COST SHEET

1) From the books of accounts of M/s Avdhoot Enterprises, the following details have been extracted for the quarter ending December 31, 2005: Particulars Rs. Stock of materials opening 2,70,000 Stock of materials closing 3,00,000 Purchases of material 12,48,000 Direct wages 3,57,600 Direct expenses 1,20,000 Indirect wages 24,000 Salaries to administrative staff 60,000 Carriage inwards 48,000 Carriage outwards 37,500 Managers salary 72,000 General charges 37,200 Legal charges and criminal suit 20,000 Commission on ales 28,000 Fuel 96,000 Electricity charges (factory) 72,000 Directors fees 36,000 Repairs to plant and machinery 63,000 Rent, rates and taxes factory 18,000 Rent, rates and taxes office 9,600 Depreciation on plant and machinery 45,000 Depreciation on furniture 3,600 Salesmens salary 50,000 Audit fees 18,000 (1) The managers time is shared between the factory and the office in the ratio of 20:80. (2) Carriage outwards include Rs.7,500 being carriage inwards on plant and machinery. (3) Selling price is 120% of the cost price. From the above details prepare detailed cost sheet for the quarter ending 31-12-2005 and ascertain sales. (March 2006) 2) The following particulars have been extracted from the books of M/s Sohan Manufacturing Company for the year ended 31-03-2007: Particulars Rs. Opening stock of raw materials 2,35,000 Closing stock of materials 2,50,000 Raw materials purchase 10,40,000 Drawing office salaries 48,000 Royalty on production 70,000 Carriage inwards 41,000 Cash discount allowed 17,000 Repairs to plant & machinery 53,000 Rent, rates and taxes (factory) 15,000 Rent, rates and taxes (office) 8,000 Office conveyance 15,500 Salesmens salaries & commission 42,000 Productive wages 7,00,000 Depreciation on plant and machinery 35,500 Depreciation on office furniture 3,000 Directors fees 30,000 Gas and water charges (factory) 7,500 Gas and water charges (office) 1,500 Managers salaries 60,000 Cost o catalogues print 10,000 Loose tools written off 8,000 Trade- fair expenses 10,000 Out of 48 hours in a week, manager devotes 40 hours for factory and 8 hours for office per week for the whole year. The management has fixed the selling price @ 110% of cost. Prepare detailed cost statement for the year ended 31-03-2007. (Mar. 08)

3) From the following particulars prepare cost sheet showing various elements of cost: Particulars Rs. Opening stock of raw materials 1,10,000 Purchases of raw materials 8,25,000 Carriage outwards 28,500 Direct wages 4,21,400 Direct power 25,840 Technical directors salary 40,590 Factory rent, rates & insurance 10,140 Sale of factory scraps 1,460 Depreciation on factory buildings 75,200 Closing work in progress 1,20,260 Factory stationery 12,340 Opening stock of finished goods 45,280 Closing stock of raw materials 36,920 Fees to brand ambassador 2,00,000 Stationery and printing 12,200 Staff salaries 6,30,000 Trade discount 1,20,000 Office 60,000 Free samples expenses 20,320 Closing stock of finished goods 50,240 Sales are made to earn profit @ 10% on cost price. (Oct. 2006) 4) From the following particulars, prepare a cost sheet showing the components of total cost and profit for the year ended 31st March, 2004. Particulars Rs. Stock of finished goods on 1-4-2003 6,000 Stock of finished goods on 31-3-2004 15,000 Stock of raw materials on 1-4-2003 40,000 Stock of raw materials on 31-3-2004 50,000 Work in progress on 1-4-2003 15,000 Work in progress on 31-3-2004 10,000 Purchases of raw materials 4,75,000 Carriage inwards 12,500 Wages 1,75,000 Work managers salary 30,000 Factory employees salary 60,00 Factory rent, rates & insurance 7,250 Power expenses 9,500 Other production expenses 43,000 Sales for the year 8,60,000 Income tax 5,000 Dividend received 2,500 Interest on debentures 10,000 Transfer to sinking fund 20,0000 Goodwill written off 10,500 Selling expenses 16,000 General expenses 32,500 5) The following details are available for the year ending 31-3-2005. Particulars Direct wages Purchases of material Indirect materials Indirect wages Office salaries Employers contribution to Employees State Insurance Corporation Printing and stationery Power and fuel Legal charges Rs. 60,000 72,000 3,600 5,400 7,200 600 1,200 5,400 864

Office rent 1,200 Sales (9000 units) 1,80,000 Opening stock: Raw materials 12,000 Work in progress 2,880 Finished goods (600units at the rate of Rs.16.25 per unit) Closing stock: Raw materials 13,344 Work in progress 9,600 Finished stock (1200 units) ? Value the finished stock at cost of production. Prepare a cost sheet showing different elements of cost. (Mar. 2005) 6) Dunkel Ltd. started a factory in Navi Mumbai on 1st April, 2003. Following details are furnished about its activity during the year ended 31st March, 2004:Raw material consumed- 40,000 units @ Rs.7 per unit. Direct wages:(a) Skilled worker Rs.9 per unit. (b) Unskilled worker Rs.6 per unit. Royalty (on raw material consumed) @ Rs.3 per unit. Works overheads @ Rs.8 per machine hour. Machine hours worked: 25,000 Office overheads at 1/3rd of works cost. Sales commission @ Rs.4 per unit. Units produced: 40,000. Stock of units at the end: 4,000 units to be valued at cost of production per unit. Sales price is Rs.50 per unit. Prepare cost sheet showing the various elements of cost both in total and per unit. (oct.96) 7) Prepare a cost sheet showing the total and per ton cost of paper manufactured by Times Paper Mills Ltd. for the month of March, 2004. There were 26 working days in the month. Also find the profit earned by the company. The details are as under:Direct raw materials: Paper pulp: 6,000 tons @ Rs.900 ton. Direct labour: 280 skilled workmen: Rs.250 per day 300 semiskilled workmen: Rs.150 per day 470 unskilled workmen: Rs.100 per day Direct expenses: Special equipments hire charges: Rs.12,000 per day Special dyes: Rs.250 per ton of total raw material input Work overheads: variable: @ 50% of direct wages Fixed: Rs.2,70,000 p.m. Administration overheads: @ 12% of works cost Selling and distribution overheads: Rs.80 per ton sold Opening stock of paper: 500 tons valued @ Rs.2,501.60 per ton Closing stock of paper: 300 tons valued at cost of production. The paper is sold @ Rs.3,000 per ton. (Apr. 97) 8) The state Government granted license to Sweet Sugar Ltd. to manufacture and sell sugar with a stipulation that 40% of the output should be sold to the State Government at a controlled price of Rs.3,000 per ton and the balance output can be sold in the open market at any price. Following are the details of Sweet Sugar Ltd. for the year ended 31st March, 2004. During the year 3,600 tons sugarcane was consumed @ Rs.1,000 per ton. Direct labour amounted to Rs.825 per ton of sugar produced. The details of the expenditure are as follows; Particulars Rs. Direct expenses 4,20,000 Telephone charges 3,52,695 Office computer purchased 2,75,350 Factory rent and insurance 3,54,760 Machinery purchased 4,25,560

Machinery repairs 98,847 Commission on sales 3,37,650 Factory salaries 2,19,588 Carriage outwards 1,54,090 Packing expenses 1,94,450 Bank interest 1,65,895 Factory electricity 2,61,880 Delivery van expenses 1,06,850 Coal consumed 3,80,125 Depreciation on machinery 2,49,600 Depreciation on computer 2,04,180 Depreciation on delivery van 1,57,360 Office salaries 1,89,325 Printing and stationery 1,13,000 During the year 2,400 tons of sugar was produced. The companys profit target for the year, for fixing the open market selling price on the basis of cost sheet, is 10% of its average paid-up capital of Rs.1,42,56,000. Prepare cost sheet and find various components of total cost and per unit cost and suggest the selling price for open-market. (Apr. 2000) 9) M/s Vishal Manufacturing Company manufactures two types of products viz. A and B. the information for the year ended on 31st March, 2004 is as under: Particulars Products A B Rs. Rs. Direct material per unit 100 120 Direct labour per unit 60 50 Direct expenses pre unit 40 80 Additional information: (1) Factory expenses are charged at 20% of prime cost. (2) Office expenses are charged at 25% of works cost. (3) 2,000 units o product A were produced of which 1,500 units were sold and 5,000 units of product B were produced of which 4,500 units were sold. (4) Selling expenses are Rs.15 per unit for product A and Rs.20 per unit for product B. (5) Company charges a profit at 20% on sales for both the products. Prepare a cost sheet showing the cost and profit in total as well as in per unit. (Apr. 98) 10) M/s Vidya pen Company manufactures two types of pens Sharada and Viveka. The particulars for the year ended 31st March, 2004 were as follows: Particulars Rs. Direct material 5,00,000 Direct wages 2,25,000 Direct expenses 75,000 Total sales 10,00,000 There was no work-in-progress at the beginning or at the end of the year. On the study it is ascertained that:(1) Direct material per unit in Sharada pen consists twice as much as that in type Viveka pen. (2) The direct wages per unit for Viveka pen were 40% of those Sharada pen. (3) Direct expenses were same per unit for Viveka as well as Sharada pen. (4) Factory overheads were 20% of the prime cost. (5) Administrative overheads were 50% of direct wages. (6) 2,500 units of Sharada pen were produced of which 2,000 were sold and 5,000 units of Viveka pen were produced of which 4,000 were sold during the year. (7) Selling overheads were rs.8 per unit for Sharada pen and Rs.9 per unit for Viveka pen. (8) Selling price per unit or Sharada pen was Rs.250 and Viveka pen was Rs.125 respectively. You are required to prepare statement showing cost and profit in total as well as per unit for Sharada pen and Viveka pen. (Oct. 99) 11) A co. manufactures two types of products viz. A and B. the information is available for the year ended on 31 st March, 2004: Direct material Rs.6,75,000 Direct wages Rs.9,90,000 Work overheads Rs.1,95,000 (1) Direct material used per unit in product A were 3 times that of product B.

(2) (3) (4) (5) (6) (7)

Direct wages per unit in product B were 2/3 that of product A. Works overheads per unit were the same or both the products. Administration overheads were 100% of the prime cost in each of the products. Selling and distribution cost per unit was Rs.6 for both A & B. 35,000 units of product A were produced, out of which 32,000 units were sold @ Rs.100/- per unit. 30,000 units of product B were produced, out of which 25,000 units were sold @ Rs.65/- per unit. Prepare cost sheet showing total cost and cost per unit for both the products. (Oct. 98)

12) Super Vision Company furnishes you with the following information about its 1000 TV sets manufactured and sold during the year: Particulars Rs. Particulars Rs. Materials 18,00,000 Office and administration 6,80,000 Direct wages 10,00,000 expenses 1,20,000 Power and stores 2,40,000 Selling and distribution 40,000 Indirect wages 3,00,000 expenses 62,00,00 Factory lighting 1,20,000 Sale of scrap 2,00,000 Cost of rectifying 60,000 Sale of 1000 TV sets defective work Repairs and depreciation of machinery Prepare the cost sheet for the above year, showing the elements of cost per unit. Prepare also the estimated cost sheet for the next year assuming that:(1) Material cost and direct wages cost will increase by 10% and 15% respectively. (2) Factory overheads will be recovered as a percentage of direct wages, as last year. (3) Office overheads and selling overheads will be recovered as percentage of works cost, as last year, and (4) 15000 TV sets will be produced and sold at Rs.6,600 each in the next year. (Apr. 2002) 13) In respect of a factory the following figures have been obtained or the year 2003: Rs. Cost of materials 12,00,000 Factory overheads 6,00,000 Selling overheads 4,48,000 Distribution overheads 2,80,000 Direct wages 10,00,000 Administrative overheads 6,72,000 Profit 8,40,0000 A work order has been executed in 2004 and the following expenses have been incurred: Materials Rs.16,000 and wages Rs.10,000 Assuming that in 2004 the rate of factory overheads has increased by 20%, distribution overheads have gone down by 10% and selling and administrative overheads have each gone up by 12%, at what price should the product be sold as to earn the same rate of profit on the selling price as in 2003? Factory overheads are based on direct wages while all other overheads are based on factory cost. (Oct. 2002) 14) The Trading Profit and Loss Account of Vijaya Manufacturing company for the year ending 31-12-2003 was as follows:Particulars Rs. Particulars Rs. To raw material 80,000 By sales (2500 units) 2,50,000 purchased 30,000 By closing stock of raw 5,000 To direct wages 25,000 material To direct expenses 40,000 To factory expenses 80,000 To gross profit c/d 2,55,000 2,55,000 25,000 80,000 To office salaries By gross profit b/d 12,000 10,000 To office rent By dividend received 12,500 7,500 To selling expenses By discount received 2,500 To preliminary expenses 5,500 written-off 40,000 To goodwill written-off 97,500 97,500 To net profit c/d For the year 2004, it is estimated that (1) Units produced and sold will rise by 20%. (2) Prices of raw material per unit will rise by 10%. (3) Direct wages per unit will increase by 25%.

(4) Direct expenses will increase by Rs.5,000 in total. (5) Factory expenses per unit will increase by 25%. (6) The office premises which was on rental basis in 2003 would be purchased by the company, on which depreciation would be Rs.6,000 in 2004. (7) Selling expenses per unit will remain same. You are required to prepare a statement showing estimated cost and profit for the year ended 31-12-2004 considering that company shall charge a profit at 20% on sales. (Mar. 2003) 15) KT manufacturing company gives you the following particulars for the year 2004. Production and sales during the year was 10,000 units. Particulars Rs. Materials 2,50,000 Direct wages 1,50,000 Administrative overheads (fixed) 1,00,000 Sales 12,00,000 Profit 2,50,000 Factory overheads:Fixed 1,00,000 Variable 2,00,000 Selling and distribution overheads:60,000 Fixed 90,000 Variable The company has worked to its maximum capacity of 10,000 units during 24. The management has decided to increase production capacity to 15,000 units for the year 2005 and it is estimated that: (i) There will be all round rise in all variables expenditure by 10%. (ii) There will be increase of 20% in all fixed overheads. (iii) There will be no need to change the selling price or the year 2005. Prepare a statement showing total as well as unit cost and profit for 2004. Also prepare a statement showing estimated profit for 2005 taking into consideration the changes in 2005. (Oct. 2003) 16) Following information is available from cost records for the year ended 31 st December, 204: Direct material Rs.36 per unit Direct labour Rs.28 per unit Chargeable expenses Rs.11 per unit Factory overheads fixed Rs.15,00,000 Variable Rs.10 per unit Office overheads fixed Rs.12,50,000 Selling overheads fixed Rs.5,00,000 Variable Rs.25 per unit Units produced and sold 50,000 Selling price Rs.210 per unit Following changes are anticipated during the year ended 31 st December, 2005. Production and sales will increase by 60%. Direct material cost per unit will increase by 12.5% Direct labour per unit will decrease by 5%. Chargeable expenses per unit will decrease by 10%. Variable factory overheads per unit will increase by 25%. Variable selling overheads will decrease by 25%. All fixed overheads will increase by 20%. 75% of the output will be sold in domestic market at a profit of 20% on sales. Balance 25% output will be sold in export market at a profit of 50% on sales. You are required to: Prepare a cost sheet for the year ended 31st December, 2004 and estimated cost sheet for the year ended 31st December, 2005, showing total and per unit cost. Calculate total and per unit profit for the year ended 31st December,2004. Calculate total sales and profit for domestic market and export market. (Oct.2005)

(1) (2) (3) (4) (5) (6) (7) (8) (9) (1) (2) (3)

17) The management of a manufacturing concern has approached the costing department to find out the cost of 6,000 units. The cost analysis of 4,000 units gives the following results: Materials Rs.90,000, labour Rs.50,000, direct expenses Rs.1,000, factory overheads Rs.2,000, administration overheads Rs.1,600 and selling & distribution overheads Rs.800. The further details in this connection are as follows:

(a) (b) (c) (d)

An increase of 10% is expected in the cost of raw material and 5% in the cost of labour. 70% of the factory overheads are fixed and 30% are variable. The ratio of fixed and variable part of administration overheads is 60:40. 50% of the selling and distribution overheads are fixed. The management desires to charge 25% profit on sale price. Prepare cost statement with maximum break up of cost and ascertain selling price for the production of 6000 units. (Mar. 2007) 18) Swadeshi Electronics Ltd. furnishes to you the following information for the year ended 31 st March, 2004: Production and sales 15,000 units Sales Rs.12,75,000 Direct wages Rs.2,70,000 Direct materials Rs.3,30,000 Factory overheads Rs.2,25,000 Administrative overheads Rs.1,05,000 Sales overheads Rs.90,000 On account of intense competing following changes are estimated in the subsequent year:Production and sales activity will be increased by one third. Material rate will be lower by 25%. However there will be increase in consumption by 20% due to quality difference. Direct wages cost would be reduced by 20% due to automation. Out of the above factory overheads, Rs.45,000 are of fixed nature. The remaining factory expenses are variable in proportion to the number of units produced. Total administrative overheads will be lower by 40%. Sales overheads pre unit would remain the same. Sale price per unit would be lower by 20%. Prepare a statement of cost for both the years ending 31 st March, 2004 and 31st March, 2005 showing maximum possible details of cost. (Apr.96)

(1) (2) (3) (4) (5) (6) (7)

19) Domestic Appliance manufactures pressure cookers. For the year ending 31 st December, 2003, expenses incurred are as follows for an output of 2,000 units. Particulars Rs. Raw materials consumed 2,00,000 Direct wages 1,00,000 Factory overheads 1,60,000 Administrative overheads 46,000 Selling overheads (10% sales 70,200 value) 36,000 Distribution overheads During the year, 200 units were unsold. For the year 2004, the following changes were estimated: (a) Raw materials price would rise by 10% but consumption per unit would decrease by 5%. (b) Direct wages would rise by 3.5%. (c) Of the factory overheads Rs.60,000 are fixed and would remain at the same level but the variable thereof would be in same proportion to direct wages as in 2003. (d) Administrative overheads would rise by 20%. (e) Selling overheads as a percentage of sales value would remain at the same level and distribution overheads would remain same per unit as in 2003. (f) The output and sales would be 3,000 pressure cookers. (g) Expected profit in the year 2004 is 40% of sales. From the above information prepare: (1) Cost-sheet of the year 2003 and projected cost sheet of the year 2004 showing per unit and total cost. (2) Working notes for the projected cost sheet. (3) Projected sales price. (Apr. 2001) 20) Vaijnath Polymers manufactures and sells a typical brand of tiffin boxes under its own brand name. The installed capacity f the plant is 1,20,000 units per year, distributable evenly over each month of calendar year. The cost accountant of the company has informed you about the cost structure of the product, which is as follows: Raw materials Rs.20 per unit Direct labour Rs.12 per unit Direct expenses Rs.2 per unit Variable overheads Rs.16 per unit

(a) (b)

(a) (b)

Fixed overheads for the year Rs.3,00,000 Semi-variable overheads are as follows:Rs.7,500 per month upto 50% capacity and Additional Rs.2,500 per month for every additional 25% capacity utilization or part thereof. The plant was operating at 50% capacity during the first seven months of the calendar year 203 and at 100% capacity in the remaining months of the year. The selling price for the period from 1st January, 2003 to 31st July, 2003 was fixed at Rs.69 per unit. The firm has been monitoring the profitability and revising the selling price to meet its annual profit target of Rs.8 lacs. You are required to suggest the selling price per unit for the period from 1 st August, 2003 to 31st December, 2003. Prepare cost sheet clearly showing the total and per unit cost and also profit for the period:From 1st January, 2003 to 31st July, 2003. Form 1st August, 2003 to 31st December, 2003. (Oct. 2000)

21) A factory manufactures a uniform type of article and has a capacity of 10,000 units per week. The following information shows the different elements of cost for three consecutive weeks when the output has changed every week. Units Direct Direct Factory overheads produced materials labour (part variable & part fixed) No. Rs. Rs. 2,000 12,000 6,000 12,500 2,800 16,800 8,400 16,500 3,700 22,200 11,100 21,000 The factory has received an order for 5,000 units and it desires a profit of 16 2/3% on selling price. Find out the price at which each unit should be sold. 22) The following figures are extracted from the Books of Gogetter Co. on 30 th September, 2008: Particulars Inventories: Finish stock 80,000 Raw materials 1,40,000 Work-in-progress 2,00,000 Office appliance 17,400 Plant & machinery 4,60,500 Buildings 2,00,000 Sales 7,68,000 Sales return and rebates 14,000 Materials purchased 3,20,000 Freight incurred on materials 16,000 Purchase returns 4,800 Direct labour 1,60,000 Indirect labour 18,000 Factory supervision 10,000 Repairs and upkeep factory 14,000 Heat, light and power 65,000 Rates and taxes 6,300 Miscellaneous factory expenses 18,700 Sales commission 33,600 Sales traveling 11,000 Sales promotion 22,500 Distribution dept- salaries and 18,000 expenses 8,600 Office salaries and expenses 2,000 Interest on borrowed funds Further details are available as follows: (1) closing inventories: Finished goods 1,15,000 Raw materials 1,18,000 Work-in-progress 1,92,000 (2) Accrued expenses on: Direct labour 8,000 Indirect labour 1,200

Interest on borrowed funds 2,000 (3) Depreciation to be provided on: Office appliances 5% Plant and machinery 10% Buildings 4% (4) Distribution of the following costs: Heat, light and power to factory, office and distribution in the ratio 8:1:1 Rates and taxes two-thirds to factory and one-third to office Depreciation on buildings to actor, office and selling in the ratio 8:1:1 With the help of the above information, you are required to prepare the following schedules of Gogetter Co. for the year ended 30th September, 2008: (i) Costs of sales (ii) Selling and distribution expenses (iii) Administration expenses Also prepare a statement showing the profit. (CA-PCC) 23) A factory incurred the following expenditure during the year 2007: Particulars Direct material consumed Manufacturing wages Manufacturing overhead: Fixed 3,60,000 Variable 2,50,000 (1) (2) (3) (4) (5) Rs. 12,00,000 7,00,000 6,10,000

