Audit Evidence

Meaning of Audit Evidence

Any document, piece of information, voucher written or oral statement of any procedure which assists an auditor in forming his opinion in regard to the accuracy of data under audit.
The role of the auditor is that of an independent professional critic who investigates, analyses and evaluates the information underlying the statement as a means of reaching a conclusion as to their fairness. Before and auditor can express an opinion on financial statements, he must have sufficient evidence that

• The items in the financial statements are supported by the balances in the ledger accounts.
• The balances in the ledger account summarize correctly the numerous debit and credit entries.
• These debit and credit entries in the accounts represent proper accounting interpretation of all the transaction entered into be the business.

Importance of Audit Evidence

While accepting the appointment, an auditor accepts to discharge certain legal obligations and responsibilities. In discharging his responsibility, the auditor should convince himself, in the first instance, that the accounts, he is reporting upon, are correct and the financial transaction recorded are duly supported by the documentary evidence. If he is not satisfied with the accuracy of the accounts or the authenticity of evidence, there is no point in certifying the accounts as correct. The examination of evidence is therefore necessary, so that strength would be based for independent, impartial and expressed opinion of the auditor. On auditor’s opinion, the Directors, Shareholders and other initiative action.

Objectives of Audit Evidence

The objects of verifying evidence are

• To ensure that the errors, if any, in the data would be discovered by verifying the evidences.
• To facilitate the completion of audit programme scheduled and undertaken.

Procedure of Audit Evidence

The following procedure is generally followed for the verification of evidences

• Verification of accounts of account balances shown in the financial statements or the accounting reports
• To ensure that the procedure installed for control purposes is properly followed

Looking at the evidence for the balance amount shown in the ledger, the auditor has to work backwards in order to ensure that all those transactions responsible to give rise to that balance is also duly supported with evidences.
The auditor should also carefully ensure that procedures being followed by the organization are effective and do not have any room for leakages. In the area where the financial involvement is heavy, the auditor should carefully review internal control procedures and the implementation of procedures designed and installed for an effective control of function.

Key Points for Collecting Evidences

1. Physical existence of the assets
2. Authoritative documents
3. Statement by third parties
4. Calculation by the auditor
5. Satisfactory Internal Control
6. Subsidiary or detailed records
7. Subsequent action of the company
8. Formal statement by company’s officers
9. Interrelationship with in the data examined.

 

Auditor’s Report

Audit Report

Auditor’s report is the expert’s opinion expressed by the auditor as to the fairness of financial statements.

The audit report is the end product of every audit. It is the medium through which an auditor expresses his opinion on the financial statements. Audit report is an important part of audit process since it summarize the results of the examination work conducted by the auditor. The report shows the scope of the work done and the responsibility assumed by the auditor regarding the fairness or otherwise of hte financial statements. The auditor draws appropriate conclusions by examining the various statements and accounts, which he conveys through the audit report. It is a formal communication by the auditor to the shareholders throwing light on the state of affairs of the company. Audit report is addressed to the members of the company and is considered at the Annual General meeting of the company. Audit reports should be so drafted that they remain simple and intelligible to a common man. The audit report should be explicit so as to provide greater information and protection to the interest of shareholders and others.

Essentials of Audit Report

1. Title
An auditor report must have appropriate title, such as “Auditor’s Report”. It is helpful for the reader to identify the auditor’s report. It is easy to distinguish it from other reports. The management can issue any report about the business performance. The title o the report is essential.
2. Addressee
The addressee may be shareholder or board of director of a company. The auditor can audit financial statements of any business unit as per agreement. The report should be appropriately addressed as required by engagement letter and legal requirements. The report is usually addresses to the shareholders or the board of directors.
3. Identification
The audit report should identify the financial statement that have audited. The financial statement may include trading profit and loss accounts, balance sheet and statement of changes in financial position and sources and application of frauds statement. The report should include the name of the entity. Moreover the data and period covered by the financial statement are also stated in it.
4. Reference to Auditing Standards
The audit report should indicate the auditing standard or practice followed in conducting the audit. The international auditing guidelines need assurance that the audit has been conducted as per set standards.
5. Opinion
The auditor’s report should clearly state the auditor’s opinion on the presentation in the financial statement of the entity’s financial position and the result of its operations. The statement give a true and fair view is an auditor’s opinion. This opinion is usually based on national standard or international accounting standards.
6. Signature
The audit report should be signed in the name of the audit firm, the personal name of the auditor or both as appropriate.
7. Auditor’s Address
The address of auditor is stated in the audit report. The name of city is stated in the report for information of the readers.
8. Date of Report
The report should be dated. It informs the reader that the auditor considered the effect on the financial statements and in his report of events or transactions about which he become aware the occurred up to that date.

