work.
3. To ensure uniformity in the performance of audit work and to avoid duplication and repetition of work.
4. To attain a fair allocation of work among audit team.
5. To fix responsibility and accountability of each audit assistant.
6. To serve as a guide for planning the audit work in future.
7. To serve as evidence in future showing the date of completion of audit work, methods or procedures undertaken, persons involved in completion of audit work etc.

Contents of an Audit Programme

The following are the details of an audit programme:

1. Name of the client.
2. Nature of operations and business of client.
3. Review of system of internal check.
4. Date of commencement of audit work.
5. Duration of audit work.
6. Accounting system followed in client organization.
7. Review the report of the previous auditor.
8. Review the remarks, instructions or objections raised in the previous audit report.
9. Examine the various ledger accounts and subsidiary books.
10. Examine the statutory books and registers, profit and loss account, and balance sheet.

Advantages of an Audit Program

An audit programme can give the following advantages:

1. Helps in Estimation and Division of Work

Audit Programme helps in estimating the quantum of audit work in advance and also helps in dividing the work among the audit assistants based on their capabilities.

2. Helps in Fixation of Responsibility

It enables to fix responsibility on the audit assistants by clearly defining the scope of work.

3. Helps in Future Planning

Audit programme serves as a basis for planning the audit work for subsequent year.

4. Serves as a Guide

It serves as  a valuable guide for the audit staff in execution of the audit work for succeeding years.

5. Valuable Evidence

It serves as an evidence for the work done as initials of those who have done the particular work are appended to it. The auditor can produce the audit programme as a proof when a charge of negligence being brought upon him.

6. Uniformity

It provides for uniformity in audit work as the same work will be done every year.

7. Continuity

When an audit staff goes on leave others can continue the work by referring to the audit programme, hence, audit programme provides for continuity of work.

8. Coordination

If facilitates coordination and helps in supervising the work of the audit staff.

Disadvantages of an Audit Programme

The disadvantages that may be experienced by conducting audit as per predetermined audit programme are –

1. Mechancial

When audit work is conducted mechanically every year based on the audit programme, it causes monotony and boredom to the auditor and audit staffs.

2. No Quality in Work

The audit staff will be more interested to complete the work in time rather than to maintain any standard in the work.

3. Loss of Initiative

Audit staff cannot take their own decisions and they are compelled to comply with the audit programme. Hence, an efficient audit clerk loses his initiative and interest as he cannot make any suggestions.

4. Rigidity

A rigid and inflexible audit programme cannot be laid for all types of business. During the course of audit, new areas to be verified may come to the notice of the audit staff. Unless the audit programme is revised, such areas may escape from auditing.

5. Shelter for Inefficient Staff

Inefficient audit staffs conceal their mistakes or weakness on the basis of audit programme. Hence, it provides shelter for inefficient audit staff.

6. Unsuitable

Pre-determined audit programme is not suitable for small business organizations.

Audit working papers are the outcome of the documentation process. Working papers are the record of various audit procedures performed, audit evidence obtained, allocation of work between audit team members etc. Audit working papers are the documents and evidence that an auditor collects and retains with himself during the audit.

Audit working papers support the work that the auditor performs for providing assurance that he conducts the audit in accordance with all the applicable standards on auditing (SA’s).

They constitute all the audit evidence that an auditor obtains. Also, it contains various procedures that he applies to indicate that the audit is performed by him.

The auditor and his audit team members prepare the audit working papers while performing the audit. Working papers are connecting link between the client’s records and audited financial statements.

Working papers provide entity’s historical records as well as matters which should be taken care and given due importance while performing future audit’s of such entity.

Audit working papers help auditor in audit planning and collecting evidence of the audit work performed on which his opinion is based.

Working papers helps auditor in allocating the time required for performing various audit procedures. The working paper helps auditor to maintain a record of various matters discussed with management while conducting an audit.

Also, the working papers help audit team members to understand entity’s business, points which they need to check on a priority basis, queries and actions against them in previous audits. Working papers helps auditor in future cases to protect himself if the client files a suit against auditor for auditor’s negligence while conducting the audit.