25,10,000 In the year 2008, following changes are expected in production and cost of production. There will be recruitment of 60% more workers in the factory. Production will increase by 44% There will be an increase of 20% in fixed overhead and 60% in variable overhead. The cost of direct material will be decreased by 6%. The company desires to earn a profit of 10% on selling price. Ascertain the cost of production and selling price. (PE-II, May 08)

24) the accounts of Z Ltd. for the year ended 31st December, 2004, shows the following: Rs. Work office salaries 6,500 Administrative office salaries 12,600 Cash discount allowed 2,900 Carriage outward 4,300 Carriage inward 7,150 Bad debt written off 6,500 Repairs to plant and machinery 4,450 Rent, rates, taxes and insurance, etc. 8,500 Factory 2,000 Office 4,61,000 Sales Stock of raw materials 48,000 1st Jan. 2004 62,800 31st Dec. 2004 1,85,000 Materials purchased 2,100 Traveling expenses 7,700 Travelers salaries and 1,26,000 commission 6,50 Productive wages 300 Depreciation on plant and 6,000 machinery 1,200 Depreciation on office furniture 400 Directors fees 10,000 Gas and water (factory) Gas and water (office) 3,400 Managers salary (1/4 office and

3/4 factory) General expenses You are required to .prepare a cost statement for the year ended 31 st December, 2004. (Apr.95) 25) From the following data, prepare a cost sheet for the year 2005. Number of units produced: 10,000 units. Rs. Opening stock of raw material 3,00,000 Purchase of raw material 8,00,000 Closing stock of raw material 1,00,000 Carriage outward 8,000 Wages indirect 20,000 Salary: Office 50,000 Sales office 40,000 Other factory expenses 50,000 Trade fair expenses 20,000 Depreciation: Factory 30,000 Office 20,000 Selling 20,000 Direct salary 50,000 Advance interest received 40,000 Custom duty paid for purchase of raw material 5,00,000 Debenture interest paid 50,000 Freight inward 20,000 Custom duty paid on purchase of 50,000 plant 2,00,000 Direct wages 50,000 Other direct charges 5,000 Goodwill written off Number of units sold 8,000 units at cost plus 12% profit Direct salary is to be allocated to factory, office and selling in the ratio of 2:1:2. ( Apr.96) 26) From the following data, prepare a cost sheet for the year 2005. Opening stock of raw material Purchases Closing stock of raw material Carriage outward Wages direct Wages indirect Chargeable expenses Rent and rates: Factory Office Indirect materials Drawing office salaries Depreciation: plant Office furniture Salary: office Salesmen W.I.P.: 1-1-2005 31-12-2005 Sale of by product Other factory expenses Other office expenses Managing directors remuneration Other selling expenses Art work charges Stock of finished goods:1-1-2005 31-12-2005 Rs. 3,00,000 8,00,000 4,00,000 50,000 7,00,000 1,0,000 2,00,000 40,000 5,000 15,000 10,000 5,000 1,000 25,000 20,000 20,000 10,000 10,000 57,000 9,000 1,20,000 10,000 40,000 10,000 50,000

Traveling expenses of salesmen 11,000 Carriage inward 10,000 Sales 25,00,000 Advance income tax paid 1,50,000 advertisement 20,000 M.D.s remuneration to be allocated as Rs.40,000 to factory, Rs.20,000 to office and Rs.60,000 to sales. (Oct. 96) 27) Hindustan Machine Tools Ltd. furnishes for March, 2006 the following information for a department: Deluxe wrist watches manufactured 1,000 pieces. Cost and other data Rs. Opening stock Raw materials 4,50,000 Finished goods (200 pieces) 3,30,000 Closing stock Raw materials 5,00,000 Finished goods (300 pieces) ? Purchases o raw material 7,00,000 Direct labour 4,00,000 Indirect labour factory 1,00,000 Consumption of stores and 90,000 spares 19,80,000 ales Other overheads Factory Rs. Office Rs. Sales depot Rs. 1,50,000 10,000 20,000 50,000 5,000 10,000 20,000

Salary 1,00,000 2,00,000 Electricity 25,000 2,000 Stationery and printing 10,000 25,000 Traveling expenses 3,000 10,000 Rent 5,000 5,000 Showroom and exhibition expenses 15,000 25,000 Miscellaneous expenses The stock of finished goods is valued at current months cost of production. (a) You are required to prepare a cost sheet for the month of March, 2006 and ascertain the amount of profit. (b) What should be the selling price in order to earn additional profit on sales? (Apr. 97) 28) Following is the Profit and loss account for the year ended 31 st March, 2005 of M/s Cool and Comforts Ltd., manufacturers of table fans. They manufactured and sold during the year 2000 fans. Particulars Rs. Particulars Rs. To materials consumed 1,20,000 By sales 6,00,000 To wages 1,80,000 To manufacturing 75,000 expenses 2,25,000 To gross profit c/d 6,00,000 6,00,000 By gross profit b/d 15,000 2,25,000 To rent, rates and taxes 30,000 To general expenses 90,000 To management expenses 45,000 To sales and distribution 45,000 expenses To net profit 2,25,000 2,25,000 Their estimates or the next year ending 31st March, 2006 are as under: (1) The production and sales would increase to 3000 fans. (2) The prices of material per fan would increase by 20%. (3) The labour cost per fan would go up by 10%.

(4) The manufacturing expenses would remain in the same proportion to materials consumed and wages as in the previous year. (5) The selling and distribution expenses per fan would remain unchanged. (6) The other expenses would remain unaffected on account of in the production. Prepare a statement for the two years, 2004-2005 and 2005-2006 showing cost and profit per fan and total cost and total profit, giving maximum possible break-up of cost. (Oct. 95) 29) From the following particulars prepare cost sheet. Particulars Raw material Productive wages Direct expenses Factory rent & taxes Unproductive wages Factory lighting Factory heating Motive power Office stationery Haulage Directors fee (works) Directors fees (office) Factory cleaning Sundry office expenses Estimating Factory stationery Water supply Drawing office salary Factory insurance Office insurance Legal expenses Rent of warehouse Depreciation on plant and machinery Depreciation on office building Depreciation on delivery vans Bad debts Advertising Sales department Salaries Upkeeping of delivery vans Bank charges Commission on ales Loose tools written off Rent & taxes Output (tonnes) Rs. 66,000 70,000 6,000 15,000 21,000 4,400 3,000 8,800 1,800 6,000 2,000 4,000 1,000 400 1,600 1,500 1,400 1,000 2,200 1,000 800 600 4,000 2,000 400 200 600 3,000 1,400 100 3,000 1,200 1,000 10,000

30) The following information is available from a manufacturing industry during the four months ended 31 st March, 2004. Particulars Raw material consumed Rs.25,000 Direct labour Rs.20,000 Direct expenses Rs.15,000 Machine hours worked 800 hours Machine hours rate Rs.25 Office on cost 30% work Selling on cost cost Unit produced Rs.5/- per Unit sold unit 1,000 800 Profit is 20% on sales. You are required to prepare a cost sheet in respect of the above showing: (i) the cost per unit, (ii) the profit for the period. (Oct. 2005)

31) From the following information prepare cost sheet: Particulars Opening stock- raw material Work in progress Finished goods Closing stock- raw material Work in progress Finished goods Purchase of raw material Donation Direct labour Direct expenses Rent and taxes- factory Office Fuel Factory insurance Profit on sale of machinery Office salary Sale of wastage Office insurance Stationery Salesmen salary Carriage inward Carriage outward Cash discount Commission received sales

Rs. 5,00,000 1,00,000 4,00,000 5,00,000 1,00,000 4,00,000 50,00,000 50,000 20,00,000 2,00,000 2,50,000 2,50,000 2,00,000 1,00,000 20,000 4,00,000 20,000 50,000 20,000 1,00,000 50,000 50,000 10,000 1,00,000 1,00,00,000

32) Mr.Nitin provides the following data relating to the manufacturing of one standard product during the month of April, 2005. Particulars Rs. Opening stock of raw material 30,000 Raw material purchased 80,000 Carriage inward 15,000 Closing stock of raw material 20,000 Direct labour charges 80,000 Machine hour worked 1,000 Machine hour rate 20 Administrative overheads 10% on works cost Selling overheads Rs.0.49 per unit Unit produced 50,000 units Unit sold 40,000 units @ Rs.7.00 per unit You are required to prepare a cost sheet from the above showing: (a) The cost per unit, (b) profit per unit sold and profit for the period. (Oct. 2006) 33) From the following information of Ashtavinayak Ltd. for the year ended 31 st March, 2006 you are required to prepare the cost sheet for the same period. Particulars Rs. Opening stock- raw material 10,000 -Work in progress 5,000 -Finished goods 20,000 Purchase of raw material 1,00,000 Carriage inward 10,000 Closing stock- raw material 5,000 -Work in progress 3,000 -Finished goods 9,000 Wages 24,000 Royalty on sale 10,000 Factory expenses 13,500 Salesmen salaries 10,000 Office and administrative 20,000

expenses Sales Profit is 20% on sales 34) From the following details prepare cost statement. Particulars Opening stock of raw materials Machinery (original cost) Printing and stationery Bank interest received Direct wages Raw material purchases Office expenses Depreciation on machinery Commission on sale Opening stock of finished goods Closing stock of raw materials Sale of scrap Advertisement expenses Closing stock of finished goods sales

? (Apr. 2007) Rs. 72,000 80,000 20,000 14,000 35,000 80,000 26,000 8,000 23,000 80,000 35,000 12,000 19,000 25,000 4,23,500 (Oct. 2006)

PROCESS COSTING
1) A product passes through 3 distinct processes to completion. During December 2003, 500 units were produced. The cost books show the following information: Particulars Process Process Process A B C Materials 3,000 1,500 1,000 Labour 2,500 2,000 1,500 Direct 500 2,160 905 expenses The indirect expenses for the period were Rs.1,400 to be apportioned on the basis of labour cost. The residue of process B was sold or Rs.145. residue of process C was sold for Rs.166. prepare the process accounts showing the cost of each process and the cost of production of the finished product per unit. 2) A manufacturer of a food preserver produces two grades of the product involving three distinct processes of manufacture. The identical units are introduced in process A and the entire output I transferred to process B. thereafter the production is divided. One third is transferred to process C to become grade I product and twothird to process C-1 to become grade II product. Rom the following particulars prepare the relevant process accounts. Particulars Rs. Rs. Opening stock Grade I 780 units 31,980 Grade II 1,320 units 50,160 82,140 Materials Process A (21,120 units introduced) 2,62,750 Process B 55,610 Process C 15,920 Process C1 3,53,280 19,000 Direct labour Process A 63,000 Process B 1,32,000 Process C 54,000 Process C1 3,36,000 87,000 There was no opening or closing stock in process A and process B. works overheads are absorbed @40% of direct labour in all processes. There were no spoiled units in any process. All the units of grade I were sold @ Rs.55 each and grade II @ Rs.50 each. Also show working of Profit/ Loss on sale of grade I and grade II units. (Oct. 2001) 3) Varun motors Ltd., manufactures a component of a motor car which passes through three processes. The normal waste of process 1 is 20% of the units introduced. The wastage (normal and abnormal) is sold at Rs.50 per unit. 2000 units were introduced in this process at Rs.100 per unit. The additional expenditure incurred was Rs.60,000. Prepare accounts showing the cot of production per unit under the following conditions: (a) If the production is 1,600 units. (b) If the production is 1,500 units. (c) If the production is 1,800 units. Show your calculations relating to the cost of production separately. 4) Samantar Ltd. manufactures a product which passes through two consecutive processes viz Purvardha and Uttarardha. The company furnishes you with the following information for the year ended 31 st March, 2004. Particulars Purvardha Uttarardha Basic material 5,000 units Rate per unit Rs.2.20 Rs. Rs. Process material 4,000 3,000 Wages 3,000 4,000 Factory overheads 2,000 2,630 Process loss as percentage of input 10% 10% Scrap value of process loss (per 40 60 100 units) Prepare process account and other relevant accounts under the following two alternative circumstances assuming that the entire process loss is: Circumstance 1: normal loss and

Circumstance 2: abnormal loss Entire output of Uttarardha process was sold for Rs.30,000. Show the consequent reflection of the final results in profit and loss account under both the circumstances. (Apr. 1996) 5) Y Ltd. manufactures a chemical product which passes through three processes. The cost records show the following particulars for the year ended 30th June, 2004. Input to I process 20,000 units @ Rs.28 per unit. Particulars Process Process Process I II III Rs. Rs. Rs. Materials 48,620 1,08,259 1,03,345 Labour 32,865 84,553 77,180 Expenses 2,515 10,588 16,275 Normal loss 20% 15% 10% Scrap value per 1 2 3 unit 18,000 16,000 15,000 Actual output (units) Prepare process accounts, abnormal gain/loss accounts. Also show process cost per unit for each process. (Oct. 2005) 6) Product A is manufactured after it passes through three distinct processes. The following information is obtained from the records of the company for the year ended 31 st December, 2003. Particulars Process Process Process I II III Rs. Rs. Rs. Direct 2,500 2,000 3,000 material 2,000 3,000 4,000 Direct wages Product overheads are Rs.9,000, 1000 units at Rs.5 each were introduced to process I. there was no stock of materials or work in progress at the beginning and at the end of the year. The output of each process passes direct to the next process and finally to the finished stock A/c. production overheads are recovered on 100% of direct wages. The following additional data is available: Particulars Output Percentages Value during of normal loss of the to input scrap week per unit (Rs.) Process I 950 5% 3 Process II 840 10% 5 Process III 750 15% 5 Prepare process cost accounts and abnormal gain or loss accounts or the year ended 31 st December, 2003. (Apr. 1995) 7) Product X is obtained after it is processed through three distinct processes. The following information is available for the month of March, 2004: Particulars Total Processes Rs. A B C Material 22,500 10,400 8,000 4,100 consumed 29,320 9,000 14,720 5,600 Direct labour 29,320 Production overheads 2,000 units at Rs.4 per unit were introduced in process A. production overheads to be distributed as 100% on direct labour. The output and normal loss of the respective processes are: Processes Output in Normal loss on Value of scrap units inputs per unit Rs. Process A 1,800 10% 2.00 Process B 1,360 20% 4.00 Process C 1,080 25% 5.00

There is no stock or work-in-progress in any process. You are required to prepare process account. (Oct. 1998) 8) Product A is obtained after it is processed through process X,Y and Z . The following cot information is available or the month ended 31 st March, 2004. Particulars Processes X Y Z Number of units introduced in the process 500 Rate per unit of units introduced (Rs.) 4 Cost of material 2,60 2,00 1,02 Direct wages 0 0 5 Production overheads 2,25 3,68 1,40 Normal loss (% on units introduced in each process i.e. input) 0 0 0 Value of scrap per unit 2,25 3,68 1,40 Output in units 0 0 0 10% 20% 25% 2 4 5 450 340 270 There is no stock in any process. You are required to prepare the process accounts. (Apr.1999) 9) The product of a company passes through three distinct processes to completion. These processes are known as X, Y and Z. from the past experience, it is ascertained that wastage is incurred in each process as under: Process X- 2%, process Y- 4%, process Z- 10% The wastage at each process possesses scrap value. The wastage of processes X and Y is sold at Rs.2.50 per unit, and that of process Z at Rs.5.00 per unit. The output of each process passes immediately to the next process and finished units are transferred from process Z into stock. The following information is obtained. Particulars X Y Z Rs. Rs. Rs. Material 2,70,000 2,60,000 1,20,000 Wages 4,30,000 2,40,000 1,30,000 Direct 1,37,500 1,45,000 1,80,000 expenses 50,000 units were put in process X at a cost of Rs.10 per unit. The output of each process is as follow: Process X- 48,750 units. Process Y- 47,000 units. Process Z- 42,000 units. There is no stock of work in progress in any process. Prepare the process accounts, abnormal gain account and abnormal loss account. (Apr. 1990, Apr. 2001) 10) A product passes through three processes. The following cost data have been extracted from the books of a manufacturing company. Particulars Total Process Process Process (Rs.) I II III Material 1,50,840 52,000 39,600 59,240 Direct wages 1,80,000 40,000 60,000 80,000 Production 1,80,000 overhead 10,000 units at Rs.6/- each were introduced into process I. there was no stock of material of work-in-progress at the beginning or at the end. The output of each process passes directly to the next process and finally to the finished stock. Production overhead is recovered at 100% of direct wages. The following additional data are obtained: Process Output Percentage of Value of unit normal loss in scrap per output unit I 9,500 5% 4 II 8,400 10% 8 III 7,500 15% 10 Prepare process accounts and abnormal loss/ gain account and normal loss account. (Oct. 2007) 11) M/s XYZ and company manufacture a chemical which passes through three processes. The following particulars gathered for the month of January, 2006: Particulars Process Process Process I II III

Materials (liter) Materials cost Wages Normal loss (% of input) Scrap sale value Output transferred to next process Output transferred to warehouse

400 Rs. 38,400 Rs. 7,680 4% 50% 50%

208 Rs. 18,800 Rs. 7,600 5% Rs.3 per liter 40% 60%

168 Rs. 6,000 Rs. 2,200 5% 100% (Mar. 2007)

Overheads are charged @ 50% of direct wages. You are required to prepare process accounts.

12) Abad Chemicals Co. Ltd. produced three types of chemicals during the month of March, 2004 by three consecutive processes. In each process 2%ofthe total weight put in is lost and 10% is scrap. Scrap of process I and process II realize Rs.100 a ton and that of process III Rs.20 a ton. The product of the processes are dealt with as follows: Particulars I II III Passed on the next process 75% 50% Sent to warehouse for sale 25% 50% 100% Details of cost: Raw materials used: tonnes 1,000 140 1,348 Rs. 1,20,000 28,000 1,07,840 Direct wages 20,500 18,520 25,000 General expenses 10,300 7,240 4,320 Prepare process cost accounts showing cost per ton of each process. 13) The product of a company passes through three direct processes, called A, B and C. from the past experience, it is ascertained that wastage is incurred in each process as under: Process A- 2%; process B- 5%; process C- 20%. The percentage of wastage is computed on the number of units entering the process concerned. The wastage of each process processes a scrap value. The wastage of process A and B is sold at Rs.50 per 100 units and that of process C at Re. 0.75 per unit. Following information was obtained for the month of March, 2004: 20,000 units of crude materials were introduced in process A at the cost of Rs.8,000. Particulars Process Process Process A B C Rs. Rs. Rs. Materials 4,000 1,500 1,000 consumed 6,000 4,000 3,000 Direct labour 1,800 3,500 1,000 Manufacturing 19,500 21,000 15,900 expenses Output in units 2,000 3,000 5,000 Finished product 1,500 4,000 ? stock 1st March, 2004 31st March, 2004 Stock valuation on 1st March, 2004: per unit Re.1, Rs.1.50, Rs.2.00 respectively in process A, B and C. stocks on 31st March are to be valued as per valuation on 1st March, 2004. Draw process accounts A, B and C and process stock accounts of process A, B and C. 14) Reliable Yarn Ltd. manufactures a yarn product. The product passes through three consecutive processes F.Y., S.Y. and T.Y. relevant details for the month of March, 2004 are as under: Particulars F.Y. S.Y. T.Y. Process Process Process Quantitative information in Kilograms: Basic input in kilograms @ Rs.10 per 2,000 kilogram 1,950 1,925 1,679 Output during the month Stock of process 200 300 100 - on 1st March, 2004 150 400 59 - on 31st March, 2004 2% 5% 8%

Percentage of normal loss to input in Rs. Rs. Rs. process 9,000 2,100 2,716 Monetary information: 3,064 1,860 4,000 Process material 3,880 6,720 2,800 Wages 1 2 4 Value of opening stock Scrap value per kilogram Closing stock is to be valued at the respective cost of each process. Prepare process accounts, process stock accounts, abnormal loss and abnormal gain account. Find out the costing profit, when the sales out of T.Y. process stock are made at Rs.40 per kilogram. (Oct. 1996) 15) Satyug Times Ltd. submits the following information in respect of its product which passes through three consecutive processes viz ingestion process, digestion process and assimilation process, for the month ended 31st January, 2004. Particulars Ingestion Digestion Assimilation Process Process Process Quantitative information (Kgs.) 80,000 Basic raw material @ Rs.40 80% 60% 50% per Kg. 62,000 36,000 21,000 Normal yield Output during the month 8,000 8,000 5,000 Stock of process output: 10,000 4,000 4,000 31-12-2003 31-01-2004 Rs. Rs.8,26,000 Rs.6,17,000 Other additional 3,45,000 1,500 1,000 information: 2,400 Rs.100 Rs.150 Process material Rs.80 50% of Rs.2,34,000 Labour man days 60% of process Labour rate per man day wages material Rs.1,27,000 Machine overheads Rs.1,63,000 Rs.300 Rs.2,75,800 Rs.140 Rs.20 Other manufacturing Rs.60 Rs.15 overheads Rs.10 Value of opening stock per Kg. Scrap value per Kg. Finished stock of assimilation process was sold at Rs.350 per Kg. Prepare the process accounts, process stock account, normal loss account and the abnormal gain/loss account. (Oct. 1997) 16) M.U. Industries Ltd. is manufacturing a product which passes through three consecutive processes, F-Yarn process, S-Yarn process and T-Yarn process. The following figures have been taken from their books for the year 31st March, 2004: Particulars Quantitative details Basic input @ Rs.300 per unit Output during the year % of normal waste Process stock- opening Process stock- closing Monetary information Process materials Wages Manufacturing overheads Value of opening stock per unit Scrap value per unit F-Yarn Process 9,000 8,000 10% 300 500 Rs. 4,20,000 2,67,000 2,40,000 420 250 S-Yarn Process 6,000 25% 500 300 Rs. 6,60,000 3,73,500 2,53,500 680 300 T-Yarn Process 5,000 15% 100 400 Rs. 8,73,000 3,11,100 2,41,900 900 400