Qualified Report

A qualified opinion is given when the auditor fells the he cannot issue an unqualified opinion. The effect of disagreement or limitation on scope is not so material as to require an advance opinion or a disclaimer of opinion. A qualified opinion should be expressed as being except to the effects of the matter to which the qualification relates.
1. No Proper Books
A qualified repeat is issued when proper books of accounts have not kept by the business concern. The law estates the number of books to be maintained by the companies by the companies. The failure to keep necessary books of accounts induces the auditor to mention the fact in the reports.
2. Informal Statement
The law states the formal for financial statement. The fourth schedule and fifth are given in the companies ordinance 1984. The companies must prepare their statement according to schedule otherwise the auditor can mention weakness in the report.
3. Disagreement Between Books and Statements
The financial statement figures must tally with figures recorded in journal and ledgers. The different in figures is not acceptable as it may lead to receive the shareholders. The auditor can qualified his report that figures of books and statement are different.
4. Inconsistent Accounting Policies
The accounting policies must remain the same from year to year. The changes in depreciation rate valuation of stock and provision for bad debts can disturb the financial statements. The auditor can state the inconsistency in accounting policies toward by the management.
5. Ultra Vires Payments
The management can misuse the power of doing the business. They may not followed articles of association or companies ordinance 1984. The payment of dividend out of capital is an example. The auditor must report to the shareholders about the misuse of powers.
6. Expenditure Incurred
The expenditure incurred during the year must be to the purpose of business of company. The expenses incurred objective may be state by the auditor in the report. The management is responsible to these wrong payments.
7. Business Conducted
The business conducted investment made and the expenditure incurred during the year may not meet the requirement of memorandum of association, articles of association and the companies ordinance. The auditor can inform the owners about the violation of law.
8. Scope Limitations
The management may have valued closing stock prior to date of appointment of auditors. There is a scope limitation as auditor was absence at the time of stock valuatio. The auditor can qualify his report as to the valuation of stack talking.
9. In Appropriate Accounting Method
The auditor may note that depreciation has not been charged on building. The depreciated on plant and machinery may be recorded at fewer rates. The difference in actual and recorded expenses may be stated in the report.
10. Inadequate disclosure
The management may have entered in to an agreement for issue of debentures for plant and expansion. The agreement may restrict the right to pay dividend to shareholders for next years. The auditor can disclose such agreement to the owners of the company.
11. Departure from Accounting Practice
The qualified report is issued when an auditor is not satisfied with the management policies. The company may not record the provision for loss on long-term contract. The disagreement with management can be recorded as adverse opinion in the report for the information.
12. Breakdown of Accounting System
The auditor can issue the qualified report when he is unable to form an opinion about the financial statements. There may be fire at computer center business office. The figures may be estimated so auditor can disclaim his opinion.
13. Failure To Prove Case Sales
The auditor can check the internal control system. The company may be dealing on cash basis. All sales may be in terms of cash. The poor internal control system may create hurdle to verify cash sales. The auditor can submit qualified report with out opinion.
14. Contingency
The auditor may qualify his report where there is contingency (tax dispute court case) which is significant to affect the financial statement of the company. The auditor has the right to report the matter to the shareholders. The items must be stated in the footnote as well as audit report.
15. No Zakat Deduction
The Zakat may be deductible at sources under the Zakat and usher ordinance 1980. The auditor may examine the relevant law. He can not the weakness of the management for deduction of Zakat. This weakness may be present in the audit report.
16. Incomplete Information
The auditor may not obtain complete and full information and explanation for the purpose of audit. The facts can be presented to the owners that he is unable to collect necessary information. He can submit qualified report in order to draw attention. He can submit qualified report in order to draw attention of owners.
17. No Access to Books
The auditor may be refused to have access to the books of accounts and other relevant record. In this case the auditor is unable to collect true information necessary for the purpose of audit. The qualified report can be presented to the shareholder due to non-availability of all or any book.

Auditor’s Duties

Auditor’s Duties in Respect of Statutory Report
1. Statutory Report
The report, which is submitted by the directors in the first general meeting of the shareholders is called statutory report. The auditors should duly verify it. The auditor will take following important steps before certifying the statutory report.
2. Study of Legal Documents
The company Memorandum and Articles as also the prospectus should be carefully studied and notes should be made of items affecting terms of share capital issue, minimum subscription, brokerage on shares or underwriting commission, acquisition of assets and liabilities from vendors, mode of satisfaction of purchase consideration etc.
3. Checking of Shares
A complete and exhaustive audit should be made of share capital and debentures issue, including checking of entries in the Register of members and he Register of Debenture holders.
4. Checking of Cash in Hand and Cash at Bank
In order to ascertain the correct balance of cash in hand and in bank, it would be necessary to include in the checking the revenue receipts and payments also.
5. Verify the Capital Receipts and Payments
A through vouching and checking of the cash book transactions for the purpose of verifying the capital receipts and payments will be necessary.
6. Checking of Commission
Auditor should check all types of commission paid or unpaid with the issue or sale of debentures to any one.
7. Verify the Borrowing Power
It should be seen that the limit, if any placed on the borrowing powers of the company is not exceeded.
8. Verify the Minimum Subscription
The auditor should ascertain that the requirements of the law as to minimum subscription have been duly complied with.
9. Checking of Bio Data
Auditor should also verify the names, addresses and descriptions of the directors manages agents and auditors.
10. Verify the Arrears
Auditor should verify the arrears due on calls from directors, managers and agents etc.
11. Scrutiny
Auditor should examine very carefully all the items, which are included in the preliminary expenses account.
12. Checking of Minutes
Director’s minutes will have to be referred to in order to see that the allotment of shares and debentures is properly done and that all capital expenditure and loans borrowed are duly sanctioned.
13. Examine the Passbook
Auditor should examine the bank passbook and verify the receipts and payment with it.
14. Specimen of Auditor’s Certificate
If the undersigned being the auditor of the company, hereby certify that so much of the report are relates to the shares allotted by the company and the cash received in respect of such shares and receipts and the payments of the company is correct.

Audit Working & Audit Note Book

Definition of Audit Note Book

Audit notebook is a diary on which auditor scribble down all important inquiries to avoid the possibility of unquestioned material facts.
Importance
Justice William throws light on the importance of audit notebook in the following words,
The audit notebook that contained detailed information proved to be very helpful to the auditor in every critical moment.
For preparing the audit report it is very useful for that auditor.
In case of negligence charge against the auditor, but note book good evidence can be presented. It may be also used for future guidance and reference. It also enables to auditor to know that what work his assistant at each audit has done.