Working papers provide information on the following matters

• Information about audit team members and work allocated to them. Information regarding unallocated work
• Whether he follows all the applicable standards on auditing (SA’s) or not
• He properly plans the audit or not
• Whether there was proper supervision over the work performed. Enabling the audit team members to be responsible for the work performed by them
• An auditor undertakes an appropriate review or not
• Whether the evidence is relevant, sufficient and appropriate to support the opinion of the auditor

We can divide the working papers into two parts

• Permanent audit file
• Current audit file

A permanent audit file contains information which is of continuous interest and is relevant in future audits. Information like articles of association, loan agreements, leases, documents related to internal control of the entity, record of accounting policies followed by the entity on a continuous basis, significant observations of previous audits etc.

A current audit file contains information regarding audit conducted for the current period. It includes information like financial statements and audit report of the entity, trial balance and worksheets, records regarding internal control risk of an entity, external confirmations received, queries of auditor and reply received from the management etc.

Examples of Audit Working Papers

Here is the example of audit working papers:

• Audit documents on client nature of business
• Audit documents of team meeting
• Evidence of the planning process including audit programs and any changes thereto
• Evidence of the auditor’s consideration of the work of internal audit and conclusions reached
• Analyses of transactions and balances
• Analyses of significant ratios and trends
• Identified and assessed risks of material misstatements
• A record of the nature, timing, extent, and results of audit procedures
• Evidence that the work performed was supervised and reviewed
• An indication as to who performed the audit procedures and when they were performed
• Details of audit procedures applied regarding components whose financial statements are audited
• Result of audit testing on depreciation expenses
• Result of audit testing on salaries expenses

Working papers are very important for auditors to support the audit opinion. It proves that auditors perform an audit assignment based on applicable standards, and as well as policy.

These working papers should state the proper information like source of the documents, the period of audit, who prepared the working papers, objective obtained or prepared the working papers and the conclusion.

Commencement of audit means that  when an organization is going to start final audit before commencement of audit the following instruction must be given by the auditor to his client.

• A list of book in use, list of employees, their duties and internal control should be provided to the audit staff.
• Books of original entry, ledgers, trial balance and Final account should be provided to the auditor.
• All supporting document should be properly arranged.
• List and schedule of assets and liabilities should be arranged properly for the examination to the audit staff managed properly for the examination to the audit staff.

The auditor of the newly established company should also carry out the following primary work before commencing the audit.

1. Appointment of the auditor

The auditor can examine his appointment the shareholder have right to appoint an auditor .a copy of resolution shows the decision of management for appointment.

2. Previous auditor

The auditor can write a letter to old auditor for obtaining his consent. He must have no objection to such appointment. it is moral duty of new auditor to inform old auditor for appointment.

3. Time of Audit

The audit can consult the management for fixing time of audit the stating data is fixed with the consent of management. The time allocated utilized for proper audit work.

4. Time required

The auditor can decide the time required for completion of audit work he can engage sufficient audit clerks to complete work in time otherwise the cost of audit increases.

5. Audit Staff

The auditor can arrange audit staff on the basis of work load. The number of audit Clerks can be engaged on the basis of audit work. There should be no extra burden of work on audit staff.

6. Audit Duties

The auditor cannot fix audit duties such duties are usually stated in audit engagement letter. The duties stated in company’s ordinance cannot be overlooked.

7. Nature of Business

The auditor can check the nature of business. The nature may relate to manufacturing, trading or services. The auditor must know the nature of activities in order to conduct audit.

8. Business History

The auditor should record the history of business. He can record year of establishment nature and number of products available in market.

9. Types of Product

The business may produce different products of successful working. One product or service is not sufficient to compete in the market the auditor should note the types of product.

10. List of officers

The auditor can ask for list of officer their duties and specimens signature he must know authority and responsibility of officer.it is essential for completion of audit work.

11. Copies of documents

The auditor can collect copies of document like memorandum of association and articles of association. He can examine all such document for the purpose of audit.

12. Books of account

The auditor can obtain lists of books of account he can check that legal requirement are followed in preparing books of account.

13. Internal control

The internal control system is tested to rely on it. Audit sampling is possible if it is effective the business work flow under proper accounting and administrative control.

14. Certificates of clients

The auditor can obtain certificate from client, the confirmation of accounts from debtors and creditor is possible. The client can issue stock valuation certificate for the auditor.

15. Old reports

   The auditor should examine old audit report. he can note the weakness stated in previous report he can check that weak point stated in old report are net repeated during this year.

16. Analytical review

The auditor can check the ration and percentage for a number of years he can examine the trend of various items in order to note the usual items.

17. Prepare report

The auditor can prepare report for work done by him. When he is fully satisfied there is clean report. In case of bad working he can submit qualified report to the shareholders.