Closing stock is to be valued at respective cost of each process (as per the respective process accounts for the year ended 31st March, 2004) You are required to prepare: (a) process accounts, (b) process stock accounts, (c) abnormal loss account and (d) abnormal gain account. (Apr. 2000) 17) Particulars Indirect material Direct wages Direct expenses Value of opening stock per unit Scrap value per unit Output Stock of process: 01-01-2005 31-12-2005 Percentage of wastage Process A Rs. 1,00,000 56,250 51,250 25 13.50 Units 9,750 1,500 1,250 2 Process B Rs. 18,750 35,000 6,875 31 11.25 Units 9,625 1,375 2,000 5 Process C Rs. 16,550 44,900 11,500 40 21.00 units 8,000 2,000 1,000 10

10,000 units of direct material were introduced in process A at the rate of Rs.5 per unit. The percentage of wastage is computed on the number of units entering the process concerned. From the above information of DE Enterprise prepare: (a) process accounts, (b) process stock accounts, (c) normal loss account, (d) abnormal loss account, (e) abnormal gain account. Value closing stock at the respective process cost. (Mar. 2006) 18) The following details for the year ending 31st December, 2003 are available from the books of a trader having three workshops and a wholesale warehouse. Particulars Workshop Workshop Workshop A B C Raw material used (tonnes) 250 152 145 Cost per ton Rs. 600 400 250 Direct wages Rs. 4,29,000 1,01,250 52,800 Direct expenses Rs. 69,000 88,350 13,450 Loss of ton due to 4% 5% 2.5% processing Proportion of production 20% transferred 50% To workshop B at cost To workshop C at cost 80% 50% 100% Proportion of production transferred 12,500 10,000 20,000 To wholesale warehouse 10 20 Wholesale warehouse: Stock on 1-1-2003 at cost Stock on 31-12-2003 at ton Sales were Rs.20,00,000, salaries Rs.2,00,000 and administrative expenses Rs.1,00,000. Prepare the respective workshop accounts showing the cost per ton each workshop and an account showing the net profit

of the firm for the year 2003. Closing stock in warehouse to be valued at the cost per ton in each workshop. (Oct. 1989) 19) Mr. Kale manufactures a product in two grades, grade I and grade II from common raw material. Raw material is introduced in basic process the produce of which is dealt with as follows: 25% sold in open market. 25% transferred to grade I process and the balance 50% transferred to grace II process. The details of process are as follows: Particulars Basic Grade I Grade II Process Process Process Raw materials 1000 units Cost per unit Rs.200 Other materials Rs.25,000 Rs.30,000 Rs.30,000 Labour Rs.60,000 Rs.50,000 Rs.50,000 Manufacturing O. Hs Rs.75,000 Rs.60,000 Rs.60,000 Sale price per unit Rs.400 Rs.1,400 Rs.900 Prepare process accounts and determine total profit earned by Mr. Kale assuming that there is no stock in any process. (Oct. 2002) 20) KT Ltd. provides you the following information for the year ended 31 st March, 2004. Particulars Processes A B C Raw materials (units) 12,000 2,440 2,600 Cost of raw material per unit (Rs.) 5 5 5 Direct wages Rs. 34,000 24,000 15,000 Production overheads Rs. 16,160 16,200 9,600 Normal loss (%of total no. of units entering to the 4% 5% 3% process) 6% 5% 4% Wastage (%of total no. of units entering to the process) 3 4 5 Scrap per unit of wastage Rs. 70% 60% Output transferred to subsequent process 30% 40% 100% Output sold at the end of the process 12 16 17 Selling price per unit Rs. Prepare process A, B and C account. (Apr. 1998, Oct. 1999, Mar. 2003) 21) Assemblers Ltd. have three assembly shops viz General assembly, Lower assembly and Higher assembly. Part of the output is transferred to the next assembly and part is sold directly. The company furnished the following information. Particulars General Lower Higher Raw material (in liters) 5,000 1,920 3,576 Material cot per liter Rs.60 Rs.40 Rs.80 Labour cost Rs.4,28,000 1,06,000 2,10,000 Direct expenses Rs.88,000 2,85,200 1,04,800 Wastage as percentage of total output 4% 5% 10% (a) output transferred: To lower assembly 60% To higher assembly 40% (b) output sold in market 40% 60% 100% Sale price per liter Rs.200 Rs.205 Rs.250 Administration overhead Rs.36,000 Marketing overhead Rs.48,000 Prepare various assembly accounts and costing profit & loss account. (Apr. 1997, Oct. 2003) 22) Tea Estate Ltd. manufactures flavored tea which passes through three processes. The following particulars are available for the year ended 30-06-2003: 23) Particulars Process I II III Raw material (Kg.) 10,000 4,600 1,500 Cost of raw materials (per Kg. Rs.) 5 6 8 Direct wages (Rs.) 24,000 18,000 12,250 Direct expenses (Rs.) 15,200 10,736 8,590 Factory expenses (Rs.) 20,960 6,000 4,255

Normal loss (1%) 4% Weight loss (%) 6% Scrap value per Kg. (Rs.) 1.80 Output transferred to next process 60% Output sold 40% Selling price of output per Kg. 14 Transferred to finished stock NIL % of normal loss and % of weight loss are based on total input in the process. Prepare process accounts and profit and loss account.

8% 2% 2.50 50% 50% 16 NIL (Oct. 2006)

5% NIL 4 NIL 80% 17 20%

23) M/s Sagar Enterprise Ltd. provides you the following data for the month of January, 2008, about processes D, C and H: Particulars Process Process Process D C H Basic raw material introduced (units) 18,000 3,156 3,450 Cost of basic raw material per unit 5.00 6.00 7.00 (Rs.) 52,000 36,000 30,000 Labour charges (Rs.) 30,440 14,874 15,660 Factory overhead (Rs.) 6% 5% 4% Normal loss (% on total number of 3.00 4.00 5.00 units input) 30% 40% 100% Scrap value pre unit (Rs.) 70% 60% Output sold at the end of process (%) Output transferred to next process 13.50 17.50 18.50 (%) Selling price per unit of the output sold at the end of process (Rs.) Other common expenses not chargeable to process accounts: Office and administration overheads Rs.30,000 Selling and distribution overheads Rs.23,636 You are required to prepare process D, C and H accounts indicating clearly profit or loss in each process and costing profit and loss account. (Mar. 2008) 24) in the timber industry, the milling operation upto the split-off point during a period amounted to Rs.72,000 with the following production: First grade 3,000 timber units Second 6,000 grade timber units Third grade 3,000 timber units 12,000 units You are required to apportion the joint cost: (a) on average unit cost method; (b) on technical evaluation with points 4, 3 and 2 for first, second and third grades respectively. 25) find out the cost of joint products A and B using contribution margin method from the following data: Sales A: 100 Kg @ Rs.60 per Kg B: 120 Kg @ Rs.30 per Kg Joint costs Marginal cost Rs.4,400 Fixed cost Rs.3,900 26) in a manufacturing company 10,000 kiloliters of A is processed to produce 6,000 kiloliters of B and 4,000 kiloliters of C. the joint cost before separation point came to an amount of Rs.24,000. From the following particulars, calculate the apportionment of joint cost and the profit of each product under (a) physical measurement, (b) market value at separation point, and (c) market value after further processing, or market value at finished stage. B C Rs. Rs. Unit selling price at separation point 5.00 3.75

Unit selling price after further processing Further processing costs after separation

7.00 5,000

7.50 7,500

27) A. Ltd. manufactures three joint products A, B and C. the joint manufacturing expenses were Rs.8,000. It was estimated that the profit on each product as a percentage of sales would be 30%, 25% and 15% respectively. Subsequent expenses were as follows: A B C Rs. Rs. Rs. Materials 100 75 25 Direct 200 125 50 wages 150 125 75 Overheads 450 325 150 6,000 4,000 2,500 sales Prepare a statement showing apportionment of the joint expenses of manufacture over different products. 28) in an oil refinery, the product passes through three different processes, viz crushing, refining and finishing. The following information is available for the month of March, 2004: Particulars Crushing Refining Finishing Process Process Process Rs. Rs. Rs. Raw materials (500 tons 9,00,000 Copra) 32,000 23,600 23,500 Wages 4,800 4,000 6,000 Power 2,000 7,600 Sundry materials 2,400 4,000 3,800 Factory expenses 200 tons of oil cake was sold for Rs.60,000 and 275 tons of crude oil was obtained from crushing process. 25 tons of by-product of the process fetched Rs.3,600. 25 tons of by-products of the refining process was sold for Rs.3,600 and 250 tons of refined oil was obtained. 10 ton of finished oil were sold for Rs.4,800 and 240 tons of finished oil was stored in drums. The establishment expenses for the month amounted to Rs.14,000 which is to be charged to the three processes in proportion of 3:2:2. The cost of drums for storing finished oil was Rs.84,100. Prepare accounts for all the three processes. (Mar. 2004) 29) three joint products are produced by passing chemicals through two consecutive processes. Output from process 1 is transferred to process 2 from which the three joint products are produced and immediately sold. The date regarding the processes for April, 2009 is given below: Particulars Process 1 Process 2 Direct material 2,500 kilos at Rs.4 Rs.10,000 per kilo Rs.6,250 Rs.6,900 Direct labour Rs.4,500 Rs.6,900 Overheads 10%ofinput Normal loss Rs.2 per Scrap value of loss kilo Joint output 2,300 kilos products A- 900 kilos B- 800 kilos C- 600 kilos There were no opening or closing stocks in either process and the selling prices of the output from process 2 were: Joint product A Rs.24 Joint product B per Joint product C kilo Rs.18 per kilo

Rs.12 per kilo Required: (a) prepare an account for process 1 together with any loss or gain accounts you consider necessary to record the months activities. (b) Calculate the profit attributable to each of the joint products by apportioning the total costs from process 2 (1) according to weight of output (2) By the market value of production. 30) a product passes through three processes A, B and C. 10,000 units at a cost of Rs.1.10 per unit were issued to process A. The other direct expenses were as follows: Particulars A B C Sundry 1,500 1,500 1,500 materials 4,500 8,000 6,500 Direct labour 1,000 1,000 1,503 Direct expenses The wastage of process A was 5% and in process B 4% of inputs. The wastage of process A was sold at Rs.0.25 per unit and that of process B at Rs.0.50 per unit and that of process C at Rs.1.00 per unit. The overhead charges was 160% of direct labour. The final product was sold at Rs.10 per unit fetching a profit of 20% on sales. Prepare all process accounts. (Oct. 2004) 31) A product passes through three processes and 40,000 units were introduced in process A at cost of Rs.30,000. The following further information is available: Particulars Process Process Process A B C Sundry materials Rs.20,000 Rs.4,000 Rs.2,000 Direct labour Rs.6,000 Rs.3,000 Rs.1,500 Direct expenses Rs.1,920 Rs.5,600 Rs.4,200 Output (Units) 38,000 37,000 34,000 Opening stock (Units) 6,000 3,000 4,000 Closing stock (Units) 4,000 5,000 9,500 Opening stock valuation Rs.1.40 Rs.1.80 Rs.2.50 (Per unit) 4% 5% 10% % of normal wastage Rs.0.20 Rs.0.30 Rs.0.40 Scrap sale price (Per unit) The closing stock in each process is valued at respective process cost. Prepare process accounts and process stock accounts. (Mar. 2005) 32) A product of a company passes through 3 processes viz process A, process B and process C to obtain three consecutive grades of the product. Details relating to its production for the year 2003 are as follows:Particulars Process Process Process A B C Raw material used 1,000 Cost per ton tons Manufacturing wages and Rs.200 Rs.41,000 Rs.11,000 expenses Rs.75,000 10% 20% Weight loss 5% 30 tons 51 tons Scrap sold at Rs.50 per ton 50 tons 500 800 Sale price per ton 400 Management expenses were Rs.15,000, selling expenses were Rs.10,000 and interest on borrowed capital was Rs.5,000. Two-third output of process A and one-half output of process B are passed on to the next process and the balance was sold. You are required to prepare process cost accounts and costing profit and loss account for the year 2003. (Oct. 1995) 33) a product passes through three processes- P, Q and R. the details of expenses incurred on the three processes during the year 2004 were as under: Particulars P Q R Units issued 10,000 -

Cost per unit (Rs.) 100 Sundry materials (Rs.) 10,000 15,000 5,000 Labour (Rs.) 30,000 80,000 65,000 Direct expenses (Rs.) 6,000 18,150 27,200 Sale price of output per unit 120 165 250 (Rs.) Management expenses during the year amounted to Rs.80,000 and selling expenses were Rs.50,000. both these are not allocable to the processes. Actual output of the three processes was as under: Process P- 9,300 units, Process Q- 5,400 units, Process R- 2,100 units. Two-third output of process P and one-half output of process Q are passed on to the next process and the balance was sold. The entire output of process R was sold. The normal wastages of the three processes calculated on the input of every process was : Process P: 5 percent, Process Q: 15 percent, Process R: 20 percent. The wastage of process P was sold at Rs.2 per unit, that of process Q at Rs.5 per unit and that of process R at Rs.10 per unit. Prepare the three process accounts and a statement of income for 2004 showing fully the accounting treatment of process wastage. (Mar. 2003) 34) Product P passes through three processes to completion. Following are the relevant details: (a) Elements of cost Total Process Rs. No. 1 No. 2 No. 3 Rs. Rs. Rs. Direct material 8,482 2,000 3,020 3,462 Direct labour 12,000 3,000 4,000 5,000 Direct 726 500 226 expenses 6,000 Production overhead (b) 1,000 units at Rs.5 each were issued to process no.1. (c) Output of each process was: Process no.1 920 units Process no.2 870 units Process no.3 800 units (d) Normal loss per process was estimated as: Process no.1 10% of units introduced Process no.2 5% of units introduced Process no.3 10% of nits introduced (e) the loss in each process represented scrap which could be sold to a merchant at values as follows Process no.1 Rs.3 per unit Process no.2 Rs.5 per unit Process no.3 Rs.6 per unit (f) There was no stock of material or work-in-progress n any department at the beginning or end of the period. The output of each process passes direct to the next process and finally to finished stock. Production overhead is allocated to each process on the basis of 50% of the cost of direct labour. Show process accounts. (Apr. 1983) 35) M/s Uttam workshop is producing a product which passes through 2 different process. The by-product results out of the process and all of them are sold off directly from workshop. Process I Process II Raw materials 15,000 (1,000 tons) 12,000 11,280 Wages 40% of prime 50% of wages Production cost 20 tons overhead 10 tons 30 tons at cost Wastage 50tons at + 20% Sale of by-products cost + 10% (Oct.1982) 36) The product of a company passes through three distinct processes to completion. These processes are known as A, B and C. From the past experience it is ascertained that- loss is incurred in each process as under:

Process A- 2%, Process B- 5%, Process C- 10%. Scrap value o loss of each process was Rs.5 per 100 units for A and B and 0.20 per unit for C. The output of each process passes immediately to the next process and from process C to finished stock. The following information is available: Process Process Process A B C Rs. Rs. Rs. Materials 6,000 4,000 2,000 consumed 8,000 6,000 3,000 Direct labour 1,000 1,000 1,500 Manufacturing expenses 20,000 units have been issued to process A at cost of Rs.10,000 and output of each process was as under: Process A: 19,500 units, Process B: 18,000 units, Process C: 16,000 units. No work-in-progress was there n any process. Prepare process accounts. (Oct. 1983) 37) Fertilisers Ltd. manufacture and sell three brands of fertilizers. The necessary details are: Process Process Process A B C Rs. Rs. Rs. Raw materials: Tons 200 71 264 Cost per ton 100 300 250 Direct wages 8,000 3,490 2,850 Direct expenses 2,520 2,400 3,820 Finished product sold 25% 50% 100% Finished product transferred to next 75% 50% process 80 100 120 Sale of scrap per ton In each process 6% of the total weight is lost and 8% is scrap. All sales are made to show a gross profit of 20% on process cost. Prepare process cost accounts. (Apr. 1984) 38) The product of a company passes through three direct processes, called respectively A, B and C. from the past experience, it is ascertained that wastage is incurred in each process as under: Process A- 2%; process B- 5%; process C- 10%. The percentage of wastage is computed on the number of units entering the process concerned. The wastage of each process processes a scrap value. The wastage of process A and B is sold at Rs.5 per 100 units and that of process C at Rs. 2 per unit. Following information was obtained for the month of March, 2007: 20,000 units of crude materials were introduced in process A at the cost of Rs.8,000. Particulars Process Process Process A B C Rs. Rs. Rs. Materials 4,000 1,500 1,000 consumed 6,000 4,000 3,000 Direct labour 640 225 2,405 Manufacturing 19,500 19,250 15,900 expenses Output in units 2,000 3,000 5,000 Finished product 1,500 4,000 ? stock 1st March, 2007 31st March, 2007 Stock valuation on 1st March, 2007 per unit. Re.1, Rs.1.50, Rs.1.80 respectively. Stocks on 31 st March are to be valued as per valuation on 1st March, 2007. Draw process accounts A, B and C and process stock accounts of process A, B and C. (Oct. 1984) 39) Find the cost of production and value of transfers in process stock and abnormal loss with the under mentioned data of process Y:

Receipt from the earlier process X Value of receipts Expenses at the process: Material Labour Overheads Transferred to next process Z Lost in process Closing balance in the process were (value of which assessed Rs.25,200)

R s. 4 9, 5 0 0 2 6, 4 0 0 8 0, 5 0 0 1, 5 6, 4 0 0

40,000 units Rs.1,44,000 (@ 3.6 P.U.)

30,000 units 6,000 units 4,000 units

The normal loss is assessed at only 4,000 units.

(ICWA, Inter)

40) The following are the details in respect of 2 processes, X and Y of a process industry. Particulars Process Process X Y Rs. Rs. Materials 10,000 Labour 12,000 20,000 Overheads 6,000 10,000 Closing stock (valued at total 4,000 8,000 cost) The output of process X is transferred to process Y at a price calculated to give a profit of 20% on the transfer price and the output of process Y is charged to finished stock on a similar basis of the output transferred to finished stock, stock costing Rs.10,000 remained unsold at the end of accounting period and the balance realized Rs.1,00,000. There was no opening or closing W.I.P. (May 1982) 41) a product passes through 2 distinct processes. The product of the first process lost wastage and by-product becomes the raw-material for the second process. All by-products are sold off directly from the factory. Particulars I Process II Process Raw1,000 tons at materials Rs.30 a ton Rs.20,000 Wages Rs.25,000 3,030 Direct Rs.4,200 75% of wages charges 80% of wages 85 tons at Rs.30 Factory 190 tons at Rs.20 per ton overheads per ton Sale of byproduct (May 1980) 42) model Ltd. processes a patent material used in buildings. The material is produced in 3 consecutive gradesSoft, Medium and Hard. Particulars Process I Process Process II III Raw material used 1,000 Cost per ton tons -

Manufacturing wages & and Rs.200 Rs.39,500 Rs.10,710 expenses Rs.87,500 10% 20% Weight loss (% of input o the 5% 30 tons 51 tons process) 50 tons 500 800 Scrap (sale price Rs.50 per 350 ton) Sale price per ton (Rs.) Management expenses Rs.17,500, selling expenses Rs.10,000. Two-third output of process I and one-half output of process II are passed on to the next process and the balance was sold. The entire output of process III is sold. (May, 1991, Apr. 1985) 43) Edible Oils Ltd. is a manufacturing concern. Their product passes through three processes viz Crushing, Refining and Finishing. Following figures were taken from their books for the month of March, 2007: Crushing Refining Finishing Rs. Rs. Rs. Wages 10,000 4,000 6,000 Power 2,400 1,440 970 Steam 2,400 1,800 1,800 Other 400 8,000 materials 1,120 1,320 550 Plant 5,280 2,640 900 repairs Sundry expenses 2,000 tons of copra were consumed and the purchase price was Rs.400 per ton. Output was 1,200 tons of crude oil, 850 tons of refined oil and 840 tons of finished product (in casks) ready or delivery. The difference in tonnage in respect of reined crude oil is not all loss, 240 tons of crude oil being sold as crude oil at cost plus 20%. Copra was brought to the factory in heavy saks and these were sold for Rs.1,500. 600 tons of copra residue were sold for Rs.35,000 and 80 tons of waste from refining process were sold for Rs.9,500. The cost of casks used in finishing process was Rs.24,000. The cake oil was sold or Rs.1,000 per ton. You are required to prepare cost account, showing the cost per ton o output at each stage of manufacture. Also calculate the total profit for the period. (Oct. 1986) 44) A product passes through three processes. The normal wastage of each process is as follows: Process I 2% Process II 4% Process III 6% Sales of wastage: Process Re. 1 per I unit Process Re. 1.50 II per unit Process Rs.4 per III unit 10,000 units were issued to process I in the beginning at Rs.2 per unit. The other expenses were as follows: Process Process Process I II III Sundry materials 1,000 500 500 Labour 5,000 9,000 6,000 Direct expenses 1,100 1,200 2,000 Actual output 9,600 9,000 8,500 units units units Prepare progress accounts assuming that there were no opening or closing stocks. Also show the abnormal wastage and abnormal gain accounts. (Apr. 1987) 45) Product A1 is obtained after it passes through three distinct processes. You are required to prepare process accounts from the following information and also abnormal loss and abnormal gain accounts, if any: Total Process Rs. I II III Rs. Rs. Rs. Material 15,200 5,200 3,900 6,100