Advantages of Audit Note Book

1. Audit Report
The audit notebook is helpful to prepare audit report. The auditor can record the weakness of accounting records. The queries not properly answered are started in the audit report when the auditor is satisfied he can submit a clear report.
2. Staff Honesty
The audit notebook is used to determine the integrity and honesty of audit clerks. The moral and ethical value can be examined through audit work. When a person completes his work in time. Time period auditor can appreciate him. If there is pending work after the expiry of time period, he can be held responsible for it. The audit staff must be honest in his work.
3. Helpful For Memory
The audit notebook is help to keep things fresh in memory. The auditor can read the book on daily basis. He can note the weakness on fingertips. The auditor can retain the data in his memory for a longer period of time. He can ask the management to clear the doubtful points before preparing audit report.
4. Reference
The audit notebook is useful for reference. In future it can provide information to the audit staff. The past data gives an insight into business matters. The auditor can note the changes. He can form an opinion about the changes in the nature and size of the business.
5. New Auditor
The audit notebook is useful for new auditor. They can see the weakness of previous years. The old weak points may not be repeated this year.
6. Court Cases
The audit notebook is helpful to defend an auditor in court cases. The people can go to court of law in order to fix liability for negligence of duty. The audit notebook is a written proof of work performed by an auditor.

Definition of Test Checking

According to Professor Meigs,
“Test Checking means to select or examine a representative sample from a large number of similar items.”
It is clear that test checking is sample checking. The whole data must cannot be examined. The audit staffs can statistical technique to check the facts and figures. A certain percentage of transaction can be selected for through examination. The remaining transactions are supposed as checked.

Essentials of Test Checking

1. Sample
The sample items selected from whole data must be representative. The selection can be made by any method. The entire data must be presented in the form of sample.
2. Last Month
The last month of the accounting year is most important. The items appearing in the last month must be given maximum importance at the time of selecting the sample.
3. First Month
The first month of accounting year provides essentials information. The transactions recorded in the first month must be assigned high weight age in order to select the sample.
4. Surprise Testing
The auditors include the element of surprise in selection of test. The accounting staff must be unaware of test checking so that he should not make arrangement for test checking.
5. Checking Method
The auditor can change his method of selecting the sample. At one time he can one use alternate method. The selection method must be charged in time to time.
6. Every Type of Transaction
The auditor must select every type of transaction in test checking. There is a need to include each type of dealing in the sample.
7. Every Employee
The auditor can select the work of every employee. The test checking can be used to examine the work of all employees in the organization.
8. Through Out The Year
The test checking can be applied to all items appearing in the books through out the year. The recurring items are most suitable for test checking.
9. Cash Book
The cash book entries must not be used for test checking. There is a need of cent percent checking of all cash items appearing in cashbook. The control over cash is essential for efficient business working.

Advantages of Test Checking

Advantages of Test Checking
1. Time Saving
The benefit of test checking is available in the shape of time saving. A simple of items is checked and remaining items are treated as checked. In this way there is saving in time.
2. Less Labour
The test checking is useful for saving in labour. A lot of work requires many clerks for completing the audit. But test checking is used to test few items so there is less labour work.
3. Accurate Books
The test checking is useful to note the accuracy of accounting books and other record. There is a demand of error free books. The test checking is a step in the right direction to prove accuracy.
4. Staff Efficiency
The efficiency of accounting staff improves due to test checking. The weakness of employee is reported to management. The employees try to improve their work by overcoming their deficiencies.
5. Timely Report
The benefit of test checking is that timely report can be submitted to the management. The large number of figures can be checked in short period of time so there is no delay.
6. Many Audits
Test Checking is useful to complete many audits in one year. It saves sufficient time, which can be used to check the books of new clients. The auditor is able to raise more income.
7. Special Attention
The auditor can pay special attention to important matters. Test Checking reduces the labour work on the part of audit staff. There is sufficient time period to settle the important matters.

Disadvantages of Test Checking

1. Errors
The demerit of test checking is that errors are not disclosed by it. In the presence of error true and fair view is not possible. No doubt the location of errors is the duty of management but it effects the audit work.
2. Frauds
The demerit of test checking is that planned frauds may not be disclosed. The fraud discovers is the responsibility of management. The audited accounts cannot show true and fair view when fraud exists in books.
3. Responsibility
The demerit of test checking is that auditor cannot shift his responsibility of management. The errors of fraud can be discovered through cent percent checking. So auditor is responsible for test checking.
4. Report
The auditor report may fail to disclose true and fair view of business matters. After test the auditor signs checking the auditor report. The auditor is responsible for audit report based on test checking.

Routine Checking

The auditors check the arithmetic accuracy of journals and ledgers. It is called routine checking. The purpose is detected the error and fraud of simples nature. The audit staff can check the balance appearing in journal and ledgers. The sub-total and total are examined. The differences are calculated. These balance are transfered from one page to another. The amounts carries forward should be the same. The checking is useful for determine the accuracy of the books of accounts. The accounting staff cannot chance the figures after routine checking. The ledger posting is also tested by means of routine checking. The errors may be locked and frauds may be disclosed by it. The auditor is able to give his opinion about the fairness of the financial statements. The auditor can fix the responsibility of the accounting staff for negligence of duty.

Essentials of Routine Checking

1. Sub-Cast
Sub-Cast is a part of routine checking. Sub-total is possible in accounts matters. The sub-cast must be correct.
2. Casts
Cast is part of routing checking. Total in journal and ledger accounts should be examined for accurate results.
3. Carry Forward
Carry forward is a part of routing checking. The balance of one page can be transfered to the next page.
4. Posting
Posting is a part of routing checking. The entries are posted in to the ledger accounts. Posting must be properly examined.
5. Balancing
Balancing is a part of routing checking. Taking the difference of debit and credit in the accounts is called balancing.
6. Carry Down
The amounts in an account can be transferred to next page. The carry down is a part of routing checking.
7. Transfer
Transfer is part of routing checking. The amount is one accounts can be transferred to another account.

Advantages of Routine Checking

1. Accuracy
The benefit of routine checking is that there is accuracy of accounting books and records. The sub-total, casts and carry forward posting, balancing and transfer are stated as correct.
2. Frauds
Routine checking is useful to checking fraud in the books of accounts. The responsibility lies on the head of management for location of fraud. The management can use this tool to meet its duty.
3. Positive Verification
Routine checking helps to verify positive made in the ledger. The correct posting can provide true and fair view of financial statements. The management can verify posting through it.
4. No Change in Figures
Routine checking is useful to eliminate the alternation of figures. The management can meet its obligation with the help of routine checking. The employees cannot alter figures.
5. Final Checking
The benefit of routine checking is that final checking work is reduced. The final checking become early as major work has already been completed through routine checking.

Disadvantages of Routine Checking

Disadvantages of Routine Checking
1. No Care
The work of routine checking is given to junior employee. They do not consider it as important matter. Therefore the expected result cannot be produced for audit purpose.
2. Fraud
The demerit of routine checking is that planned frauds are not disclosed. The responsibility of fraud lies on head of management. The audited accounts may fail to provide true and fair view.
3. Error
The demerit of routine checking is that errors of principle are not disclosed. The responsibility or error can be placed on the head of management. The audited accounts may fail to provide true and fair view.
4. Monotony
The work is routine checking is boring and time consuming. The clerks go on checking the totals and sub-totals and balances. It does not improve the performance of employee rather it bring monotary.

Auditor’s Liabilities

Liabilities of an Auditor

(A) Civil Liabilities
Civil liabilities arise when there are dispute between two parties for a loss caused to one due to the act of another. In this case, the auditor is called upon to pay damages as decided by the court. These may be of the following types
1. Liability of Negligence
Negligence means acting carelessly or failing to perform a duty enjoyed upon a person. An auditor is expected to perform his duties as an agent of the shareholders by exercising care and diligence in the implementation of statutory requirements for the maintenance and presentation of the financial statement. Auditor must be kept himself up to date with the information if he commits some negligence the purpose of audit is failed.
2. Liability of Liable
In the report the auditor may criticize any person. If it is based on the fact there is no liability of the auditor. On the other hand the auditor is liable in order to avoid this liability the auditor should take care that the report is based on facts and is prepare with good intention.
3. Liability of the Third Party
The auditor is expert in finding out the errors and frauds and is aware how to check the books of accounts. Many third parties as the shareholders, investors, tax authorities, creditors and government rely upon his reports. So if he makes any type of error or fraud, he is liable to pay the damages.
4. Misstatement in Prospectus
According to section 59 The civil liability of an auditor arises due to misstatement in prospectus. Where a prospectus invites person to subscribe for shares or debentures of a company, the auditor shall be liable to pay compensation to every person who subscribe for a purchase any shares or debentures on the faith of the prospectus for any loss or damage be may reason of any untrue statements.
5. Breach of Contract
If the auditor fails to fulfill the term of the contract the civil liability arises of an audited. In case if he omits the all or some conditions of contract, if he cannot make the secrecy, if fails to provide the true and fair view to the owner, he is liable to pay to the owner if sustain any finacial loss.
(B) Criminal Liabilities
Since for certain purpose of the companies Act, and auditor is deemed to be an officer of the company, he is a liable for such. Act of omission or commission constituting offence under the Act.
6. Misstatement in Prospectus (Sec-63)
Here a prospectus containing any untrue or misstatement is issued with the consent of auditor who shall be punished the with imprisonment which may extend up to two years or with fine which may extend up to Rs. 5,000/- or both.
7. Requirements of Reports (Sec-225)
Here the auditor does not confirm to the requirement of reports as per sec-229 he shall be punished with fine, which may extend up to Rs. 1,000.
8. Assistant to Investigate (Sec-240).
Auditor has statutory duty to assist any investigator appointed by the central Government in collecting any information of the company otherwise he shall be punished with imprisonment which may extend up to six month or with a fine up to Rs. 2,000/- or both for continuous default Rs. 200/- per day may also be charged.
9. Assistance to Prospectus (Sec-242)
On the basis of report of an inspector control Government may prosecute any officer. Auditor is to assist in such prosecution otherwise he is to be punished for contempt of court.
10. Return Books, Papers Property etc. (Sec-477)
At the time of winding up of a company, court may ask the auditor to return any property books or papers of the company otherwise he can be arrested.
11. Public Examination (Sec-478)
On the report of official liquidation, the audition of the companies to the publicly examined. Notes of such examination shall be used as evidence in any civil or criminal proceeding against the auditor.
12. Falsification of Books of Accounts (Sec-539)
Where the auditor is guilty of destruction, multilation, alteration, falsification of any books papers securities, he shall be imprisoned which may extend up to 7 years and shall also be liable to fine.
13. Prosecution of Auditor (Sec-545)
Where auditor is found be guilty of any criminal offence by the liquidator of the company, he shall be prosecuted.
14. False Statement In Any Return
Where the auditor makes any false statements in any material respect in any return report, certification, balance sheet etc, he shall be imprisoned which may extend up to 2 year and shall also be liable to fine.
15. Disqualified Auditor (Sec-254(6))
The company ordinance has clearly stated the persons who are not qualified as auditor, but if an unqualified auditor may act as auditor of the company. He is liable to fine up to Rs. 5,000/- rupees.
16. Non-Compliance (Sec-260)
In case when the auditor makes any report or signed against the legal requirement and the report may be not true the auditor is liable to fine for Rupees 2,000/- if it is willful fault.
17. Auditor Report
If the auditor make the report with the extent to profit himself and the third party for any loss for a material consideration it is a criminal liablity. He may be punished for six months and fine upto 2,000/- rupees.
18. Assist Inspector (Sec-268)
The auditor has to give all the necessary assistance in connection with investigation to the inspector. Some times the auditor may fail to give it. In this case he shall be punishable up to one year and fixed up to ten thousand rupees.
19. Auditor Account (Sec-384(4))
The auditor is liable to submit his report after or within he two months at the end of the period to which account relates. If he fails there is a fine up to rupees 5,000/-
20. False Evidence (Sec-419)
If any person provides false evidence he is punishable up to two years and liable for fine also. The evidence may be affidavit oath or some affirmation etc.
21. Winding (Sec-420)
The criminal liability of company officers including auditor may be composed may year before or during liquidation of company of criminal offences like concealing or removing property, concealing or falsifying document and papers. The liquidation can go to the court of law for proving the breach of duty.
22. False Statement (Sec-492)
Whoever makes a statement false or incorrect or omits any material fact shall be punishable with imprisonment for a term, which may extend to three year and shall be liable to a fine not exceeding twenty thousand rupees.
23. Pakistan Penal Code (Sec-197)
Whoever makes a statement false or incorrect or omits any material fact shall be punishable with imprisonment for a term, which may extend to three year and shall be liable to a fine not exceeding twenty thousand rupees.
24. Professional Misconduct
If the auditor fails to follow the rules of their own profession he is liable for the criminal liability. For this default the council can with draw the certificate of practice. The council can also go to the court of law for prosecuting the concerned auditor. The auditor can suffer the jail or fine or both.
(C) Other Liabilities
25. Honorary Audit
The auditor on the honorary basis may also accept an audit work. After the completion of the audit work he is bound to submit his report.
26. Joint Audit
When the two auditors carried out the work of audit it is called as the joint audit. It is possible by the two independent auditors under the agreement. Sometimes, a business concern may have two or more than two business places in different cities or countries conduct the audit by one auditor. So this audit is conduct the responsibilities lies on the head of every auditor who had done the work of audit. It is also stated in the audit report.