Direct wages 25,800 4,800 8,400 12,600 Production overheads 25,800 1,000 units @ Rs.10 per unit were introduced in process I. production overheads to be distributed on the basis of direct wages. Actual Unit Normal Sale value of scrap per output s loss unit Rs. Process 900 5% 4 I 850 10% 10 Process 700 15% 12 II Process III (Oct. 1987) 46) A product passes through three distinct processes to completion. These processes are X, Y and Z. from past experience it is ascertained that wastage is incurred in each process as follows: Process X 2% Process Y 5% Process Z 10% In each case the percentage is computed on the number of units entering the process concerned. The scrap value o each process is: Process X Rs.5 per 100 units, Process Y Rs.20 per 100 units and Process Z Rs.10 per 100 units. The output of each process is transferred immediately to the next process and the finished units are transferred from process Z into stock. Other particulars are as under: Process Process Process X Y Z Rs. Rs. Rs. Materials 3,000 1,000 1,000 consumed 2,000 1,500 1,500 Labour 500 1,000 500 Manufacturing expenses 10,000 units have been put into process X at a cost of Rs.4,000. The output of each process has been as under: Process X 9,800 Process Y units Process Z 9,200 units 8,350 units. There is no stock or work in progress in any process. Prepare necessary accounts. (Oct. 1988) 47) A product passes through three processes A, B and C. the normal wastage of each process are as follows: Process A- 3%, Process B- 5% and Process C- 8%. Wastage of process A was sold at 25 paise per unit, that of process B at 50 paise per unit and that of process C at Re.1 per unit. The other expenses were as follows: Process Process Process A B C Rs. Rs. Rs. Sundry 786 1,552 501 materials 3,712 8,551 6,786 Labour 2,552 85 1,722 Direct expenses Actual output 9,500 9,100 8,100 was: Prepare the process accounts, assuming that there were no opening or closing stocks. (Apr. 1986)

RECONCILIATION OF COST AND FINANCIAL ACCOUNTS

1) The net profit of a company for the year ended 31 st March, 2004 was Rs.56,600 as shown by the financial books. The cost accounts disclosed a profit of Rs.59,650 for the same period. On an examination of both the sets of accounts the following facts were discovered: (a) Goodwill written off in financial accounts Rs.1,500. (b) Transfer fees received during the year Rs.200. (c) Depreciation charged in financial accounts Rs.750. (d) Depreciation recovered in cost statements Rs.1,000. (e) Opening stock as on 1st April, 2003 as per financial records Rs.13,000. (f) Opening stock as on 1st April, 2003 as per cost statement Rs.12,000. (g) Closing stock as on 31st March,2004 as per financial records Rs.14,000. (h) Closing stock as on 31st March,2004 as per cost statement Rs.15,000. Prepare a reconciliation statement reconciling the profit as shown by financial and cost books taking (i) financial profit as the starting point, (ii) costing profit as the starting point. 2) From the following, prepare a statement of reconciliation and find out profit/loss as per financial records. Particulars Rs. Net loss as per cost records 1,72,400 Works overhead under-recovered in costing 3,120 Administrative overheads over-recovered in costing 1,700 Depreciation in financial A/c 11,200 Depreciation in cost A/c 12,500 Interest received 8,750 Obsolescence loss in financial A/c 5,700 Provision for tax 40,300 Opening stock: - financial records 52,600 - cost records 54,000 closing stock: - financial records 52,000 - cost records 49,600 Interest charges in cost account only 6,000 Preliminary expenses w/off 950 (Oct. 2001) 3) The following information is available from cost and financial accounts in respect of Progressive Co. Ltd. for the year ended 31st December, 2003. You are required to prepare a statement reconciling the profit or loss from the same. The following items are shown in financial accounts but not in cost accounts. Particulars Rs. Loss due to obsolescence of assets 3,700 Provision for income tax 38,000 Reduction in value of stock 6,000 Debenture interest 4,000 Loss by fire 1,050 Interest on investments 6,000 Bank interest and transfer fees 1,225 Rent received of staff quarters 2,000

The additional information is as follows: (a) In cost accounts, works overheads are estimated at Rs.26,000, while in financial accounts they are charged at Rs.29,120. (b) In cost accounts, administration overheads are estimated at Rs.20,000, while in financial accounts they are debited at Rs.18,300. (c) In cost accounts, excess charge for depreciation is Rs.1,300 compared to financial accounts. (d) Profit as shown by financial accounts does not agree with the profit shown by cost accounts. Profit as per cost accounts is Rs.1,72,400. 4) From the following particulars, prepare reconciliation statement and ascertain costing profit/loss. Net profit as per financial P&L A/c Rs.50,000. Opening stock was overvalued by Rs.2,000 in cost accounts as compared to financial accounts. Administrative overheads charged in financial books Rs.20,000 but recovered in cost Rs.40,000. Income tax provision Rs.1,200. Notional salary of proprietor in cost Rs.20,000. Interest received Rs.12,000. Closing stock as per financial books Rs.16,200. Whereas in cost books it was Rs.19,000. (Mar. 2005) 5) From the following, prepare reconciliation statement of M/s XYZ and company as on 30-6-2004: (1) Net profit as per financial accounts Rs.40,340. (2) Income tax provision made Rs.30,000. (3) Material purchased of 5,000 units were recorded in cost at standard cost Rs.24 per unit whereas in financial it was recorded at actual cost Rs.22 per unit. (4) Old bad debts recovered Rs.20,500. (5) Loss on sale of furniture was Rs.4,120. (Oct. 2006) 6) From the following information you are required to prepare a statement reconciling the results of cost books: Particulars Rs. Net profit as per financial books 51,052 Works overheads under recovery in cost book 1,001 Depreciation charged in financial books 13,000 Depreciation charged in cost book 14,326 Obsolescence loss charged in financial books only 2,021 Income tax provided in financial books only 2,626 Interest received but not recorded in cost book 3,031 Bank interest debited in financial books only 292 7) The net profit of a company amounted to Rs.60,412 for the year ending 31 st December, 2003 as per its financial records. The cost records revealed a different figure. A scrutiny of the two sets of accounts disclosed the following facts: (a) Works overhead recovered in cost accounts during the period amounted to Rs.28,450 while the actual amount of these expenses was Rs.21,390 only. (b) Actual office expenses for the period were Rs.19,850, whereas the office overhead recovered in cost accounts amounted to Rs.14,500. (c) The annual rental value of premises owned by the company amounting to Rs.10,800 was charged in cost accounts but not in financial accounts. (d) Selling and distribution expenses for the period amounting to Rs.16,490 were excluded from costing records. (e) Excess depreciation charged in cot accounts Rs.2,400. (f) Expenses not included in cost accounts and shown in financial accounts - Interest on loan 1,600 - Bank charges 160 - Directors fees 750 - Penalty due to late completion of contract 2,500 (g) Gains during the year not included in cost accounts - transfer fees 45 - Profit on sale of investment 4,250 - Interest on investment 9,450 (h) The following appropriation had been made before arriving at the profit figure of Rs.60,412 - Transfer of dividend equalization fund 10,500 - Transfer to income tax reserve 6,400 - Transfer to debenture redemption fund 9,000

(i) A sum of Rs.10,000 given as donation to the prime ministers relief fund had been charged to profit and loss account as business expense. Prepare a reconciliation statement and find the amount of net profit/loss as per the costing records. 8) A companys Trading and Profit and loss account is as follows: Particulars Rs. Particulars Rs. Purchase Sales 75,000 units @ 37,815 31,695 Rs.1.50 each 1,12,500 Less: closing stock 15,750 Profit on sale of 3,900 6,120 18,195 machinery wages [direct] 10,650 works expenses 8,010 selling expenses 1,650 administration 30,450 expenses depreciation net profit 1,16,400 1,16,400 The profit as per cost accounts was Rs.29,655. prepare reconciliation statement to reconcile cost profit with financial profits. Further information as per cost accounts: closing stock was taken at Rs.6,420. The works expenses were taken at 100% of direct wages. Selling and administration expenses were charged at 10% of sales and at Re. 0.10 per unit respectively. Depreciation was taken at Rs.1,200.

(a) (b) (c) (d)

9) following is the profit and loss account of M/s Anubhav Manufacturing company or the year ended 31 st December, 203. Particulars Rs. Particulars Rs. To opening stock of By sales 9,20,000 Raw materials By closing stock: 60,000 Raw materials Work in process 1,75,000 60,000 35,000 2,40,000 Work in process 1,31,000 Finished goods 60,000 41,000 80,000 66,000 Finished goods To purchases 90,000 30,000 To factory wages 4,20,000 To electricity charges 10,51,000 10,51,000 To factory overheads 25,000 4,20,000 To gross profit c/d 1,15,000 20,000 30,000 To administrative By gross profit b/d 2,70,000 expenses By miscellaneous To selling and dist. income Expenses To bad debts To net profit 4,40,000 4,40,000 Their cost account showed a profit of Rs.2,81,750. on scrutiny of their costing profit and loss account, it was found that(1) their opening stocks and closing stocks were valued as under: opening stock of: closing stock of: raw material Rs.80,000 raw material Rs.70,000 work in process Rs.40,000 work in process Rs.44,000 Finished goods Rs.60,000 finished goods Rs.20,000 (2) they charged administrative expenses at Rs.18,000 and selling and distribution expenses at Rs.1,27,000. (3) They had charged depreciation @ 25% on written down value method on its plant which was purchased on 1 st July, 2000 for Rs. 80,000. in financial accounts, however, the depreciation was provided on straight line method and the same was included in the factory overheads of Rs.90,000. Prepare a statement reconciling the difference in the profits as disclosed by the two records. (Apr. 1995) 10) A companys Trading and profit and loss account was as following: Particulars Rs. Particulars

To opening stock To purchases Less: closing stock To direct wages To factory expenses To gross profit c/d To administrative expenses To selling expenses To net profit (a) (b) (c) (d)

1,00,000 80,000 1,80,000 80,000 1,00,000 20,000 15,000 40,000 1,75,000 10,000 15,000 15,000

By sales

1,75,000

By gross profit

1,75,000 40,000

40,000 40,000 Costing records show the following: stock ledger closing balance Rs.89,000 direct labour Rs.23,000 factory overheads Rs.13,000 administrative overheads and selling expenses each are calculated at 8% of the selling price. Prepare costing profit and loss account and the statement o reconciliation between the profit and loss as per the two accounts.

11) profit and loss account of Chetan Ltd. for the year ended 31-12-2003 was as under: Particulars Rs. Particulars Rs. To office expenses 39,200 By gross profit 60,950 To selling expenses 23,000 By interest on deposit 2,500 To loss on sale on 1,250 By dividend 3,450 machinery 1,800 By net loss 1,850 To depreciation on 2,300 machinery 400 To depreciation on 800 building To debenture discount To preliminary expenses 68,750 68,750 As compared to cot accounts, office indirect expenses are 12% more in financial accounts while selling indirect expenses are 8% less. Depreciation on machinery was over-estimated by Rs.350, while depreciation on building was under estimated by Rs.150. Prepare (1) statement of cost and profit/loss and (2) statement showing reconciliation of profit or loss of cost accounts with that of financial accounts. 12) given below is the Trading and Profit and loss account of Vikas Electronics for the accounting year 31-3-2004. Particulars Rs. Particulars Rs. To material consumed 3,00,000 By ales (2,50,000 7,50,000 To direct wages 2,00,000 units) To factory expenses 1,20,000 To office expenses 40,000 To selling and distribution expenses 80,000 To net profit 10,000 7,50,000 7,50,000 Normal output of the factory is 2,00,000 units. Factory overheads are fixed upto Rs.60,000 and office expenses are fixed. Selling and distribution expenses are fixed to the extent of Rs.50,000; the rest are variable. Prepare a statement reconciling profit as per cost accounts and financial accounts. 13) following is the profit and loss account, as per financial records, of M/s Tirupati Traders for the year ended 31st March, 2008. Particulars Rs. Particulars Rs. To opening stock 59,760 By sales 11,70,000 (finished 6,000 units) (90,000 units)

To raw materials consumed To carriage inwards To direct wages To salesmen commission To office salaries To motor car expenses To advertisement To directors remuneration: - office 12,000 - works 12,000 - sales 14,400 To indirect wages To plant depreciation To workmen compensation reserve To office rent To after sales service expenses To interest To showroom rent To carriage outwards To depreciation on delivery van To factory fuel To packing & forwarding To misc. factory expenses To preliminary exp. w/off To audit fees To general office expenses To factory rent To loss on sale of investments To insurance: - office 300 - sales 720 - factory 1,800 To printing & stationery To depreciation: - factory furniture 600 - office furniture 900 - showroom furniture 420 To telephone charges: - office 129 - sales 627 To legal fee

5,19,400 5,100 72,872 38,520 25,368 18,384 61,920

By closing stock (finished 4,500 units) By bank interest By dividend

52,776 410 6,900

38,400 20,268 11,472 13,275 6,900 4,476 6,000 9,000 6,240 5,040 4,248 3,270 3,270 4,200 2,520 1,500 18,720 4,071

2,820

1,920 756 504 2,59,226

To net profit c/d to B/S 12,30,086 12,30,086 Closing stock in cost accounts is valued at cost of production. However, opening stock in cost records is same as per financial records: (a) detailed cost statement showing total cost (excluding per unit) and profit. (b) Reconciliation statement showing reconciliation of profits. (Mar. 2009) 14) from the following particulars prepare: (a) a statement of cost of manufacture for the year ended 2003; (b) a statement of profit as per cost accounts; (c) profit and loss account in the financial books; and (d) show how you would attribute the difference in the profit as shown by (b) and (c). Particulars Rs. Opening stock of raw materials 2,88,000 Opening stock of finished articles 5,76,000 Purchases of raw materials 17,28,000 Stock of raw materials at the end 4,32,000 Stock of finished articles at the 1,44,000 end 7,20,000 wages Calculate factory oncost at 20% on prime cost, and office on cost at 80% on factory on cost. Actual works expenses amounted to Rs.4,54,300 and office expenses amounted to Rs.3,71,900. the selling price was fixed at a profit of 20% on cost. 15) the following data is available from the financial accounts of a company for the year ending 31 st December, 2003. Particulars Rs. Material consumed 5,20,000 Direct wages 2,40,000 Factory expenses 3,60,000 Administration expenses 5,00,000 Selling and distribution expenses 9,60,000 Bad debts written off 40,000 Preliminary expenses written off 30,000 Interest and dividend received 1,20,000 Sales [1,20,000 units] 19,20,000 Closing stock [40,000 units] 4,00,000 Work in progress 31-12-2003 1,60,000 The following information was revealed by the cost accounts: (1) Direct materials consumption was Rs.5,70,000. (2) Factory overheads were taken at 20% on prime cost. (3) Administration expenses have been taken at Rs.4 per unit of production. (4) Selling and distribution expenses were taken at Rs.6.50 per unit sold. Prepare: (a) Statement of cost and profit. (b) Financial profit and loss account. (c) Statement reconciling the difference in profit/loss as per cost records and as per financial accounts. 16) from the following details of KT & Co. compute profit as per profit & loss A/c as well as, as per cost sheet and reconcile profit between cost sheet and profit & loss A/c showing clearly the reasons for the variation of the two profit figures. Particulars Rs. Sales 20,000 Purchase of material 3,000 Closing stock of material 500 Direct wages 1,000 Indirect wages 500 Indirect factory expenses 2,000 Bad debts 100 Interest on overdraft 50 Profit on sale of assets 1,000 Selling expenses 2,000 Distribution expenses 1,000

In cost sheet manufacturing overheads are recovered at 30% of direct wages, selling overheads at Rs.1,500 and distribution overheads at Rs.700. (Oct. 2003) 17) Enthusiasts Ltd. commenced business on 1st April, 2003. Cost and financial records are maintained for the year ended 31st March, 2004. From the following information prepare statements: (a) Showing the results as per costing records. (b) Showing results as per financial records and (c) Reconciling these results. Particulars As per costing As per records financial records Material consumed Rs.28.50 per kg. Rs.26 per (20,000 kgs.) Rs.80 per man day kg. Direct wages (3,000 man 20% of the prime Rs.85 per days) cost man day Factory overheads Rs.30 per kg. of Rs.3,60,000 Administrative overheads output produced Rs.4,00,000 Rs.50 per of kg. Sales overheads output sold Rs.9,60,000 Stock (of output At cost of Rs.1,50,000 produced) as on production 31.3.2004 2,000 kgs. Rs.1,62,000 Work in process as on Rs.1,62,000 Rs.129.50 31.3.2004 Rs.130 per kg. per kg. Sales (16,000 kgs.) Rs.1,20,000 Rent income Rs.30,000 Preliminary expenses written off (Oct. 1997, Mar 2004) 18) The following figures have been extracted from the financial accounts of Bawa Manufacturing Company for the first year of its operations: Particulars Rs. Direct material consumption 50,00,000 Direct wages 30,00,000 Factory overheads 16,00,000 Administrative overheads 7,00,000 Selling & distribution overheads 9,60,000 Provision for bad debts 80,000 Preliminary expenses written off 40,000 Dividend received 1,00,000 Interest received on deposits 20,000 Sales (1,20,000 units) 1,20,00,000 Closing stock: - finished goods (4,000 units) 3,20,000 - work in progress 2,40,000 The cost accounts for the same period reveal that the direct material consumption was Rs.56,00,000. Factory overheads are recovered at 20% on prime cost. Administrative overheads are recovered at Rs.6 per unit of production. Selling & distribution overheads are recovered at Rs.8 per unit sold. Prepare the profit & loss account as per financial records and cost sheet as per cost records. Reconcile the profit as per the two records. The cost accounts value closing stock of finished goods at cost of production. (Oct. 2004) 19) Following is the Trading and profit and loss account of M/s Vishal Enterprises for the year ended 31-3-2006. Particulars Rs. Particulars Rs. To opening stock (500 17,500 By sales (10,250 units) 7,17,500 units) 2,60,000 By closing stock (250 12,500 To materials 1,50,000 units) To wages 94,750 To factory overheads 2,07,750 To gross profit c/d 7,30,000 7,30,000 1,06,000 2,07,750 To administrative By gross profit b/d 55,000 overheads By dividend received on 9,000 10,250

To selling overheads To loss on revaluation of assets To net profit

48,000

investments

2,18,000 2,18,000 In cost accounts, materials charged @ Rs.25/- per unit and wages @ Rs.15/- per unit. Factory overheads taken @ 60% of wages. Administrative overheads applied @ 20% of works cost. Selling overheads taken @ Rs.6/- per unit sold. You are required to prepare: (a) Statement of cost showing total cost and cost per unit. (b) Statement of reconciliation of profit/loss. (Oct. 2007) 20) find out the profit as per costing records and financial accounts from the following information and reconcile the results. Particulars Product Product A B Number of units produced 600 400 and sold 3,600 2,800 Total direct materials 3,000 2,400 Total direct wages 25 30 Selling price per unit The works oncost is charged at 80% of the direct wages and office oncost at 25% of works cost. The actual works expenses amounted to Rs.4,500 and office expenses Rs.3,900. There was no opening or closing stock. 21) The following is the trading and profit and loss account of a manufacturing company for the year ending 31 st December, 2007. Particulars Rs. Particulars Rs. To opening stock 100 units By sales (2,400 units) 9,600 at prime cost 400 By closing stock (200 600 To materials 3,000 units) To wages 2,00 To work overheads 2,200 To selling and distribution overheads 800 To net profit 1,800 10,200 10,200 Factory overheads are charged at 40% of prime cost, selling expenses are charged at Rs.0.3 per unit sold. Prepare a cost sheet and a reconciliation statement. (Apr. 1984) 22) A factory manufactures two products, A and B. the cost of materials and labour is as follows: A B Rs. Rs. Materials (per 25 15 unit) 20 12 Direct wages (per unit) Works expenses are charged at 100% of wages and office expenses at 25% of works cost. 200 units of A and 500 units of b were produced and sold at Rs.100 and Rs.60 per unit respectively there being no opening and closing stocks. If actually the works expenses amount to Rs.9,600 and office expenses Rs.8,400, reconcile the results shown by cost accounts and financial accounts. (Apr. 1988) 23) The following information is presented to you from the costing and financial department of a manufacturing company. You are required to prepare a statement reconciling profit as per cost records with profit as per financial records. As per cost As per financial records records Rs. Rs. Stores consumed 2,00,00 2,02,000 Works on cost 75,000 Works expenses 80,500 Office on cost 42,700 -

Office expenses Net profit

97,500

37,000 95,700 (Apr. 1981)

24) From the following particulars, prepare a statement of profit as per cost of manufacture for the year 2007, a statement of profit as per cost A/c, profit and loss A/c in the financial books and a statement to attribute the difference in the profits as shown by the cost records and financial records. Rs. Opening stock of raw materials 1,44,000 Opening stock of finished articles 2,88,000 Purchases of raw materials 8,64,000 Stock of raw materials at the end 2,16,000 Stock of finished articles at the 72,000 end 3,60,000 wages Calculate factory oncost at 20% on prime cost, and office on cost at 80% on factory on cost. Actual works expenses amounted to Rs.2,27,150 and office expenses amounted to Rs.1,85,950. The selling price was fixed at 20% above total cost on finished articles sold as per cost records. (Oct. 1981) 25) Profit disclosed by a companys cost A/cs for the year ended 31 st March, 2007 was Rs.1,00,000 whereas the N.P. as disclosed by the financial A/cs was Rs.59,500. following information I available: (1) Work has commenced during the year on a new factory and expenditure of Rs.60,000 was incurred, depreciation was provided at 5% for 6 months in the financial A/cs. (2) Directors fees shown in financial A/cs was Rs.4,000. (3) Share transfer received during the year were Rs.2,000. (4) Provision for income tax was Rs.30,000 (5) The company allocated Rs.10,000 as provision for doubtful debts. (6) O/H as per cost A/cs were estimated at Rs.17,000. The charge for the year shown by the financial A/c was Rs.14,000. (Oct. 1982) 26) Prepare a reconciliation statement between financial and cost accounting records. Cost sheet Particulars Rs. Direct material 62,000 Direct labour 36,000 Direct expense 10,000 PRIME COST 1,08,000 Add: factory overhead 32,000 FACTORY COST 1,40,000 Add: office and administration overhead 40,000 COST OF GOODS SOLD 1,80,000 Add: selling and distribution overhead 60,000 TOTAL COST 2,40,000 Add: profit 60,000 SALES 3,00,000 Particulars To raw material To direct labour To direct expenses To gross profit c/d To factory expenses To office & administration expenses To selling and distribution expenses To finance expenses To loss on sale of machinery Trading and Profit & Loss A/c Rs. Particulars 80,000 By sales 30,000 10,000 1,80,000 3,00,000 By gross profit b/d 40,000 By dividend 40,000 received 50,000 By net loss c/d 30,000 40,000 Rs. 3,00,000

3,00,000 1,80,000 5,000 15,000

2,00,000

2,00,000

27) prepare a reconciling statement between financial and cost accounting records. Particulars Rs. Particulars Rs. To opening stock 5,000 By sales 1,42,000 To purchase 60,000 By closing stock 8,000 To wages 13,000 To chargeable expenses 17,000 To gross profit c/d 55,000 1,50,000 1,50,000 To rent (office) By gross profit b/d 6,000 55,000 To telephone (sales By interest 18,000 5,000 department) By profit on sale of 16,000 10,000 To advertisement investment 30,000 1,00,000 To office salary By profit on sale of land (?) To net profit 1,70,000 1,70,000 Further information is available from which you are required to prepare cost sheet. (a) The opening and closing stock are Rs.4,000 and Rs.6,000 respectively. (b) Wages are to be considered Rs.12,000. (c) Chargeable expenses are 110% of direct wages. (d) Office rent, sales telephone charges and office salary are to be considered same as to the financial accounting. (e) Advertisement considered at 10% on sales.

CONTRACT COSTING
1) Write up the contract accounts from the following particulars: Particulars Rs. Direct materials 16,200 Wages 10,800 Special plant 8,000 Stores issued 2,880 Loose tools 1,500 Tractor expenses (fuel, wages of driver and expenses of workers) 3,420 Contract price 40,000 The contract was completed in 20 weeks. The special plant was returned subject to depreciation of 20% on original cost. The value of loose tools and stores returned were Rs.1,000 and R.400 respectively. The written down value of tractor used for the contract was Rs.19,500 and depreciation was to be charged to this contract at 20% per annum on this value. Provide 7% for administrative expenses on works cost. 2) On 31st October, 2003, A undertook a contract No.786 for Rs.2,00,000. The following information is available in respect of this contract for the accounting year ended 31 st December, 2003. Particulars Rs. Work certified 40,000 Wages paid 15,000 Materials supplied 20,000 Other expenses 3,000 Plant supplied on 1-1020,000 2003 1,000 Uncertified work 800 Materials unused lying at 600 the site Wages due but not paid Provide 10% depreciation on plant. Prepare contract account in the books of A. 3) M/s Air craft builders undertook a contract for a contract price of Rs.60,00,000 and commenced the work on 1st July, 2003. The following particulars are available for 9 months ended 31-03-2004. Particulars Rs. Materials issued from 4,00,000 stores 20,50,000 Materials bought directly 19,00,000 Wages paid 3,00,000 Direct expenses 1,50,000 Establishment charges 6,50,000 Plant 1,00,000 Sub-contract charges 30,000 Scrap sold 50,00,000 Work certified The following further information was available:

(a) (b) (c) (d)

Outstanding wages and direct expenses were Rs.10,000 and Rs.20,000 respectively on 31-3-2004. Materials at site at the end of the year is valued at Rs.1,20,000. Value o work uncertified Rs.2,00,000 on 31-3-2004. Included in wages is the salary paid to a supervisor @ Rs.30,000 p.m., who had devoted half of the time on this contract. (e) Working lie of the plant is estimated to be 5 years at the end of which it is estimated to realize Rs.50,000 as scrap value. The plant was purchased exclusively for this contract only. Prepare contract account for the year ended 31-03-2004. (Apr. 2001) 4) The following is the summary of the entries in a contract ledger as on 31 st December, 2003 in respect off contract No.51. Particulars Rs. Materials (direct) 60,000 Materials (from stores) 13,0000 Wages 34,600 Direct expenses 13,400 Establishment charges 16,000 Plant 68,400 Sale of scrap 3,640 Sub-contract cost 14,400 You are given the following information: (1) Accruals on 31-12-2003 are: wages Rs.1,600 and direct expenses Rs.2,200. (2) Depreciation on plant upto 31-12-2003 is Rs.17,100. (3) Included in the above summary of abstract are wages Rs.2,000 and other expenses Rs.3,000 since certification. The value of the material used since certification is Rs.4,160. (4) Materials on site on 31-12-2003 cost Rs.20,000. (5) Work certified was Rs.1,25,000. Prepare contract account No.51 and show that profit or loss should be taken into account for the year ended 31st December, 2003. 5) The Maharashtra Construction Company undertook the construction of a building at a contract price of Rs.12,00,000. The date o commencement of contract was 1 st April, 2003. Particulars Rs. Materials sent to the site 3,00,000 Wages 4,40,000 Architect fees 55,500 Office and administrative overheads 1,51,000 Uncertified work 55,000 Materials at the site at the end of the year 10,000 Cash received from the contractee (being 90% of the work 9,45,000 certified) 5,000 Materials destroyed by fire 2,00,000 Plant and machinery at cost (date of purchase- 1stt July, 2003. the estimated working life of the plant- 10 years and its estimated scrap value at the end 60,000 Rs.20,000) supervisors salary You are required to prepare a contract account for the year ended 31 st March, 2004. (Apr. 1999) 6) Reliable Constructions Ltd. entered into a contract to construct a building. The contract value is Rs.13,00,000 to be realized in installments on the basis of the value of work certified by the architect subject to retention of 10%. The work commenced on 1-4-2003 but it remained incomplete on 31-12-2003 when the final accounts are to be prepared. The facts and figures of the contract are: Plant charged to a contract at the 64,000 commencement 3,60,000 Materials charged to contract 1,74,000 Wages paid 77,500 Expenses incurred on the contract Total establishment expenses amounted to Rs.82,000 out of which 25% is attributable to this contract. Out of the materials issued to the contract, material costing Rs.8,000 were sold for Rs.10,000. A part of plant (costing Rs.4,000) was damaged on 1-10-2003 and the scrap realized Rs.600 only. Plan costing Rs.6,000 was transferred to another contract site on 31-12-2003. Plant to be depreciated @ 10% p.a.

Materials in hand on 31-12-2003 35,000 Cash received from contractee 6,12,000 Cost of work yet to be certified 60,000 Prepare contract account showing therein the amount of profit or loss to be transferred to profit and loss account. (Apr. 2002) 7) Mr. Vivek undertook a contract for the construction of building on 1 st January, 2004, the contract price being Rs.15,00,000. The following details are available for the year 2004: Rs. Materials purchased 2,40,000 Materials issued from stores 3,00,000 Labour employed on site 90,000 Plant installed on site 1,20,000 Direct expenses 60,000 Proportionate establishment 15,000 charges 6,00,000 Cash received (80% of work 1,50,000 certified) 15,000 Work un-certified 6,000 Materials returned to stores 18,000 Materials in hand at the end 24,000 Wages outstanding Direct expenses accrued Prepare the contract account and show the amount that would appear in the balance sheet. A part of plant costing Rs.20,000 was stolen at the beginning of the year and the insurance Co. paid Rs.12,000. Plant is depreciated @ 20% p.a. (Oct. 2002) 8) Uddan Constructors Pvt. Ltd. provide you the following information:(a) The project commenced on 1st September, 2003 and it was estimated to be completed by 31 st March, 2005. (b) The contract price was negotiated at Rs.680 lacs. (c) The actual expenditure upto 31st March, 2004 and subsequent additional estimated expenditure upto 31 st March, 2005 is furnished as under: Particulars Actual Estimated expenditure additional during 1-9-2003 expenditure upto 31-3-2004 during 1-4(Rs.) 2004 to 31-32005 (Rs.) Direct material 1,95,60,000 1,27,40,000 Indirect material 14,23,000 11,77000 Direct wages 42,46,500 41,33,500 Supervision charges 4,14,400 5,55,600 Architect fees 8,17,500 12,82,500 Construction overheads 31,52,600 21,47,400 Administrative overheads 14,16,000 24,34,000 Closing material at site 7,50,000 Work uncertified at the end o 13,80,000 the year 3,50,00,000 3,30,00,000 Work certified during the year The value o plant and machinery sent to site was Rs.60 lacs, whereas the scrap value of the plant and machinery at the end of the project was estimated to be Rs.3 lacs. It was decided that the profit to be taken credit for should be that proportion of the estimated net profit to be realized on completion of the project which the certified value o work as on 31-03-2004 bears to the total contract price. You are required to prepare contract account for the period ended 31 st March, 2004 along with the working of profit to be taken credit for. (Apr. 2000) 9) Rex Ltd. commenced a contract on 1-7-2003. The total contract price was Rs.5,00,000 but Rex Ltd. accepted the same for Rs.4,50,000. It was decided to estimate the total profit and to take to the credit of Profit& Loss A/c that proportion of estimated profit on cash basis which the work completed and certified borne to the total contract. Actual expenditure till 31-12-2003 and estimated expenditure in 2004 are given below.

Particulars

Actuals Rs.

Materials 75,000 Labour 55,000 Plant purchased (original cost) 40,000 Miscellaneous expenses 20,000 Plant returned to stores (at 10,000 original cost) 5,000 Materials at site 2,00,000 Work certified 7,500 Work uncertified 1,80,000 Cash received The plant is subjected to annual depreciation @ 20% of original cost. The contract is likely to be completed on 30-9-2004. You are required to prepare the contract account for the year ended 31-12-2003. Working should be clearly given. It is the policy of the company to charge depreciation on time basis. (Mar. 2003) 10) M/s Rajendra constructions obtained a contract to build a Fly- over bridge at a contract price of Rs.150 lacs. The contractee agrees to pay 90% of value of the work done as certified by the architect immediately on receipt o the certificate to pay and balance on completion of the contract. The contractor commenced the work on 1st May, 2007 and it is estimated to be completed by 31 st December, 2008. The actual expenditure upto 31st March, 2008 and subsequent estimated expenditure upto 31 st December, 2008 is furnished below:Particulars Actual Estimated expenditure expenditure from 1-4upto 2008 to 31-12-2008 31-3-2008 Rs. Rs. Direct materials 33,50,000 28,00,000 Indirect materials 5,60,000 7,00,000 Direct wages 8,42,000 7,95,000 Sub contract charges 98,000 52,000 Architects fees 1,84,000 2,84,000 Administrative 6,50,000 4,50,000 overheads 4,86,000 2,54,000 Special equipment 10,000 p.m. 12,000 p.m. charges 8,000 p.m. 9,000 p.m. Supervision charges Establishment 67,50,000 82,50,000 charges 4,10,000 Other details: 1,80,000 Cash received 75,00,000 1,50,00,000 Closing material at site Uncertified work Certified work (cumulative) A special machinery costing Rs.13,40,000 was bought or the contract and the estimated scrap value of the machinery at the end of the contract would be Rs.1,40,000. It is decided that the profit to be taken credit for should be that proportion of the estimated net profit to be realized on completion of the contract which the certified value of the work as on 31st March, 2008 bears to the total contract (excluding such provision for contingencies). You are required to prepare the contract account for the period ending 31 st March, 2008 and show your calculation of the profit to be credited to the profit & loss A/c for the period ended 31 st March, 2008. (Mar. 2009) 11) Navnirman Ltd. has undertaken three contracts. It furnishes the following information for the year ended 31 st March, 2004: Particulars Goa Contract Roha Contract Surat Contract

Estimate for 2004 Rs. 1,30,000 60,000 35,500 25,000 Full Full

Rs. Rs. Rs. (1) Balances on 1st April, 2003 Material at site 100 2,000 Uncertified work 2,500 4,000 Plant at site 2,200 3,100 Work certified 19,500 1,400 Provision for contingencies 1,000 600 (2) Transactions during the year Material issued 6,200 8,000 Subcontract charges 600 11,800 9,000 (3) Balances on 31st March, 2004 1,000 800 Material at site 1,000 3,850 Uncertified work 2,000 950 Plant at site 25,000 30,000 12,000 Work certified 25,000 40,000 50,000 (4) Contract price 25,000 27,000 10,800 (5) Amount received (6) Value of plant transferred from Goa contract to Surat contract Rs.1,550. The company consistently adopts to policy of taking credit for the contract profit considering the proportion of amounts received to the contract price. You are required to: (a) Prepare the respective contract accounts or the year ended 31st March, 2004. (b) Find the net profit as per profit and loss A/c. (Apr. 1996) 12) Mr. Behram contractor has undertaken two contracts one at Mumbai and another at Thane. The details of the contracts are given below for the year ended 31 st March, 2004: Particulars Contract Contract at at Thane Mumbai Date of commencement 1st July, 1st Oct. 2003 2003 Rs. Rs. Contract price 10,00,000 15,00,000 Direct labour 2,55,000 1,82,000 Material issued from stores 2,20,000 2,00,000 Material returned to stores 10,000 15,000 Plant installed at site 2,00,000 3,50,000 Direct expenses 40,000 30,000 Office overheads 15,000 10,000 Material sold (cost rs.8,000) 10,000 Material at site 18,000 16,000 Cash received from contractee (representing 80% work 4,80,000 2,40,000 certified) 13,000 9,000 Work uncertified 7,000 3,000 Architects fees (a) Provide depreciation on plant at 20% p.a. (b) During the year materials costing Rs.10,000 were transferred from Thane contract to Mumbai contract. You are required to prepare contract A/c of Mumbai and Thane contracts. Oct. 1998) 13) Siddesh construction company has undertaken three contracts during the year and the following particulars are available as on 31-12-2004. Particulars Contract Contract Contract A B C Rs. Rs. Rs. Contract price 10,00,000 25,00,000 7,50,000 Material issued to contract 1,65,000 2,24,500 1,89,600 Labour 1,02,800 1,26,500 1,75,5000 Sub-contract charges 72,800 65,900 28,500 Supervision charges 12,000 18,000 15,000 Architect fees 10,000 15,000 25,000 Insurance charges 3,000 6,100 7,400

Work certified 4,00,000 5,00,000 5,00,000 Work uncertified 35,000 40,000 25,000 Amount received from 3,20,000 4,50,000 3,75,000 contractee 9,000 10,000 20,000 Closing stock of material All contracts were commenced during the current year. Total depreciation on plants amounted to Rs.11,200 and allocate the same to all contracts in the ratio o work certified. Prepare contract accounts. Show the calculation of profit transferred to profit and loss account. (Oct. 2005) 14) M/s Rajkumar and company has undertaken two contracts viz A and B. the following particulars are available for the year ended 31st March, 2004. Particulars Contract Contract Date of commencement A B 1st July, 1st Dec. 2003 2003 Rs. Rs. Contract price 6,00,000 5,00,000 Materials sent to site 1,60,000 60,000 Materials returned 4,000 2,000 Closing stock of materials 22,000 8,000 at site 1,50,000 42,000 Direct labour 66,000 35,000 Direct expenses 25,000 7,000 Establishment expenses 80,000 72,000 Plant installed at site 23,000 10,000 Work uncertified 4,20,000 1,35,000 Work certified 2,000 1,000 Architect fees During the year materials costing rs.9,000 have been transferred from contract A to contract B. the contractor charges depreciation @ 25% p.a. on plant. You are required to prepare contract accounts, working for profits, if any, and show how the relevant items would appear in the balance sheet assuming the contractee had paid 90% of the work certified. (Oct. 2001) 15) highway Flyovers Construction ltd. has received a contract for construction of a flyover for a contract price of rs.820 lacs. The contractee ha agreed to pay 90% of the work certified. The company has decided not to book any profit to P & L A/c until 25% of the total work is completed and thereafter in that ratio which the amount received bears to the total contract price. The entire amount was received by 31-3-2004. Highway Flyovers Constriction Ltd. has commenced their project work on 1 st August, 2002 and completed the work by 31st January, 2004. the value of plant and machinery bought for the contract was R.57 lacs and the estimated scrap value of the machinery at the end o the contract was Rs.12 lacs. The accounts are maintained on the financial year ending 31st March and the details are as under:Particulars 2002-2003 2003-2004 Rs. Rs. Materials 2,28,00,400 26,01,000 Wages 1,09,27,800 38,10,000 Direct expenses 92,85,400 29,44,000 Indirect expenses 87,88,400 11,05,000 Supervision charges 40,000 30,000 (monthly) (p.m.) (p.m.) Administrative overheads 82,500 40,000 (monthly) (p.m.) (p.m.) Architect fees 5% of work 5% of work RCC Consultant fees certified certified Work uncertified at the year 3% of work 3% of work end certified certified Materials at site at the year 11,35,000 end 3,37,000 Amount received during the 5,90,40,000 2,29,60,000 year You are required to prepare contract accounts for the years ended 31 st March, 2003 and 31st March, 2004 and compute profit/loss from the contract. (Oct. 2000)

16) Bal Ram contractors undertook a contract for Rs.15,00,000 on 1 st July, 2002. The contract was completed on 31st March, 2002. The contractors prepares his accounts on 31st March. The details of the contract are: Particulars Period Period From 1-7-02 to 31From 1-4-03 to 3-03 31-3-04 Rs. Rs. Material issued 1,52,000 3,30,000 Direct wages 1,25,000 4,65,000 Direct expenses 30,000 45,000 Materials returned 22,000 15,000 to stores 20,000 8,000 Material at site 48,000 Uncertified work 23,000 66,000 Office overheads 5,000 Material lost by fire 3,00,000 15,00,000 Work certified 3,00,000 1,50,000 Plant issued Provide depreciation 2 20% p.a.on plant. Prepare contracts accounts for the year ended 31-3-2003 and 31-32004. (Apr. 1998) 17) the following information relates to building contract undertaken by m/s Asmit Ltd. for Rs.10,00,000 and for which 80% of the value of work certified by the architect is being paid by the contractee. Particulars I Year II Year III Year Materials 1,20,000 1,45,000 84,000 issued 1,10,000 1,55,000 1,10,000 Direct wages 5,000 17,000 6,000 Direct 2,000 2,600 500 expenses 2,35,000 7,50,000 10,00,000 Indirect 3,000 8,000 expenses 14,000 Work certified 2,000 5,000 8,000 Uncertified work Plant issued Material on site The value of plant at the end of I, II, III year was Rs.11,200, Rs.7,000 and Rs.3,000 respectively. Prepare contract account for these three years. (Oct. 2007) 18) Bhushan Contractors Ltd. obtained the contract to construct a building for rs.35,00,000. The contractee agrees to pay 90% o the work certified immediately upon the receipt of the certificate from the architect and the balance amount would be paid on the completion of contract. The work was commenced on 1st July, 2005 and completed on 30-09-2007. A machine costing Rs.45,000 was specially bought for the use on contract and it would not fetch any value upon completion of the contract. Particulars Year Year Year 2005 2006 2007 Work certified (cumulative) (Rs.) 8,75,000 28,25,000 35,00,000 Work uncertified (Rs.) 50,000 Materials purchased Steel (Tons) 16 20 15 Price per ton (Rs.) 25,000 26,000 26,500 Bricks (Nos.) 16,500 20,000 10,000 Price per brick (Rs.) 5.00 5.50 6.00 Wages (Rs.) 4,25,000 5,65,000 4,17,000 Direct overheads (Rs.) 17,500 44,500 10,000 Indirect materials (Rs.) 7,500 10,000 4,000 Materials returns Steel (Ton) 1 Bricks (Nos.) 1,000 Materials lost in accident Steel (Tons) 2 Materials sold

Steel (Tons) 4 Sale price per ton (Rs.) 27,000 Scrapped value of bricks (Rs.) 18,000 You are required to prepare contract account and contractee accounts for the year 2005, 2006 and 2007 in the books of the company. The accounts are closed on 31st December each year. (Mar. 2008) 19) A company took up a contract for Rs.10 crore and as per the agreement, it would receive 75% of the work certified each year. The contract was commenced on 1st April, 2000 and completed on 1st October, 2003, further details are as follows: Particulars 20002001200220032001 2002 2003 2004 Rs. Rs. Rs. Rs. Machinery purchased 50,00,000 Materials purchased 20,00,000 50,00,000 1,00,00,000 2,00,00,000 Labour 10,00,000 30,00,000 50,00,000 1,40,00,000 Other expenses 5,00,000 12,18,000 40,00,000 90,00,000 Stock of materials at year end 1,00,000 2,00,000 3,20,000 5,50,000 Work certified (cumulative) 20,00,000 2,00,00,000 5,00,00,000 10,00,00,000 Work uncertified 8,00,000 10,00,000 60,00,000 During 2000-2001 materials costing Rs.20,000 were returned to stores. During 2002-2003 certain materials costing Rs.30,000 were found unsuitable and sold at a loss of Rs.4,000. Materials worth Rs.8,000 were stolen from the site. During 2003-2004 there was an accident at site due to which a worker had to be paid Rs.50,000 as compensation. This amount is included in wages. On completion of contract the machinery was sold for Rs.25,00,000. The company provides depreciation at 20% p.a. on machinery on diminishing balance method. The company closes its accounts on 31st March every year. Prepare contract account of each of the above years. Also show contractees account. (Mar. 2005) 20) The Perfect Constructions Company ltd. has undertaken the construction of a bridge for a value of Rs.45,00,000 subject to a retention of 20% until one year after the certified completion of the contract. The following information is available for the year ended 31 st March, 2004: Particulars Rs. Labour on site 11,55,000 Material sent to site 12,30,000 Material from stores 2,35,500 Plant hire 34,800 Direct expenses 63,000 General overheads allocated to the 1,18,200 contract 22,800 Material at site (31-3-2004) 28,800 Wages accrued on 31-3-2004 5,100 Direct expenses accrued on 31-343,500 2004 39,00,000 Work not yet certified at cost 31,20,000 Value of work certified Cash received on account You are required to prepare: (1) contract account (2) contractees account and (3) Show relevant items in the balance sheet. (Mar. 2004) 21) The following trial balance was extracted on 31-12-2003: Trial balance Particulars Rs. Particulars Land and building 64,000 Share capital Bank balance 18,000 Sundry creditors Contract A/c: Material 1,00,000 Cash received Plant 40,000 (90% of work certified) Wages 1,50,000 expenses 10,000 3,82,000