Vouching

Introduction It means to test the truth of items appearing in the books of original entry. It is an important part of an auditor’s duty to certify as correct the transactions recorded in the looks of accounts. The Accountant of a business is responsible for passing entries in the books of prime entry. The question arises how and on what basis such entries have been passed. The auditor’s primary duty is to check these entries and only then certify the accounts as correct and free from any error or fraud.
Definition
A careful examination of all original evidence such as invoice receipt of correspondence minutes, contracts etc.
Vouching is very useful in proving the accuracy of the entries in the books of accounts. It also indicates about that transaction, which is omitted from the books of account.
Importance
Vouching is called the essence of auditing. So audit is not possible without vouching. The object of vouching is to find out the accuracy of the entries appearing in the books of accounts and detect that no entry has been omitted from the books of account.

Principles of Vouching

1. Arranged Voucher
In the books of accounts the vouchers are based an entry. A voucher is helpful to support any transaction, which may be cash memo fill, voucher, ticket or others.
2. Checking of Date
The voucher date can also be checked; it must be related to the current year. The date of the last or future year must not be adopted.
3. Checking of Authority
The vouchers are considers correct only when the proper authority signs on them. For the approval of the dealing the owner or the management must put the signatures for the approval of dealing if the vouchers are without the signatures of the proper authority. They are not considers the true.
4. Cutting or Change
There should be no changes in the vouchers. Any person for making the fraud can change the time, date, amount and name of concern. So, these changes cannot be acceptable till the approval authority has made the signature.
5. Compare the Words and Figures
The auditor should satisfy himself amount written on the vouchers, it figures and words are same or not.
6. Transaction Must Relate to Business
For the correctness of the vouchers it is necessary that it relate with the business. Concern, the vouchers must be in the name of the business and also the manager. If it does not the vouchers are not acceptable and doubtful.
7. Case of Personal Vouchers
The auditor should not accept the voucher in personal name. There is a chance than an officer of the company has purchased any item in his personal capacity.
8. Checking of Account Head
Auditor must be satisfied about the head of account in which cash is deposited and drawn. He should examine the documentary evidence in these regards.
9. Revenue Stamps
For the stamps, the stamps act 1899 is applicable while fixing the revenue stamps. The stamps are required according to the valuation of the amount or cash memo. There is no need of vouchers if amount is less than twenty rupees.
10. Case of Cancelled Voucher
The auditor should not accept the cancelled vouchers because it has already served the purpose of payment. There will be a danger of double payments, if it is accepted.
11. Important Notes
For finding the correct decision, the auditor can also take help from the working papers of the previous year and others paper or note related to business and available with the management.
12. Minutes Book
When the meeting of shareholders is held. All the resolutions and decisions of the directors and shareholders are recorded in the minute’s book. This minutes book must be examine by the auditor. He has to check that these decisions have been implemented in the books of accounts or not.
13. By Laws
In case of company the article of association and memorandum are basically the rules and regulations. But on the other hand in the societies and clubs the by laws are used to determine the powers of management. The auditor goes through these rules and regulations to find the true and fair view.
14. Agreements
The auditor must examine all the related papers of the business such as the agreement, correspondence and others. The basic information can be received to the auditor by such papers.
15. Deed of Mortgage
Some times, you are the sale or purchase of any assets, the management can enter into the agreement is prepare in this case. If the agreement is prepare in this case. If the agreement is made for a loan against the immovable property then the mortgage deed is signed. It is compulsory for the auditor to study the content of the deed.

Techniques of Vouching

1. Correct Accounts
The auditor can check the accounts debited and credited are correct in all respects. The rules of debit and credit can be followed for dividing the transactions into accounts.
2. Agreements
The auditor must examine the agreements, correspondence and other papers relating to business activities. Such agreement provides basic information to the auditor. He can vouch the transactions based on such agreements.
3. By-Laws
The memorandum and articles of association are rules and regulations in case to company. The by-laws of societies and clubs and used to determine management power. The auditor has the right to go through these rules and regulation.
4. Mortgage Deeds
The management may enter into agreement with any party for the purpose and sale of assets. The deed or agreement is prepared. In case of loan against immoavable property mortgage deed is signed. The content of deed must be situated.
5. Minutes Book
The auditor should examine the minute’s book. The resolution and decision of directors and shareholder are recorded there. He can see that such decision have been implemented in the books of accounts.

Procedures of Vouching

1. Reading Out
The vouching is a task of the auditor. The junior audit can read out the contents of the vouchers. He can inform the senior auditor about the data name of organization, number of voucher and amount of vouchers.
2. Comparison
The senior can head the contents called out by junior auditor. He tally each and every item stated in the voucher with entries in the books of accounts. Thus comparison is a part of vouching procedure.
3. Ticking
The senior auditor can use various ticks or symbols to clear the items checked. The ticks may be an abbreviation of words. Such ticks or symbols may differ from auditor to auditor because these are code words.
4. Stamping
The senior auditor instead of signature or initials he can use stamps for checking the vouchers can use the rubber stamps. The rubber stamp may have the wording checking and cancelled on it.
5. Signatures
The senior auditor can vouch the entries with the help of vouchers. He can put his signature or initials on every voucher for safety measures. The signed vouchers cannot be presented again for another entry.
6. Query
The voucher may be missing. The entries may be doubtful due to over writing and erasing. The audit staff can make the word “Q” against such entry. This entry is recorded in working papers.
7. Management
The audit staff can be giving sometime to the management for clearing the objections. The doubtful entries are handed over in written form. The management can examine the record in detail.
8. Reply
The management may reply after one or two days about the doubtful entries. The auditor can examine the reply of the managers. The auditor can judge whether the reply is right or wrong.
9. Clearance
The audit staff can clear the query for which proper answer is made available. The auditor may not be satisfied with the answer of objections. He can inform the management about this query.
10. No Satisfactory
The auditor may reject the unsatisfactory reply. He has skill, training and experience. He can use all available means to test the truth. He can note down poor clarification in working papers.
11. Objections
The objection stated in the working papers can be discussed with the management at the end of audit. He can form an opinion on the basis of such objections. He can submit his report either clear or qualified.

Objectives of Vouching

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

Internal Control

Internal Audit

Internal audit is an evaluation and analysis of the business operation conducted by the internal audit staff. (who are employee of the business)It is the part of over all system of internal control established in an organization. “Internal audit is the independent appraisal of activity with in an organization for the review of accouting, financial and other business practices as a protective and constructive arms of management. It is a type of control which functions by measuring and evaluating the effectiveness of other type of controls.” Professor Walter B Meigs define internal audit
Internal auditing consist of a continuous, critical review of financial and operating activities by a staff of auditors functioning a full time salaried employees.

Internal Control

The concept of internal control has evolved gradually over the years, with the greatest development occurring at the beginning of 1940. Not only the complexities of modern business techniques but also the increased size of business units have encouraged the adoption of methods which, while increasing the efficiency of the business, also act as a safeguards against errors and frauds. Furthermore, the regulation of business activities under an efficient system of internal control may obviate the necessity of protracted detailed work by an independent auditor with beneficial results to all parties concerned. Thus the inpetus for development of internal control has come from both management and auditor. The effect on auditing has been to reduce the need of routine mechanical verification of book-keeping, accuracy, permitting substitution of a less time-consuming approach that involves reasoning and judgment and stress on such activities as review, analysis, evaluation and statistical sampling.

Internal Check

Internal check is an arrangement of duties allocated in such a way that the work of one employee is automatically checked by another. These are no separate staff engaged to carry out the system of internal check. It, in fact, represents only the arrangements of duties of the staff in a way. The system of internal check is devised in such a way that the possibilities of errors, frauds and irregularities are minimized.
Following matters are included in the internal check

• Matters relating to allocation of power.
• Division of work.
• Methods of recording transactions

Various Types of Internal Control

Types of Internal Control
1. Organization
Organization is concerned with placement of workers on their jobs. Authority and responsibility go together. The workers are responsible for their activities. The head of department is responsible for looking after the worker of his own department.
2. Segregation of Duties
The segregation of duties is necessary. There are many employees. All aspects of a transaction are not complete by one person. The recording of transaction by many persons can reduce the risk of errors and frauds. The division of duties can improve the working of workers.
3. Physical
The physical internal control is desirable to safeguard assets. The access to assets must be limited. The authorized persons can be allowed to examine the assets. The persons may visit the warehouse or they may release the assets through requisition slips. The assets require lockers, iron safe possession of keys and use of passes of warehouse.
4. Approval
All transaction in any business requires proper approval of responsible person. The limit for approval may be fixed. The creditor recovery officer can approve credit sales. The foreman can approve overtime wages. Purchase officer can approve the purchase of goods.
5. Accounting
The accounting control is concerned with approval of transactions, accurately processing and correctly recording. The control of total, preparation of trail balance reconciliation’s and control accounts is necessary. There is examination of vouchers that every aspect is not over looked so far this type of control is concerned.
6. Management
The top-level management can apply certain controls beyond the routine working of business. The management control, include internal audit review of management accounts comparing actual result with budgets, supervisory control and many other review procedure of business functions.