Rs. 1,00,000 12,000 2,70,000 3,82,000

The contract price is Rs.5,00,000. It began on 1st January, 2003. Out of the plant and material charged to the contract, plant costing Rs.4,000 and material costing Rs.6,000 were destroyed by an accident. On 31-12-2003 plant costing Rs.10,000 was returned to store, the vale of material on site was Rs.5,000 and the cost of work done but not certified was Rs.10,000. Depreciate plant at 10%p.a. and 2% land and building. Prepare contract A/c after taking 2/3 profit on cash basis to profit and loss A/c and balance sheet as on 31-122003. (Oct. 2003) 22) M/s AB & Associates, a partnership firm comprising of partners A and B, undertook a contract to build a bridge for Rs.20,00,000 and commenced the work on 1-10-2003. The following is the trial balance of firm as on 30-9-2004: Particulars Rs. Particulars Rs. Plant & machinery 2,50,000 Capitals: A 1,20,000 Office buildings 3,00,000 B 80,000 Materials purchased 4,20,000 Advanced from 6,00,000 Wages 1,40,000 contractee 1,40,000 Sub-contracting 80,000 Bank overdraft 10,000 charges 10,000 Outstanding wages 1,50,000 Interest 50,000 Creditors 1,50,000 Office overheads loans 12,50,000 12,50,000 Additional information: (1) Materials worth Rs.4,00,000 were sent to site. (2) Outstanding sub-contracting charges Rs.20,000 at the year end. (3) Allocate 50% of office overheads and 100% wages to contract. (4) Plant and machinery were used for the whole year on contract and provide depreciation @ 10%p.a. (5) Partner A was entitled to salary of Rs.20,000 for site supervision for the year. Provide the same in account. (6) Contractee pays 75% of the work certified. (7) Partner A & B share the profit and losses in the ratio of 6:4 respectively. (8) At the end of the year, work uncertified valued at Rs.10,000 and material at site Rs.20,000. Prepare contract A/c. profit and loss A/c or the year ended 30-09-2004 and balance sheet as on that date. (Oct. 2006) 23) Ratnagiri Project Contractors provide you with the following informations as at 31 st March, 2004: (a) The project commenced on 1st August, 2003 and it is estimated to be completed by 31 st January, 2005. (b) The contract price of the contract was negotiated at Rs.900 lacs. (c) The actual expenditure upto 31st March, 2004 and subsequent total estimated expenditure upto 31 st January, 2005 is furnished as under: Particulars Actual Subsequent expenditure estimated upto 31-03expenditure 2004 Rs. Rs. Direct material 2,10,00,000 1,85,00,000 Indirect material 35,50,000 47,50,000 Direct wages 52,16,400 49,83,600 Supervision charges 6,20,600 3,29,400 Architect fees 11,50,000 18,00,000 Construction overheads 42,87,800 27,42,200 Administration 29,12,200 15,87,800 overheads 25,80,000 30,000 Closing material at site 1,25,000 Uncertified work 4,50,00,000 9,00,00,000 Certified work (d) the values of plant and machinery sent to site was Rs.80 lacs, whereas the scrap value of the plant and machinery at the end of the project was estimated to be Rs.8 lacs. It is decided that the profit to be taken credit for should be that proportion of the estimated net profit to be realized on completion of the project which the certified values of work as on 31-3-2004 bears to the total contract price. As a cost consultant, you are required to draft contract account or the year ended 31-03-2004, showing the working of profit to be taken credit for. (Apr. 1997) 24) M/s Everfine constructions commenced a contract for the construction of a bunglow on 1 st July, 2003. Originally the contract price was Rs. 50,00,000/- but finally the same was fixed at Rs.45,00,000/-.

Their actual expenditure during the year 2003 and estimated expenditure during 2004, till the completion of the contract is as under: Particulars Actual Estimated expenditure expenditure during upto 31-032004 2004 Rs. Rs. Building materials 8,00,000 13,00,000 Labour charges 6,00,000 6,00,000 Plant installed at site (at 4,00,000 cost) 50,000 Materials at site on 312,50,000 3,55,000 12-2003 General expenses 1,00,000 Plant returned to stores 20,00,000 Contract completed at cost at the end of the 75,000 year 90% of the work 45,00,000 Works certified certified Works uncertified Cash received The contract is expected to be completed by 30th September, 2004. The plant is subject to depreciation at 20%p.a. on the original cost. In order to calculate the correct account of profit made on the contract for the year 2003, it was decided to take certain proportion of the estimated profit on completion of the contract to the credit of profit and loss account; such proportion being cash received to the total contract price. Prepare the contract account for the year ending 31 st Dec. 2003 and work out the estimated profit on the completion of the contract by 30th September, 2004. (Oct. 1995) 25) The following information relates to a building contract for rs.20,00,000: 2005 2006 Rs. Rs. Material issued 6,00,000 1,68,000 Direct wages 4,60,000 2,10,000 Direct expenses 44,000 20,000 Indirect expenses 12,000 2,800 Work certified 15,00,000 20,00,000 Work uncertified 16,000 Material at site 10,000 14,000 Plant issued 28,000 4,000 Cash received from contractor 12,00,000 20,00,000 The value of the plant at the end o 2005 and 2006 was Rs.14,000 and Rs.10,000 respectively. Prepare: contract account for the two years taking into consideration such profit or transfer to profit and loss account as you think proper. Please state your assumption if any. (PGDFM, May, 1997/ BAF, Apr. 2007) 26) The following expenses were incurred on a contract: Material purchased 6,00,000 Material drawn from 1,00,000 stores 2,25,000 Wages 75,000 Plant issued 75,000 Chargeable expenses 25,000 Apportioned indirect expenses The contract was for Rs.20,00,000 and it was commenced on January 1, 2007. The value of the work completed and certified upto 30th November, 2007 was Rs.13,00,000 of which Rs.10,40,000 was received in cash, the balance being held back as retention money by the contractee. The value of work completed subsequent to the architects certificate but before 31 st December, 2007 was Rs.60,000; this was certified later for Rs.65,000. There were also lying on the site materials of the value of Rs.40,000. It was estimated that the value of the plant as at 31st December, 2007 was Rs.30,000. You are required to show the contract account from the above particulars or the year ended 31-12-2007. (PGDFM, May, 1998) 27) The following information pertains to a contract for construction of a bunglow at a total cost of Rs.20,00,000:

Material issued to site Direct wages at the site Direct expenses Indirect expenses Plant issued Work certified Work not certified Plant at site (year-end) Material at site (year-end) Amount received from contractee Prepare, for both the years, (a) contract account (b) contractees account Make necessary assumptions, but state them clearly.

2005-06 Rs. 4,00,000 2,10,000 80,000 30,000 40,000 7,00,000 50,000 20,000 25,000 6,30,000

2006-07 Rs. 3,00,000 1,60,000 55,000 15,000 13,50,000 50,000 6,000 10,000 12,15,000

(PGDFM, May, 2000)

28) Prepare a contract a/c from the following information for the month of December: Material sent to site Labour engaged at site Plant installed at site Direct expenditure Establishment charges Material returned to stores Work certified Value of plant at site on 31/12 Cost of work uncertified Wages accrued on 30/12 Direct expenses accrued on 31/12 Rs. 85,349 74,375 15,000 3,167 4,126 549 1,95,000 11,000 4,500 2,400 240 (PGDFM, May, 2000) 29) The following data pertains to a building contract of Rs.20,00,000: 2005-06 2006-07 Rs. Rs. Material issued 4,00,000 3,00,000 Direct wages at the site 2,10,000 1,50,000 Direct expenses 80,000 55,000 Indirect expenses 30,000 15,000 Plant issued 40,000 Work certified 7,00,000 13,50,000 Work uncertified 60,000 50,000 Plant at site (at year-end) 20,000 5,000 Material at site (at year-end) 25,000 20,000 Cheque received from principal 6,30,000 12,15,000 Prepare, for both the years, (a) contract account (b) contractees account. (PGDFM, May, 2002) 30) space building contractors obtained a contract to build a bunglow at a contract price of Rs.3,50,000. the contractee agrees to pay 90% o the value of the work done as certified by the architect immediately on receipt of the certificate and to pay the balance in 2 years after the completion of the contract. Contractors commenced the work on 1st May, 2002. a machine costing Rs.5,000 was specially bought and used for the contract. The value of the machine at the end of 2002 and 2003 and on completion of the contract at the end of 2004 was Rs.4,000, R.2,500 and Rs.1,000 respectively. The work done and certified by the architect as at the end of 2002 and 2003 was Rs.87,500 and Rs.2,82,500 respectively. Work costing Rs.5,000 done as at the end of 2003 was not certified as on that date. The expenses on the contract were as under: 2002 2003 2004 Rs. Rs. Rs. Materials 45,000 55,000 31,500 Wages 42,500 57,500 42,500 Direct expenses 1,750 6,250 2,250

Indirect expenses 750 1,000 Prepare the contract account of space building contractors for all the three years 2002,2003 and 2004 and show the relevant figures in the balance sheets as at the end o the three years. (Apr. 1983) 31) the Hindustan Construction Company Ltd. have undertaken the construction o a bridge over a river Yamuna for a Municipal Corporation. The value of the contract is Rs.12,50,000 subject to a retention of 20% until 1 year after the certified completion of the contract, and final approval of the corporation engineer. Following details are available as on 30/6/2006. Particulars Rs. Labour on site 4,05,000 Material directly sent to site (-) 4,20,000 returns 81,200 Materials issued from store 12,100 Hire & use of plant plant upkeep 23,000 A/c 37,100 Direct expenses 6,300 General overhead 7,800 Material in hand 30/6/2006 1,600 Wages accrued 30/6/2006 16,500 Direct expenses accrued 30/6/2006 11,00,000 Uncertified work 8,80,000 Amount certified by corporation engineer Cash received on A/c (M. Com) 32) Particulars House A Rs. House B Rs.

WIP 1st January, 2007 (excluding Rs.800 estimated profit which was taken to profit & 14,000 loss A/c in 2006) 23,000 16,600 Material purchased 20,000 14,000 Wages 1,400 300 Electrical services and fittings 8,000 Road making charges 60,000 40,000 Contract price (including road making) 60,000 24,000 Cash received to 31/12/2007 100% 66.23% Percentage of cash received to work 400 540 certified 2,500 Material in hand 31/12/2007 12,000 6,000 Work uncertified 10 8 Value of plant used on sites months months Period of plants used The total establishment expenses incurred during the year 2007 amounted to Rs.12,240. These are to be charged to the two contracts in proportion of wages. Depreciation of plant to be taken into account at the rate of 10% p.a. (Delhi University) 33) A firm of contractors undertook a contract for Rs.3,50,000 on 1st July, 2005. Expenses upto 31/12/2005: Particulars Amount Rs. Materials charged 3,750 directly 26,250 Materials issued 15,000 from stores 1,500 Wages Direct charges The amount of work certified was Rs.60,000 of which the contractor received in cash. The transactions for the year 2006 were: Particulars Amount

Rs. Materials issued 67,500 from stores 3,000 Direct charges 30,000 Wages The cost of special plant issued on 1st January, 2006 for the contract was Rs.60,000. Further work certified during the year amounted to Rs.1,65,000. 75% of which was received. Uncertified work as on 31/12/2006 was valued at Rs.11,250. Special plant is to be depreciated at 25% p.a. on the original cost. Material on site valued at Rs.7,500. The contract was completed on 30th April, 2007 upto which expenses were: Particulars Amount Rs. Materials charged 5,250 directly 30,000 Materials issued from 11,250 stores 1,012 Wages Direct charges The general overheads is to be charged at 5% of the materials consumed and wages paid during the year. On 30th April, 2007 the plant was valued at Rs.37,500. The materials at site were sold for Rs.5,250 and those returned to stores amounted to Rs.9,750. Prepare contract A/c and contractees A/c. 34) M/s Manholes & Sewers Ltd. undertook a contract for erecting a sewage treatment plant for a municipality for a total value of Rs.24 lacs. It was expected that the contract would be completed by 31 st January, 2006. You are required to prepare a contract A/c for year ending 31 st January, 2005. (a) Wages Rs.6,00,000. (b) Special plant Rs.2,00,000. (c) Material Rs.3,00,000. (d) Overhead Rs.1,20,000. (e) Depreciation @ 10% on plant. (f) Material at site 31.1.2005 Rs.40,000. (g) Work certified was to the extent of Rs.16,00,000 and 80% of the same was received in cash. (h) 5% of the value of material issued and 6% of wages may be taken to have been incurred for the portion of work completed but not yet certified. (i) Overheads are charged as a percentage of direct wages. (j) Ignore depreciation on plant for use on uncertified portion of the work. (k) Ascertain the amount of profit. (ICWA) 35) A Construction Company has undertaken to construct a small bridge. The following particulars relate to this bridge for the year ended 31st December, 2006. Rs. Materials: Direct purchase 1,00,000 Issue from stores 25,000 Wages 80,000 General plant in use: Written down value 1,00,000 Depreciation thereon 10,000 Direct expenses 6,000 Share of general overhead 3,000 Materials on hand at 31st December, 4,000 2006 2,000 Materials lost by fire 200 Salvage value thereof 5,000 Wages accrued due at 31st 3,00,000 December, 2006 6,000 Value o work certified Cost of uncertified work The value of the contract is Rs.5,00,000 and it is practice of the contractee, as per terms of the contract, to retain 10% of the work certified. From the above particulars prepare the contract account total , also show how the relevant items would appear in the balance sheet as on 31st December, 2006. (Apr. 1987)

36) Trial balance of Apollo Contractors as on 31st December, 2007: Particulars Amount Amount Rs. Rs. Contractees A/c 3,00,000 Building 1,00,000 Creditors 62,000 Bank 35,000 Capital A/c 3,00,000 Materials 1,00,000 Wages 70,000 Expenses 37,000 Plant 2,50,000 WIP (contract No. 837) (1/1/2007) 1,00,000 Contract No. 837 (1/1/2007) 30,000 (unadjusted profit) 6,92,000 6,92,000 Contract No. 837, which was in progress on 1st January, 2007, was completed on 31st March, 2007. Contract No. 838 commenced on 1st January, 2007. Rs.20,000 materials and Rs.10,000 wages were paid for contract no. 837. Rs.60,000 wages paid for contract no.838 material Rs.60,000 but Rs.3,000 worth was lost by accident. Rs.50,000 plant was used in contract no. 838 all through but plant costing Rs.2,00,000 was used on contract no.838 from 1st April, 2007, prior to that, the above machinery was used in contract no. 837. Rs.4,000 materials were at site on contract no.838 at the end o the year. Provide 10% depreciation on the plant and 2% on buildings. Contract no. 837 was for Rs.1,50,000 and certified work upto last year was Rs.1 lac. The work has been certified upto the full extent, but payment has been received upto 80% of the certified amount. The balance ha not been paid yet, nor any entry has been passed, on completion of the contract. Contract no. 838 work certified 2,00,000. Expenses are charged to contracts on the basis of 50% of direct wages. The new contract is for Rs.4 lacs and 90% is paid on certification. The uncertified work of the contract as on 31 st December, 2007 is estimated at Rs.15,000. (May, 1980) 37) M/s Rajesh Construction Ltd. commenced a contract on April 1, 2003. The total contract was for Rs.50,00,000. Actual expenditure in 2003-04 and estimated expenditure in 2004-05, are given below: Particulars 1-4-03 to 1-4-04 to 31-3-04 31-12-04 (actual) (estimated) Rs. Rs. Materials issued 13,50,000 8,20,000 Labour paid 7,30,000 5,60,000 Plant purchased 2,00,000 Expenses paid 2,50,000 2,00,000 Plant returned to store 50,000 1,50,000 (historical cost) (on 31st 80,000 Dec. 2004) Material at site 30,00,000 20,000 Work certified 2,00,000 Full Work uncertified 24,00,000 Cash received Full The plant is subject to annual depreciation @ 25% of written down value basis. The contract is likely to be completed on December 31, 2004. You are required to prepare contract account for 2003-04 & estimated contract A/c for 1-4-2003 to 31-122004. Determine the profit on the contract for the period 2003-2004 on prudent basis, which has to be credited to Profit & Loss A/c. (BAF, Oct. 2005) 38) The following information is obtained from the books of a contractor relating to a contract for Rs.80,00,000. The contractee pays 90% o the value of work done as certified by the architect. Following is the information during the year ended on 31t December, 1998, 1999 & 2000. Particulars 31-1231-1231-121998 1999 2000 Rs. Rs. Rs.

Material issued to contract 10,50,000 12,60,000 Wages 6,80,000 9,45,000 Direct expenses incurred for 85,000 1,25,000 contract 45,000 1,00,000 Indirect expenses allocated to 19,00,000 40,20,000 contract 1,30,000 Work certified during the year 1,00,000 Work uncertified 40,000 30,000 Plant issued to contract (on 1-180,000 50,000 1998) Material returned to stores Value of plant at the year - end Prepare contract accounts for the year ended 31 st December, 1998, 1999 & 2000. (BAF, Oct. 2005)

8,80,000 6,50,000 1,45,000 20,000 20,80,000 15,000 20,000

39) Amar builders undertook a contract whose contract price was Rs.30 lacs. The contractee agreed to pay 90% of the value of work certified immediately and balance on completion of contract. Contract was commenced on 1st May, 2002 and was completed on 30th November, 2004. The contractor closes his books on 31st December every year. A plant for Rs.4,00,000 was bought and sent to the contract site on the same day. Depreciation was to be charged on the plant at 12% per annum on straight line basis. Following further details are available: Particulars Year Year Year ended ended ended 31/12/2002 31/12/2003 31/12/2004 Materials sent to 3,60,000 6,40,000 2,52,000 site 3,40,000 5,60,000 3,40,000 Direct wages 14,000 50,000 18,000 Direct expenses 6,000 8,000 Nil Indirect 4,000 Nil Nil expenses 7,00,000 23,00,000 30,00,000 Material on hand 35,000 40,000 Nil Work certified at the year endcumulative Work uncertified All amounts were duly received from the contractee as per the terms of contract. Prepare contract account for three years and show the amount to transfer to the profit & loss account of each year. (BAF, Apr. 2006) 40) Mahavir Contractors undertook thee contracts during the year ended 31 st March, 2005 and following details are available: Particulars Theatre Shopping Housing contract centre society contract contract Contract price 15,00,000 10,80,000 12,00,000 Raw materials 2,88,000 2,32,000 80,000 Direct wages 4,40,000 4,48,000 56,000 Direct expense 16,000 11,200 4,000 Plant installed 80,000 64,000 48,000 Closing stock of materials 16,000 16,000 8,000 Wages accrued at the year 16,000 16,000 7,200 end 8,00,000 6,40,000 1,44,000 Work certified 24,000 32,000 8,400 Work uncertified 6,00,000 4,80,000 1,08,000 Amount received from the contractee Depreciation is to be charged at 10% per annum. Plant was sent to each contract on the date of commencement, which was as follows. Theatre 1st April, Shopping 2004 centre 1st October, Housing 2004 society 1st January,

2005 Prepare contract account and show the amount to be transferred to the Profit and Loss A/c, if any, in respect o each contract. (BAF, Apr. 2006) 41) Arjun Constructions Pvt. Ltd. engaged on two contracts A and B. from their books of account the following particulars are obtained in respect for the year 2006. Particulars Contract Contract A B Rs. Rs. Contract price 18,00,000 15,00,000 Materials purchased 4,80,000 1,80,000 Wages paid 4,20,000 1,05,000 Materials returned 12,000 6,000 Direct expenses 1,80,000 90,000 Establishment charges 81,000 24,000 Plant installed 2,40,000 2,10,000 Accrued wages upto 48,000 36,000 31-12-06 66,000 24,000 Material on site on 3112,60,000 4,05,000 12-06 11,34,000 3,75,000 Work certified 1,95,000 1,92,000 Cash received 69,000 30,000 Plant valued on 31-1206 Uncertified work On 25th September, 2006, materials costing Rs.27,000 have been transferred to contract B from contract A. You are required to show: (a) contract account (b) contractees account (c) Balance sheet presentation of contract items. (BAF, Oct. 2006) 42) The following is the trial balance of Prestige Construction Company engaged on the execution of contract no. 250 for the year ended 31st December, 2006. Particulars Rs. Rs. Contractees A/c amount 3,00,000 received 1,60,000 Building 72,000 Creditors 1,35,000 Bank balance 6,00,000 Capital A/c 2,00,000 Materials 1,80,000 Wages 47,000 Expenses 2,50,000 Plant 9,72,000 9,72,000 The work on contract no.250 was commenced on 1st January, 2006. Materials costing Rs.1,70,000 were sent to the site of the contract but those of Rs.6,000 were destroyed in an accident. Wages of Rs.1,80,000 were paid during the year. Plant costing Rs.50,000 was used on the contract all through the year. Plant with a cost of Rs.2,00,000 was used from 1 st January to 30th September and was then returned to stores. Materials of the cost of Rs.4,000 were at site on 31 st December, 2006. The contract was for Rs.6,00,000 and the contractee pays 75% of the work certified. Work certified was 80% of the total contract work at the end of 2006. Uncertified work was estimated at Rs.15,000 on 31 st December, 2006. Expenses are charged to contract at 25% of wages. Plant is to be depreciated at 10% for the entire year. Prepare contract no.250 A/c for the year 2006 and make out the balance sheet as on 31 st December, 2006 in the books of Prestige Construction Company. (BAF, Oct. 2006) 43) PAC Ltd. obtained a contract for the erection of a building. Building operations started in July, 2004. The contract price was Rs.18,00,000. On 30th June, 2005, the end of the financial year, the surveyor issued the certificate for work completed as Rs.9,00,000 and 20% of this amount was retained by the contractee. The following additional information is given: Particulars Rs. Materials issued to contract 3,60,000 Materials on hand at site as on 30th 15,000

June, 2005 4,93,200 Wages paid 1,800 Unpaid wages Plant purchased specially for contract 60,000 and to be depreciated at 10% p.a. 25,800 Direct expenses paid 15,200 General overhead allocated to contract 30,000 Work finished but not yet certified (cost) However 50% of the plant mentioned above was destroyed due to fire at site. The scrap value of such a loss of plant was nil. Out of the direct expenses paid for the year Rs.4,300 was paid on the contract for the next year. You are required to prepare the contract account and statement showing the profit on the contract to 30 th June, 2005, indicating what proportion of the profit the company would be justified in taking to the credit of the profit and loss account, and to show what entries in respect of the contract would appear in the Balance sheet. (BAF, Apr. 2007) 44) M/s Vikas builders undertook three contracts during the year 2004. The firms accounts were made up on 31 st December, 2004 when the position was as under: Contract Contract Contract A B C Rs. Rs. Rs. Materials 36,000 29,000 10,000 Wages 35,000 56,000 7,000 Plant installed at 10,000 8,000 6,000 site 2,000 1,200 900 Wage accrued 100,000 75,000 18,000 Work certified 2,000 1,400 500 General expenses 75,000 60,000 13,500 Received from 3,000 4,000 1,050 contractee 2,00,000 1,60,000 1,50,000 Work uncertified 2,000 2,000 1,000 Contract price Closing stock of material Contract A was undertaken on 1st January, 2004, contract B was undertaken on 1 st July, 2004 whereas contract C was undertaken on 1st October, 2004. The plant was installed on the respective dates at the contract and depreciation is to be provided @10% p.a. You are required to prepare contract accounts for the year ended 31 st December, 2004. Working will form part of your answer. (BAF, Oct. 2007) 45) A building construction company quoted Rs.60 Lakhs for construction of Hospital building, finally contract was signed for Rs.50 Lakhs. The trial balance of the company as on 31 st March, 2005 was as under: Dr. (Rs.) Cr. (Rs.) Charged to contract Materials 16,00,000 Plant and machinery 4,00,000 Wages 18,00,000 Expenses 2,20,000 Share capital 15,00,000 Creditors 6,40,000 Cash received (80% of work 32,00,000 certified) 12,40,000 Land and building 80,000 Bank balance 53,40,000 53,40,000 (1) On 31st March, 2005, work uncertified was Rs.40,000 and material costing Rs.60,000 was in hand at site. (2) Of the plant and materials charged to the above contract, plant costing Rs.1,00,000 and materials costing Rs.1,50,000 were destroyed by fire on 1st April, 2004. (3) On 31st March, 2005, plant costing Rs.80,000 was returned to stores. (4) Provide depreciation @20% on plant and machinery. Prepare contract account for the year ended 31 st March, 2005 and balance sheet as on that date. (BAF, Oct. 2007)

INTRODUCTION TO STANDARD COSTING 1. From the following data, calculate break-even point (BEP). Rs. Selling price per 20 unit 15 Variable cost 20,000 per unit Fixed overheads If sales are 20% above BEP, determine the net profit. 2. (i) Find out contribution and BEP sales if Budgeted Output is 80,000 units. Fixed Cost is Rs.4,00,000, Selling Price per unit is Rs.20. variable Cost per unit is Rs.10. (ii) Find out Margin of safety, if profit is Rs.20,000 and PV ratio is 40%. 3. From the following data, calculate: (i) Break-even point expressed in amount of sales in rupees. (ii) Number of units that must be sold to earn a profit of Rs.1,60,000 per year. Selling price Rs.20 per unit Variable manufacturing cost Rs.11 per unit Variable selling cost Rs.3 per unit Fixed factory overheads Rs.5,40,000 per year Fixed selling cost Rs.2,52,000 per year 4. Sales Rs.1,00,000, Profit Rs.10,000, Variable cost 70%. Find out (a) PV ratio (b) Fixed cost and (c) Sales to earn profit of Rs.40,000. 5. S. Ltd. furnishes you the following information relating to the half year ending 30 th Sept. 2003. Particulars Rs. Fixed 50,000 expenses 2,00,000 Sales value 50,000 Profit During the second half of the same year, the company has projected a loss of Rs.10,000. Calculate(i) The P/V ratio, break-even point and margin of safety for six months ending 30 th Sept. 2003. (ii) Expected sales volume for second half of the year assuming that selling price and fixed expenses remain unchanged in the second half year also. (iii) The break-even point and margin of safety for the whole year 2003-2004. 6. A company sells its product at Rs.15 per unit. In a period if it produces and sells 8,000 units, it incurs a loss of Rs.5 per unit. If the volume is raised to 20,000 units, it earns a profit of Rs.4 per unit. Calculate break-even point both in terms of rupees as well as in units. 7. From the following, calculate (i) Contribution per unit (ii) Margin of Safety (iii) Volume of Sales to earn a profit of Rs.24,000: Total fixed costs- Rs.18,000 Total Variable costs- Rs.30,000

Total sales- Rs.50,000 Units sold- 20,000 8. Two companies P Ltd. and Q Ltd. producing and selling similar products forecast their Profit and Loss A/c for the next year, which is as follows: Particulars P Ltd. Q Ltd. Rs. Rs. Rs. Rs. Sales 3,00,000 3,00,000 Less: Variable 2,00,000 2,25,000 Cost 50,000 2,50,000 25,000 2,50,000 Fixed Expenses 50,000 50,000 Estimated Profit Calculate: (a) P/V Ratio, Break-even point and margin of safety for both the companies. (b) Sales required to earn a profit of Rs.30,000 for both companies. 9. Sales Profit Rs. Rs. Period 1 10,000 2,000 Period 2 15,000 4,000 You are required to calculate: (a) PV ratio, (b) Fixed cost, (c) Break-even sales volume, (d) sales to earn a profit of Rs.3000 and (e) Profit when sales are Rs.8,000. 10. Calculate Break-even point: 2002 Sales 2003 Rs.80,000 Sales Rs.90,000 Particulars

Cost Rs.70,000 Cost Rs.76,000

11. S. Ltd., a multi-product company, furnishes the following data relating to the year 2003. Particulars 1st half of 2nd half of the year the year Sales 45,000 50,000 Total Cost 40,000 43,000 Assuming that there is no change in prices and variable costs and that the fixed expenses are incurred equally in the two half-year periods, calculate for the year 2003: (a) the profit-volume ratio, (b) the fixed expenses, (c) the break-even sales and, (d) the percentage of margin of safety to total sales. 12. The following figures are available from the records of Venus Enterprises as at 31 st March: 2003 2004 Rs. Rs. Lakhs Lakhs Sales 150 200 Profit 30 50 Calculate: (a) the PV ratio and total fixed expenses (b) The break-even level of sales (c) Sales required to earn a profit of Rs.90 Lakhs, (d) Profit or Loss that would arise if the sales were Rs.280 Lakhs. 13. A company had incurred fixed expenses of Rs.2,25,000 with sales of Rs.7,50,000 and earned a profit of Rs.1,50,000 during the first half-year. In the second half-year, it suffered a loss Rs.75,000. Calculate: (i) The profit-volume ratio, break-even point and margin of safety of the first half-year. (ii) Expected sales-volume for the second half-year assuming that selling price and fixed expenses remained unchanged during the second half-year. 14. The cost accountant of X Ltd. furnishes you the following information: Fixed cost for the year Rs.40,000; Net Profit for the year Rs.50,000; P/V Ratio 30%. What is the amount of sales during the year? 15. Sales at break-even point is Rs.25,000 and fixed cost is Rs.10,000. What is the total contribution?

16. Find out profit volume ratio if fixed cost is Rs.10,000 and Break-even Sales are Rs.25,000. 17. Profit Volume Ratio of a company is 50%, while its margin of safety is 40%. If sales volume of the company is Rs.50 Lakhs, find out its break-even point and net profit. 18. (1) Ascertain Profit, when Sales Rs.2,00,000 Fixed Cost Rs.40,000 BEP Rs.1,60,000 (2) Ascertain Profit, when Fixed Cost Rs.20,000 Profit Rs.10,000 BEP Rs.40,000 19. Fixed Costs Rs.8,000 Break-even units 4,000 Sales (units) 6,000 Selling Price per unit Rs.10 Calculate (i) Variable Cost per unit and (ii) Profit. 20. From the following data find out (i) sales and (ii) new break-even sales, if selling price is reduced by 10%. Particulars Rs. Fixed Cost 4,000 Break-even 20,000 sales 1,000 Profit 20 Selling price per unit 21. Calculate PV Ratio and Fixed expenses from the following: Margin of Safety Rs.80,000 Profit Rs.20,000 Sales Rs.3,00,000 22. The ratio of variable cost to sales is 70%. The break-even point occurs at 60% of the capacity sales. Find the capacity sales when fixed costs are Rs.90,000. Also compute profit at 75% of the capacity sales. 23. If margin of safety is Rs.2,40,000 (40% of sales) and PV ratio is 30% of AB Ltd., calculate (1) Break-even sales, (2) Amount of profit on sales of Rs.9,00,000. 24. A retail dealer in garments is currently selling 24,000 shirts annually. He supplies the following details for the year ended 31st December, 2003. Particulars Rs. Selling price per shirt 40 Variable cost per shirt 25 Fixed Cost: - Staff salaries for the year 1,20,000 - General office costs for the year 80,000 - Advertising costs for the year 40,000 As a cost accountant of the firm, you are required to answer the following each part independently. (i) Calculate the break-even point and margin of safety in sales revenue and number of shirts sold. (ii) Assume that 20,000 shirts were sold in a year. Find out the net profit of the firm. (iii) If it is decided to introduce selling commission of Rs.3 per shirt, how many would require to be sold in a year to earn a net income of Rs.15,000. (iv) Assuming that for the year 2002 an additional staff salary of Rs.33,000 is anticipated, and price of a shirt is likely to be increased by 15%, what should be the break-even point in number of shirts and sales revenue? 25. The following information is obtained from a company for January: Sales Rs.20,000

Variable Costs Rs.10,000 Fixed Costs Rs.6,000 (a) Find P/V Ratio, Break-even Point and Margin of Safety at this level, and the effect of: (b) (1) 20% decrease in fixed costs; (2) 10% increase in fixed costs; (3) 10% decrease in variable costs; (4) 10% increase in selling price; (5) 10% increase in selling price together with an increase of fixed overheads by Rs.1,200; (6) 10% decrease in sales price; (7) 10% decrease in sales price accompanied by 10% decrease in variable costs. 26. From the following particulars you are required to calculate: (1) Profit Volume Ratio (2) Break-even Point (3) Profit when sale is Rs.2,00,000 (4) Sales required to earn a profit of Rs.40,000 (5) Margin of safety in the 2 nd year. Year Sales Profit Rs. Rs. I 2,40,000 18,000 II 2,80,000 26,000 You may assume that the cost structure and selling prices remain constant in the two years. (Mar. 03) 27. K.T. and Co. has prepared the following budget estimates for the year 2002-2003: Sales 15,000 units, Sales value Rs.1,50,000, Fixed Expenses Rs.34,000. Variable cost per unit Rs.6/-. You are required to find: (i) Profit Volume Ratio (ii) Break-even Point (iii) Margin of Safety. Also calculate revised Profit volume ratio, Break-even point and margin of safety, if selling price per unit is reduced by 10%. (Oct. 03) 28. The following data have been extracted from the books of Alfa Ltd. Year Sales Profit Rs. Rs. 2002 5,00,000 50,000 2003 7,50,000 1,00,000 You are required to calculate: (i) P/V Ratio (ii) Fixed Cost (iii) Break-even Sales (iv) Profit on sales of Rs.4,00,000 (v) Sales to earn a profit of Rs.1,25,000. (Mar. 04) 29. Z Ltd. produces and sales a single article at Rs.10 each. The marginal cost of production is Rs.6 each and fixed cost is Rs.400 per annum. (1) P/V Ratio. (2) The break-even sales (in Rs. and Nos.) (3) The sales to earn a Profit of Rs.500 (4) Profit at sales of Rs.3,000. (5) New break-even point if sales price is reduced by 10%. (6) Margin of safety at sales of Rs.1,500, and (7) Selling price per unit if the break-even point is reduced to 80 units. (Oct. 04) 30. A product is sold at Rs.80 per unit. Its Variable Cost is Rs.60, Fixed cost is Rs.6,00,000. Compute the following: (1) P/V Ratio. (2) Break-even Point (3) Margin of Safety at a Sale of 50,000 units. (4) At what Sale the producer will earn profit at 15% on Sales? (Mar. 05) 31. The following is the cost structure of a product. Selling price Rs.100 per unit. Variable Cost per unit Material Rs.38 Labour Rs.14 Direct Expenses Rs.8 Fixed Overheads for the year Factory Overheads Rs.2,80,000 Office Overheads Rs.2,20,000 No. of units produced and sold Rs.40,000 Calculate: (1) P/V Ratio

(2) (3) (4) (5) 32. (1) (2) (3)

Break-even point in units Margin of Safety Amount Break-even Point if fixed overheads increased by 20% Revised P/V ratio when selling price increased by 20%. (Oct. 05) From the following data, compute: P/V Ratio B.E.P. in Rupees and Units. Number of units to be sold to earn a profit of rs.7,50,000. Sales price Rs.20 per unit Direct Material Rs.5 per unit Direct Wages Rs.6 per unit Variable Administrative Overheads Rs.3 per unit Fixed Factory Overhead Rs.6,40,000 per year Fixed Administrative Overhead Rs.1,52,000 per year (Mar. 06)

33. The XL Ltd. furnishes the following information: 1st period 2nd period Sales 20,00,000 30,00,000 Profit 2,00,000 4,00,000 From the above, calculate the following: (1) P/V Ratio (2) Fixed Expenses (3) BEP (4) Sales to Earn Profit Rs.5,00,000 (5) Profit when sales are Rs.15,00,000. (Oct. 06) 34. A company produces and sells 1,500 units of a commodity at Rs.20 each. The Variable cost of production is Rs.12 per unit and Fixed cost Rs.8,000 per annum. Calculate: (i) P/V ratio (ii) Sales at break-even point and (iii) Additional sales required to earn the same amount of profit if selling price is reduced by 10%. (Mar. 07) 35. The following figures relate to M/s. Deepak Industries: Fixed Overheads Rs.2,40,000 Variable Overheads Rs.4,00,000 Direct Wages Rs.3,00,000 Direct Materials Rs.8,00,000 Sales Rs.20,00,000 Calculate: (i) P/V Ratio (ii) BEP (iii) Margin of Safety (Mar. 08) 36. Following particulars are available for A Ltd. and B Ltd.: Particulars A Ltd. B Ltd. Sales Rs.6,00,000 Rs.6,00,000 P/V ratio 25% 20% Fixed cost Rs.90,000 Rs.80,000 Calculate for each company(i) Break-even Point (ii) Margin of Safety (iii) Sales required to earn a profit of Rs.90,000. (Mar. 09)

INTRODUCTION TO MARGINAL COSTING

1. Calculate material price variance of products A and B. Particulars A B Standard Price (per unit) Actual Price (per unit) Units produced Rs.2 0 Rs.2 4 300 unit s Rs.3 2 Rs.3 0 250 unit s

2. From the following data compute (1) Material Cost Variance and (2) Material Price Variance. Particular Stand Actu s ard al Cost per unit (Rs.) Quantity (units) 5 50 6 45

3. From the following, calculate Material Variances: Quantity of material purchased Value of material purchased Standard quantity of material required for one ton of finished products Standard rate of material Finished production

2,500 units Rs.7,5 00 25 units Rs.2 per unit

80 tons

4. A manufacturing concern which has adopted standard costing furnishes the following informations: (1) Standard materials for 70 kg. finished products, 100 kg. (2) Standard price of material Rs.1 per kg. (3) Actual output 2,10,000 kg. (4) Actual material used 2,80,000 kg. (5) Cost of material Rs.2,52,000 Calculate: (1) Material usage variance (2) Material Price variance (3) material cost variance (Oct. 03)

5. The standard raw material costs of producing 300 units of product A were as follows: 600 units of Raw Materials @ Rs.50 per unit Rs.30,000. But actual Raw Materials costs of producing 300 units of Product A were 1,000 units of Raw Materials @ Rs.40 per unit Rs.40,000. Determine: (i) Raw Materials Cost Variance (ii) Raw Materials Price Variance and (iii) Raw Materials Usage Variance.

6. From the following particulars compute (a) Material Cost Variance (b) Material Price Variance (c) Material Usage Variance.

Quantity of material purchased

Value of material purchased Standard quantity of material required per ton of output Standard rate of material

Opening stock of materials Closing stock of materials Output during the period

3000 units Rs.9,000 30 units Rs.2.50 per unit 100 units 600 units 80 tons

7. From the data given below, calculate the material variances: Raw Standard Actual Mater ial A B 40 units @ Rs.50 each 60 units @ Rs.40 each 50 units @ Rs.50 each 60 units @ Rs.45 each

8. From the following information, compute Material Variances:

Mater ial

Standard Kil o 10 20 20 Pri ce 2 3 6 Kil o 5 10 15

Actual Pri ce 3 6 5

A B C

9. Gemini Chemical Industries provide the following information from their records. For making 10 Kgs. of GEMCO, standard material requirement is: Mater Quant Rate per ial ity Kg (Rs.) (Kg) A B 8 4 6.00 4.00

During April 2002 1,000 Kg of GEMCO were produced. The actual consumption of materials is as under: Mater ial A B Quant ity (Kg) 750 500 Rate per Kg (Rs.) 7.00 5.00

Calculate: All Material Variances.

10. MVM produces an article by mixing two inputs. The following standards have been set up for the input. Mater Stand Standard ial ard Price per Kg. Mix A B 40% 60% Rs.4 Rs.3

The standard loss in processing is 15%. During September 2001, the company produced 1,700 Kg. of finished output. The actual position of inputs was as under: Mater ial A B Purchas es (Kg.) 830 1,190 2,020 Rate 4.25 per Kg. 2.50 per

Kg. Calculate all possible Material Variances. (Oct. 07)

11. For producing 80 units of a product 30Kg of material X and 20 Kg of Material Y is the standard requirement. Standard price is Rs.6 per Kg of X and Rs.10 per Kg. of Y. 80 units were actually produced using 50 Kg of Material X purchased for Rs.200 and 10 Kg of Material Y purchased at Rs.8 per Kg. Compute: (1) Material Cost Variance (2) Material Price Variance and (3) Material Usage Variance. (Apr. 05)

12.

The standard material cost for 200 units of output is: Mater Kg Rate ial per Kg A B C 50 10 0 10 0 12 9 10

The actual cost for 8000 units is as follows: Mater ial A B C Kg Rate per Kg 28,35 0 30,75 0 46,48 0

210 0 375 0 415 0

Calculate material cost variance, material price variance and material usage variance. (Oct. 05)

13. From the following, calculate Material Cost Variance, Material Price Variance and Material Usage Variance: Materi Standard Actual als Uni Pric Uni Price ts e ts per per unit unit A 600 Rs.3 640 Rs.4.0 0

B C

800 100 0

Rs.5 Rs.4

960 840

Rs.4.5 0 Rs.5.0 0 (Mar. 08)

14. Using the following information for Department X, calculate all possible labour variances: Actual wage rate per hour (Rs.) 3.40 Standard hours for production Standard rate per hour (Rs.) Actual hours worked 8,640 3 8,200

15. From the following information, calculate Labour cost, rate and efficiency variance: Stand Actu ard al Labour hours Rate per hour 300 hrs. Rs.2.20 320 hrs. Rs.2. 00

16. From the following information of Orient Manufacturing Co. Ltd., determine (a) the Labour Cost Variance (b) Labour Efficiency Variance and (c) Labour Rate Variance: (1) Standard labour cost per unit of production is Rs.15. (2) Time allotted per unit is 30 hours. (3) During the month of March, 2003, 3,000 units are produced in 75,000 hours. (4) Actual payment of wages for the month is Rs.45,000. 17. Calculate all labour variances from the following data. Standard Actual Hou rs Hour ly Rate Hou rs Hour ly Rate

Skilled Labour Semi-skilled Labour Total Output

2,88 0 1,9 20 4,8 00 108 Kg.

20 10

1,76 0 2,6 40 4,4 00 90 Kg.

25 5

18. The following details relating to a product are made available to you: Standard cost per unit: Material 50 Kg. @ Rs.40 per Kg. Labour 400 hours @ Re.1 per hour Actual cost: Material 490 Kg. @ Rs.42 per Kg. Labour 3,960 hours @ Rs.1.10 per hour Actual production was 10 units. Calculate all possible variances.

19.