Principles of Internal Control

Principles of Internal Control
1. Simple Record and Books
The principal of the internal control is also the simple records such as the record of employees, plant register list of shareholders etc are kept in usual simple manner books should be kept up to date and at regular internals these should be balanced. He different persons should make handling of cash transactions. For instance the cashier should not be allowed to record the cash in the accounts book. He should have no concern with written ledgers.
2. Independent Checking
Another person should independently and automatically check work performed by one person.
3. Principle Relating to Staff
It is also the part of the internal control. The employees are placed on the business according to their ability. The employees are bound for the duties for which they are assigned. Duties of each staff member should be clear and there should be no confusion and doubt in this regard. In case of any staff member absence duties arrangements should be made in advance.
4. Changing
It is also an important principle that no one should handle the transaction from beginning to end, because in this situation there is a chance of fraud. Generally most of the frauds are committed due to this reason.
5. Proper Supervision
It is also a principal of the internal control. All the senior officers have a right to supervise the activities of their juniors. It is necessary for the benefit of the business.
6. Clear Rules
All those rules relating to cash stock receipts and issuance of goods should be very clear and well defined. It should be also checked that the employees should follow their rules properly.
7. Instructions in Writing
All the instructions should be in written form according to the best internal control system.
8. Qualified and Competent Staff
For the better internal control system the qualified staff is necessary. And it should also necessary that the stuff is placed at a proper place.
9. Double System of Accounting
For the internal control the double accounting system is very helpful. No doubt, it is an expensive system but it helps a lot for the internal control.
10. Incentive for Honest Worker
Honest and hardworking person must be encouraged. He should be given some reward in the shape of promotion and cash. This principle is also very effective in improving the internal control.
11. Use of Machines
It is also the principal of the internal control how to use the machines. He has to check either the proper machines have been installed and if it does so the work can be completed in time.
12. Performance of Duties Record
For the best internal control it is necessary that the performance of all the employees must be recorded.
13. Record of Goods and Assets
All the companies assets and property record should be maintained properly. There should be also the security measures for the property.
14. Surety Bonds
To protect the company from fraud and to make the internal control more effective surety bonds can be taken from the employees.
15. Division of Duties
Division of duties is a part of internal control. The employees can be placed on jobs according to their abilities. The duties are assigned to which they are accountable.
16. Rotation of Duties
Rotation of duties is a principle of internal control. An employee must be from one seat another. It is necessary for increasing the efficiency and avoiding the chances of errors and fraud.
17. Division of Work
Division of work is a principle of internal control. The total amount of work is determined. It is divided among the department’s branches and sections. It has become possible due to specialization and division of labour.
18. Subsidiary Record
Subsidiary record is a principle of internal control. The detail every account is maintained. Stock of goods may consist of many items. As a whole it is called stock account or stock control account and every group of items can be stated in subsidiary record.
19. Confirmation From Outsiders
The confirmation from outsiders from outsiders is a principle of internal control. The letters may be written to debtors to confirm their accounts balances. There may be positive or negative approach in collecting information from sundry debtors.
20. Checking Physical Existence
The auditor can check the physical existence. He can see the asset in the possession of a responsible officer. He can touch, court and check the items at business premise.
21. Dependent Work
Dependent work is a principle of internal control. One person cannot be allowed to do every aspects of a transaction. The work depends upon many persons. Every person is dependent upon others to perform his duties.
22. Supervision
Supervision is a principle of internal control. The officer, foreman or supervision has the right to look after activities of junior workers. The supervisory control is essential to make the business effective.
23. Internal Audit
Internal audit is a part of internal control. The management can ask expert employees to examine the accounts of the business. It helps the concern to check and frauds. The progress of the entity is disclosed through it.
24. Fidelity Bond
It is an agreement between the issuance of company and the employee. In case of loss the insurance company can pay compensation for loss of cash or goods. The cashier can get insurance from the insurance company.
25. Control Accounts
Control accounts are proposed to check the accuracy of the accounting books and other record. The total debtors accounts and total creditors accounts or sales ledger adjustments and purchase ledger adjustments accounts are prepared.

Objects of Internal Control in Detail

1. Assets Protection
The assets are the backbone of any business. These assets are in the custody of some specific officers of the business. The internal control system checks the valuation and protect the assets of the business.
2. Accurate Record
The main object of the internal control is to maintain all records and transactions of the business according to the generally accepted accounting principal.
3. Follow Policies
The purpose of internal control is follow policies of management. The policies are guidelines for obtaining the business objectives. All employees try their best to follow the rules of the game.
4. Prevention of Error
The purpose of internal control is to prevent errors. There may be unintentional mistake due to overwork or carelessness. There is normal load work with every person. Others check the work of one person.
5. Prevention of Frauds
The purpose of internal control is to prevent fraud. It is an intentional misrepresentation of financial information by one or more individuals among management, employees or their parties.
6. Best Use of Resources
The purpose of internal control is the best use of resources. There is a need of optimum combination of resources for maximizing profits. Internal control can point out weakness, which can be removed.
7. Nature of Audit Test
The purpose of internal control is to determine nature and extent of audit test. When there is effective internal control there will be few audit test other wise there is need of through checking.
8. Reliable Record
The purpose of audit is to maintain reliable accounting record. The equal distribution of work among the employees provides complete and reliable record, as it is free from error and fraud.
9. Reduces Work Load
The purpose of internal control is the reduction of workload. The effective internal control can be useful for auditors. They can check few items and remaining items will be treated as checking by the auditor.
10. Location of Errors
The purpose of internal control is the location of errors. There are many types of error, which may be found in the accounting record. The internal control procedures are useful to locate the error in accounting.
11. Detection of Fraud
Detection of fraud is the purpose of internal control. The compliance procedure and substantive procedures can be applied to detect the fraud. Basically it is a management responsibility.
12. Record of Business
Internal control system is also required for the maintainers of the reliable accounting record. Due to the internal control the records are without the errors and frauds.
13. Record of Expenditures
Same way the internal control system keeps the records of all the expenditure of the business and there are fewer chances of errors and frauds.
14. Recording of Transaction
Due to the internal control system all the transactions are recorded properly in the correct account in the proper period.
15. Actual Comparison
The assets and the other records, which are recorded, can be easily compared with the actual existed information.
16. Preparation of Statement
Another object of the internal control is to ensure about the preparation of the financial statement at the proper time as the balance sheet or profit and loss.
17. Management Objectives
The objectives of the system of internal control are to ensure the achieving of the other important management control.

Limitations of Internal Control

1. Cost
The management thinks that cost of a control procedures must not be in excess of potential loss due to error or frauds.
2. Transactions
The internal control tends to be directed a anticipated types of transactions and not at unusual transactions.
3. Error
There is possibility of human error due to carelessness distraction, mistake of judgement or the misunderstanding of instructions.
4. Circumstances
There may be collusion with parties outside the entity employees of the entity. Due to such collusion there is possibility of circumvention of control.
5. Responsibility
There is chance that a person responsible for exercising control could abuse that responsibility, for example, a member of management overriding a control.
6. Conditions
There is possibility that procedure may become inadequate due to changes in conditional and compliance with procedure may deteriorate.

Principles of Internal Check

1. Sufficient Staff
The principle of internal check is sufficient staff. The employees can be appointed according to the workload. The management can determine the amount of work, which is distributes among the departments. The persons are hired to perform their duties. The overloading can creates trouble for management.
2. Division of Work
Division of work is a principle of internal check. The management can determine the total amount of work. The whole work is divided among departments. The heads of such department are responsible for completion of work according to timetable.
3. Co-Ordination
Coordination is a principle of internal check. All departmental managers are bound to coordinates with other in order to achieve organization objectives. When there is fault in one department, the work of other department suffers. The objectives cannot be achieved. Internal check determines the degree of coordination among the managers.
4. Rotation of Duties
Rotation of duties is a principle of internal check. The workers feel bore by doing the same work from year to year. There is a need of rotation of duties. It is in the interest of concern as well as employees. The efficiency is improved due to changes is duties.
5. Recreation Leave
The recreation leave is a principle of internal check. The employee can check recreation leave. It is necessary for mental health. He can commit fraud as the new employee in his place can disclosed teh matter. The internal check system can work in the interest of business. The weakness is of one person is disclosed due to leave.
6. Responsibility
The responsibility is a principle of internal check. The employee can enjoy recreation leave. It is necessary for mental health. He can enjoy recreation leave. It is necessary for mental health. He cannot commit fraud as the new employee in his place can disclose the matter. There internal check system can work in the interest of business. The weakness in of one person is disclosed due to leave.
7. Automatic Machines
The principles of internal check is that machines must be used to do accounting work if permissible. The machines can do a lot work without delay. The changes of fraud and error are reduced to a minimum. The working of machines improves efficiency of accounting staff.
8. Checking
The principle of internal check is to check the work of other employees. Many persons perform the work. The officers can put his signatures to verify the work done by his subordinate. In this way one work passes many hands. The changes of error and fraud are minimized due to checking and counter checking.
9. Simple
The principle of internal check is simples in working the employees can understand the working of internal check system. A person can work under the supervision of other employees. The line of authority moves from top to bottom level. All workers can understand their duties in the organization.
10. Documents Classification
The classification of documents is the principles of internal check. The business documents are prepared, collected, recorded and placed in proper files. The index is prepared to compile the data. The filing system is useful to place the latter. In case of need the documents are traced at once.
11. Dependent Work
Dependent work is a principle of internal check. The work of one employee is dependent upon others. One work passes in the hand of two or three persons till it is complete. Another person checks the passes done by one person. No person is all in all to start and complete the transactions.
12. Harmony
The principles of internal check are harmony among the employees and departments. The understanding is essential for business goals. The management is to achieve other social and national objectives. The harmony is basis for successful internal check.

Disadvantages of Continuous Audit

Disadvantages of Continuous Audit

1. Alteration of Figures
The records and figures in the books of accounts, which have already been checked by the auditor, may be altered after the audit is over. A dishonest clerk can do it do defraud the accounts.
2. Expensive
Continuous audit is more expensive as compared to other kinds of audit, because the auditor has to devote more time to this audit.
3. Inconvenience
In this audit, the auditor visits the client’s office at regular intervals to check the accounts and records these frequent visits made by the auditor may dislocate the work of his client and cause convenient to him.
4. Mechanical Work
The work of audit becomes too mechanical because it remains continue throughout the year.
5. Queries Problem
If the auditor’s two visits interval is long then so many queries remains outstanding.
6. Small Business
Continuous audit is not fit for small business concerns. A small business has few transactions so there is no need of audit for whole one year. The owner as manager can know facts behind books as details audit is burden.
7. Client Work
The demerit of continuous audit is that the work of the client suffers due to clash of duties and the client staff remaining busy for the whole years. When the audit work is started work of accounting staff as books are not spare.
8. Staff Initimacy
The accounting staff and audit staff work side by side for the whole year. Friendship among the employees and auditors may lead to error and frauds. The sympathetic view of audit staff may fail to show true and fair view.
9. Missing Link
In the audit the auditor has to come at regular interval to check the accounts and hence the link between the past and present work cannot be maintained. Consequently the thread of work is very likely to be lost.
10. Low Income
The continuous audit keeps the staff busy for one year. They are not able to start and complete many audits at the same time. The given to one business is much higher as compared to final audit. So it is not suitable for audit staff from financial point of view.
11. Spoon Feeding
Frequent visits by the auditor may induce the client’s staff to depend upon him even for minor things.
12. Expensive
A continuous audit is an expensive form of audit in that the more frequent visits by the auditor means the higher fees of auditor.
13. Wastage of Time
This type of audit is not helpful for the auditor because in this time period they cannot conduct any other audit. So this is low-income audit for the auditor.
14. Words of Client
Another disadvantage of the audit is that the works of the client staff suffer due to the work of both positive. The books of the accounts are not free for the other party to do.
15. Type of Business Concern
This is not fir for the small type of business concern. In the small business concern, there are only few transactions. So there is no need for this concern.
16. Mechanical Work
In this type of audit, the auditor has to repeat all the products as bookkeeper does where as audit work by nature should not be under thinking and boring.
17. Extensive Notes Taking
In this type of audit possible alteration after audit can be avoided by taking note on diary regarding audit of internal control. So the continuous audit requires the compilation of bundle of notes.
18. Chances of Collusion
Frequent visits of auditor may establish some unhealthy relationship between the client’s staff and auditor’s staff. Thus there are chances of moral check. Upon them and there may be collusion between them.