The following standards have been set to manufacture a product: Direct Materials Rs. 2 units of A at Rs.4 per unit 3 units of B at Rs.3 per unit 15 units of C at Re.1 per unit 8.00 9.00 15. 00 32.0 0 24. 00 56.0 0

Direct Labour 3 hours (@ Rs.8 per hour) Total Standard Prime Cost

The company manufactured and sold 6,000 units of the product during the year. Direct Material Costs were as follows: 12,500 units of A at Rs.4.40 per unit 18,000 units of B at Rs.2.80 per unit 88,500 units of C at Rs.1.20 per unit

The company worked 17,500 direct labour hours during the year. For 2,500 of these hours the company paid at Rs.12 per hour while for the remaining the wages were paid at the standard rate. Calculate Material Variances and Labour Variances.

20. The following standard and actual data in respect of chemical X is made available to you from the records of Naulakha Chemicals Ltd. Standard Data: Tota l Materials 450 kg of material A @ Rs.20 per kg 360 kg of material B @ Rs.10 per kg 810 Labour: @ per hour 2,400 skilled hours Rs.2 1,200 unskilled hours Re.1 90 kg normal loss 720 kg 4,80 0 1,20 0 -18, 600 Rs. 9,00 0 3,6 00 12,6 00 Rs.

Actual Data: Materials 450 kg of material A @ Rs.19 per kg 360 kg of material B @ Rs.11 per kg 810 Labour: @ per hour 2,400 skilled hours Rs.2.25 1,200 unskilled hours Rs.1.25 50 kg Actual loss Rs. 8,55 0 3,9 60

Tota l Rs.

12,5 10

5,40 0 1,50 0 -19,4

760 kg You are required to compute:

10

(1) Material Cost Variance (2) Material Price Variance (3) Material Usage Variance (4) Labour Cost Variance (5) Labour Rate Variance (6) Labour Efficiency Variance. 21. The following information is gathered from the labour records of KT & Co. (1) Payroll allocation for direct labour Rs.20,000. (2) Time card analysis shows that 8,000 hours were worked on production lines. (3) Production reports for the period shows that 4,000 units have been completed each having standard labour time for 1 hours and standard labour rate Rs.2 per hour. Calculate: (i) Labour Rate Variance (ii) Labour Cost Variance (iii) Labour Efficiency Variance. (Apr. 03)

22. From the following information, calculate labour variance: Standard for 100 units 500 labour hours Rate Rs.24 per hour Actual production 1,000 units were produced. Total wages paid Rs.1,30,000 for 5,200 hours. (Oct. 06)

23. Calculate material and labour variance from the following data: For 5 units of Product A, the Standard Data are: Materi al Labou r Actual data are: Actual Production- 1000 units 40 kg. 100 hour s @ Rs.25.00 per kg. @ Rs.2.50 per hour

Material Labour

7,840 kg. 19,80 0 hours

@ Rs.27.00 per kg. @ Rs.2.60 per hour (Mar. 06)

24. Calculate Material and Labour variances from the following data: Standard (per unit) Material 6 kg @ Rs.4

per kg Labour Actual production for the month Actual material price per kg Material used during the month Direct labour hours worked Actual wages rate per hour (Mar. 07) 4 hours @ Rs.4 per hour 12,500 units Rs.4.50 78,000 kg 48,000 hours Rs.3.50

CH 1 INTRODUCTION TO AUDIT
MEANING OF AUDITING: The final accounts of a business concern are used by various persons such as the owners, shareholders, investors, creditors, lenders, Government etc. for different purposes. All these users need to be sure that the

final accounts prepared by the management are reliable. An auditor is an independent expert who examines the accounts of a business concern and reports whether the final accounts are reliable or not. DEFINITIONS OF AUDITING: Different authorities have defined Auditing as follows: (1) Mautz: "Auditing is concerned with the verification of accounting data, with determining the accuracy and reliability of accounting statements and reports." (2) Prof. L. R. Dicksee: "Auditing is an examination of accounting records undertaken with a view to establish whether they correctly and completely reflect the transactions to which they relate." (3) International Auditing Guidelines: "Auditing is an independent examination of financial information of any entity with a view to expressing an opinion thereon." OBJECTIVES OF AUDITING: The objects of the audit depend upon the type of audit- financial audit, internal audit, cost audit, tax audit, etc. (A) Objects of Financial Audit: Financial Audit means an independent audit of the financial statements (i.e. balance sheet and profit and loss account) of a concern. A Financial Audit has the basic object of examining whether the accounts are true and fair and an incidental object of detecting errors and frauds. 1. Basic Object - True and Fair View: The basic object of financial audit is to enable an auditor to express an opinion on the financial statements. The auditor gives an opinion on whether the final accounts give a true and fair view of the affairs of the concern i.e. whether (i) the balance sheet gives a true and fair view of the financial position of the concern as at the end of the year and (ii) the profit and loss account gives a true and fair view of the profit or loss for the year. 2. Incidental Object - Detection of Errors and Frauds: The main objective of a financial audit is to report on the truth and fairness of the final accounts. Since the final accounts are based on the books of accounts, the incidental objective of audit is to ensure that the final accounts tally with the books of accounts. Detection of errors or frauds is no doubt important. If the accounts are to be true and fair, they must be free from errors and frauds. (B) Objects of other Audits: 1. Internal Auditing aims (i) to examine the accounts to ensure that records are properly maintained, (ii) to ensure that assets of the concern are safeguarded, (iii) to check if the policies and procedures laid down by the management are complied with and (iv) to review the operations of the concern to report on the efficiency of management. 2. Cost Audit aims to ensure that cost statements tally with the cost records and give a true and fair view of the cost of production and cost of marketing of the products. 3. Tax Audit under the Income-tax Act aims to ensure that the income of the concern is computed in accordance with the provisions of the Income-tax Act. ERRORS: Error means an unintentional mistake in financial information. It is an inadvertent or innocent (bona fide) mistake in the books and records. A "Fraud", on the other hand, is a deliberate and mala fide mistake. Both errors and frauds are known as "misstatement". A misstatement also covers wrong grouping or presentation. An Error may be [A] Error of Principle or [B] Clerical Error. Clerical Errors are further classified into: (1) Errors of Omission (2) Errors of Commission (3) Compensating Errors and (4) Errors of Duplication.

1) Errors of Principle:
An Error of Principle occurs when the transaction is not recorded according to the basic principles of accounting. The debit or credit is given to the wrong head of account. These errors do not affect the trial balance, but they affect the true and fair view of accounts. Thus, due to such errors the accounts show a misleading picture of the assets, liabilities, profit or loss of the concern. Following are the examples of Errors of Principle: a. Over valuation or under valuation of Stocks. b. Over charging or under charging Depreciation. c. Treating revenue expenses as capital expenditure and vice versa. d. Treating revenue expenses as deferred revenue expenses and vice versa. e. Ignoring pre-paid or outstanding expenses. f. Ignoring Income received in advance or income accrued. g. Ignoring, over estimating or under estimating amount of Bad Debts or Provision for Doubtful Debts. h. Over valuation or under valuation of an asset or a liability. Errors of principle can be detected only by vouching of all material transactions, verification of assets and liabilities, scrutiny of ledgers, overall checks, quantity reconciliations, party confirmations and so on.

2) Clerical Errors: i. Errors of Omission:

An Error of Omission occurs when a transaction is omitted from books either wholly or partly. If a transaction is partially omitted, the trial balance would not tally and the error can be detected and rectified. If a transaction is wholly omitted, the trial balance would still tally and it would be difficult to detect such error. Let us clarify this through an example of a cheque payment to a creditor. If this payment is partially omitted i.e. only one account is entered (say Bank Account) and another (Creditor) account is omitted, the trial balance would not tally. The error can be detected by checking the posting of the Bank Book into the Creditors Ledger. However, if the entire transaction is omitted, the trial balance would tally and the error would not be noticed at first. Such error can be detected only through (1) Bank Reconciliation (2) Confirmation of Bank Accounts (3) Vouching Cheque Counter-foils (4) Scrutiny of Creditors Accounts (5) Confirmation of Creditors Balances and so on. Thus the detection of errors of complete omission is more difficult. Errors of Commission: An Error of Commission occurs when a transaction is entered in the books but wrongly. Such errors may be (1) Mathematical Errors (2) Casting Errors or (3) Posting errors. Mathematical Errors: Mathematical Error of calculations may occur in voucher, books, ledger, trial balance and so on. Thus, in a Sales Bill, 100 No. x Rs.10 may be calculated as Rs.10,000 instead of Rs.1,000. Since the original entry itself is of wrong amount, the trial balance will tally. Such error can be detected by checking the calculations on the voucher, scrutiny of party accounts obtaining statement of accounts from parties and so on. Casting Errors: Casting Errors, i.e. errors in totalling, carry-forward, extension etc. may occur in Day Books, Ledgers or the Trial Balance. Thus, in Sales Register, while totalling all bills for a month a bill of Rs.1,000 may be taken as Rs.10,000. Thus the amount posted to Sales Account (Rs.10,000) will be more by Rs. 9,000 as compared to the amount posted to the Debtors A/c. (Rs.1,000). This will lead to difference in the Trial balance and can be detected by checking the casting of the Sales Register. Posting Errors: Posting Errors occur while posting amounts from Registers into the Ledgers. Thus, a Sales Bill of Rs.1,000 on Mr. A may be (i) posted to Mr. A's A/c for Rs.10,000, or (ii) posted on the Credit side instead of Debit side of Mr. A's A/c, or (iii) posted in Mr. B's A/c. Or, The error of posting wrong amount or of posting on the wrong side of account will affect Trial Balance and can be detected by checking the posting. The error of posting into wrong party a/c can be detected through ledger scrutiny, confirmations from parties etc. The error of posting sales into purchase a/c can be detected through reconciliations, ratio analysis, comparison with previous year's figures, etc. Compensating Errors: Compensating Errors occur when the effect of one error is compensated by another error. Thus one error cancels the effect of another error and there is no final net effect on the accounts. For example, one sales bill No. 12 for Rs. 1,000 on A is posted into account of B, and another sales bill No. 22 for Rs. 1,000 on B is posted into the account of A. The posting error in the first bill is compensated by the posting error in the second bill. These errors cancel each other and do not affect the trial balance. These errors, though difficult to trace, can be detected through vouching, obtaining statement of account or confirmations from parties, etc. Errors of Duplication: Errors of Duplication occur when a transaction is recorded twice in the original book of entry. The posting is also done twice. Thus, a Sales Bill for Rs.1,000 on A may be recorded twice in the Sales Register. Such an error would not affect the trial balance. An Error of Duplication can be detected by careful vouching, scrutiny of ledger account, confirmation from parties, ratio analysis, quantity reconciliations and so on. FRAUDS: Meaning: "Fraud" means intentional misrepresentation of financial information by management, employees or third parties. It is a deliberate and mala fide act to cheat or deceive someone. Frauds may be of the following types Manipulation, Falsification of records: Records may be manipulated or falsified in the following manner: Not Recording Transactions Transactions may not be recorded at all. For example, goods sold may not be recorded as sales in the sales register. Thus, such fraud occurs when an Error of Omission (explained above) is intentional. Recording Dummy Transactions Dummy transactions may be recorded. For example, goods sent on consignment may be shown as actual sales in Sales register. Thus, such fraud occurs when an Error of Commission (explained above) is intentional. Misapplication of Accounting Policies

ii. a)

b)

c)

iii.

iv.

1) a) b) c)

Accounting policies may be applied wrongly. For example, income accrued may be shown as advance received. Thus, such fraud occurs when an Error of Principle (explained above) is intentional. Such manipulation of accounts is called "window-dressing" when it shows a picture better than the actual position. If such manipulation leads to showing a picture worse than the actual position, it results in creation of "secret reserves".

2) Misappropriation of Cash: 1. From Cash Received: a. b. 2. 3. 3) 1.

Cash may be misappropriated, embezzled or stolen out of (a) Cash Received (b) Cash Paid (c) Cash Balance. Cash received may be misappropriated: by not recording cash received at all or recording only part amount as received and pocketing the balance. This is an intentional Error of Omission and occurs in case of - (a) cash sales (b) sale of scrap (c) sale of assets e.g. furniture (d) windfall gains e.g. recovery of bad debt, damages, discount from creditors etc. by teeming and lading, i.e. pocketing the first receipt from party A and showing second receipt from party B as received from A, then showing third receipt from party C as received from B and so on and using the money meanwhile [See Para 7.5 below]. From Cash Payments: Cash may be misappropriated out of cash payments by recording dummy or excess payments. Thus salaries or wages may be shown as paid to dummy employees or amount paid may be shown as higher than the actual payment. From Cash Balance: Cash may be actually stolen or embezzled out of the cash in hand lying in the cash box. Misappropriation of goods: Goods may be misappropriated out of (a) Goods Received (b) Goods Dispatched and (c) Stock in hand. From Goods Received: Goods received may be misappropriated by not recording goods received at all or recording only part quantity as received and misappropriating the balance. This is an intentional Error of Omission and occurs in case of weak control over purchases and storage. From Goods Dispatched: Goods may be misappropriated out of dispatches by recording dummy or excess sales. From Stock in Hand: Goods may be actually stolen out of the stock in hand lying in the warehouse. SHORT NOTE ON TEEMING AND LADING: This is a term used to describe attempts to hide the loss of cash received from one customer by using cash received from another customer to replace it. This is the method by which the cash is misused for sometime. When cash is received from some debtor (say Mr. A), it is not recorded in the cash book and is misappropriated. Later on, when cash is received from any other debtor (say Mr. B), B's account is not credited but the account of Mr. A is credited and, again later on, when cash is received from another debtor (Mr. C), C's account is not credited but that of Mr. B is credited and so on. This process goes on till the fraud is discovered. This method of fraud is also known as short banking or delayed accounting of money received or lapping. This is a method by which the past frauds are covered up by the present receipt. To detect such frauds the auditor should find out what is the internal check system regarding cash and cheques. If there is any weak point, he must investigate it. The cashier should not have access to ledger. Auditor should check the counterfoils of the receipts with the cash book paying particular attention to the dates. Auditor should check the bank reconciliation statement carefully. The cheques deposited should be cleared within reasonable time (say 2 days). If there is a longer delay, it indicates there may be a teeming and lading fraud. Auditor should check that the day's cash receipts/cheques were banked either on the same day or next day (by checking the entry in the cash book and the date stamped by the bank on the copy of the paying-in-slip). If there is a delay and if the unbanked cheques and cash are missing a teeming and lading fraud is taking place. WINDOW DRESSING: Meanign: In accounting, window dressing means the skill of presenting the accounts in a way that creates a good impression. In window dressing, the accounts are made in such a way as to show a much better condition than the actual condition. The profits and the net worth are overstated in the final accounts. Due to Window Dressing the financial position of the concern seems to be much better than what it actually is. Why Window Dressing is done: Mislead Investors & Lenders: A company may want to mislead investors into buying its shares by showing a better picture of its net worth. The banks may give larger loans based on the higher net worth shown in the accounts. The concern may be taken over by another concern for a higher consideration. Hide Losses:

2. 3.

1.

2.

3.

1. 2. 3. 4. 5.

Sometimes, the concern may suffer extraordinary losses. The concern may not like to show a huge loss in its books. A company may show fictitious profits through window dressing in order to be able to pay dividends to the shareholders. Higher Commission: Many times, window dressing is done by the directors themselves so as to earn more commission based on the higher profits shown in the books of the company. Objections against Window Dressing: No True and Fair View: When a concern does window dressing, the balance sheet does not disclose the actual net worth of concern. The profit and loss account fails to disclose the actual working results of the concern during the year. Shareholders Suffer: The shareholders do not get to know the true picture of the value of their investments. They may get a dividend, but that is out of their capital. Hides Inefficiency of Management: Window dressing helps the management to hide its inefficiency. The rosy picture shown in the accounts is used to hide the losses during the current year. Fraud by Management: The management may defraud the company by siphoning off (withdrawing for personal use) the profits created through window dressing. Against Companies Act: If window dressing is done by the company, it would be against the provisions of Schedule VI to the Companies Act, 1956. Auditors duty regarding Window Dressing: The auditor of a company has to report under S. 227(2) of the Companies Act, whether the accounts give a true and fair view (a) in the case of the Balance Sheet, of the state of the company's affairs as at the end of the financial year, and (b) in the case of the profit and loss account, of the profit or loss for the financial year. So, it is his duty to prevent or report any window dressing. Verify Income: He should verify whether the income has been properly recorded in the books and reported in the final accounts. Verify Assets and Liabilities: He should verify all the assets and check the valuation of each asset. Similarly, he should verify all the liabilities and examine the correctness of their value. Verify Provisions: He should examine whether the provision for any liability is lower than the required amount. Verify Closing Stock: He should verify the value of the closing stock. He should see that there is no change in the basis of valuation of the closing stock. Disclose Change in Method of Accounting: He should see whether there is any change in any method of accounting e.g. in the method of charging depreciation or in valuation of closing stock or in accounting for foreign exchange transactions and so on. Prevent Omission of Liabilities: Similarly, he should see that none of the liabilities is omitted from the books.

1. Disclosure in Audit Report:

2. 3. 4. 5. 6. 7.

SECRET RESERVE: Meaning: Secret Reserve means part of profits secretly reserved for future use. Secret reserves are those reserves which are not shown on the face of the balance sheet. When secret reserves are created, financial position of the company seems to be worse than what it actually is. It is exactly opposite of the term "window dressing". In window dressing, the position as shown in the Accounts is made to appear better or rosier than what it is in reality. Definition: In "A Dictionary for Accountants" Eric L. Kohler defines a secret reserve as: "The amount by which the net worth has been deliberately understated - a hidden reserve. Such a condition exists where the assets are omitted or undervalued or where liabilities are overstated. " When secret reserves are created, financial position of the company seems to be worse than what it actually is. It is exactly opposite of the term window dressing. In window dressing, the position as shown in the Accounts is made to appear better or rosier than what it is in reality.

1. Mislead Competitors:

Why Secret Reserves are created: A concern may like to mislead its competitors by hiding its real earnings. Sometimes, the concern may earn extra-ordinary or abnormal profits. The concern may not earn such profits in future. Such profits may be transferred to secret reserves to set off losses or for maintaining dividends in lean years in future. Fraud: Many a time, secret reserves are created by the owners with an ulterior motive. The owners may intend to siphon off (withdraw) the excess funds for their personal use later. Legally Allowed to Banks: A secret reserve is legally allowed to be created by banks. Banks are allowed not to disclose their provision for bad and doubtful debts in order to maintain public confidence. Objections against Secret Reserves: When a concern crates secret reserves, the actual net worth of the concern is not disclosed in the balance sheet of the concern. The profit and loss account fails to disclose the true and fair position of the working results of the concern during the year. Shareholders suffer: The shareholders do not get to know the true picture of the value of their investments. They do not get a proper dividend as the profits are understated. Undue benefit to management: The secret reserve helps the management to hide its inefficiency. The secret reserve of the previous year is used to hide the losses during the current year. Fraud by management: The management may defraud the company by spinning of (withdrawing for personal use) the funds represented by secret reserve. No check on Assets: Where certain assets (fixed assets or stock) are omitted from the accounts, there would not be any records for such assets and it would be easy for dishonest employees to sell off such assets and misappropriate the money. No insurance claim: In case of loss by fire where such hidden assets are destroyed, the company would not get full compensation from the insurance company. Auditors duty regarding Secret Reserves: The auditor of a company has to report whether the accounts give a true and fair view (a) in the case of the Balance Sheet of the state of the company's affairs as at the end of its financial year, and (b) in the case of the profit and loss account, of the profit or loss for its financial year. So, it is his duty to report any secret reserve. Check Articles of Association: He should study the Articles of Association of the company to verify the provision regarding reserves contained therein. Verify Income: He should verify whether all the income has been brought in the books. Verify Assets and Liabilities: He should verify all the assets and check the valuation of each asset. Similarly, he should verify all the liabilities and examine the correctness of their value. Verify Provisions: He should examine whether the provision of any liability is in excess of the amount considered reasonable and necessary in the opinion of the directors. Verify Closing Stock: He should verify the value of the closing stock. He should see that there is no change in the basis of valuation of the closing stock. Disclose Change in Method of Accounting: He should see whether there is any change in Jhe method of accounting e.g. in the method of charging depreciation, in accounting for foreign exchange transactions and so on. Prevent Omission of Assets:

2. Hide Abnormal Profits:

3. 4.

1. No true and fair view:

2. 3. 4. 5.

6.

1. Disclose in Audit Report:

2. 3. 4. 5. 6. 7. 8.

Similarly, he should see that none of the assets, fixed as well as current including items of the closing stock, has been omitted from the books. CIRCUMSTANCES INDICATING ERRORS OR FRAUDS: The following circumstances indicate that there may exist errors or frauds : Quality of management: Management is dominated by one person or a small group. Internal control is absent or weak. There is high turnover of accounting staff. The accounts department is understaffed. Auditors and lawyers are changed frequently. Unusual pressures on the concern: The working capital is inadequate. Credit sales are made to show more income ignoring the risk of bad debts. There is need to show better financial picture to succeed in shares issue. There is heavy investment in a product which is subject to rapid obsolescence. There is heavy dependence on few products or customers. Unusual transactions: There are many transactions near the year-end affecting amount of profit. There are many transactions with associates, related parties etc. There are excessive payments for services. Problems in audit: There are inadequate records, incomplete files, untallied trial balance. Vouchers are not available or not duly authorised or supporting documents are altered. There is- absence of or differences in party confirmations and quantity reconciliations, or unexplainable changes in ratios. There is lack of or inadequate explanation from management. AUDITOR'S RESPONSIBILITY FOR ERRORS AND FRAUDS: The Institute of Chartered Accountants of India has spelt out the responsibility of an auditor for Errors and Frauds in AAS (Auditing & Assurance Standard) - 4 as follows: Basic Responsibility of Management: Management is basically responsible for prevention and detection of errors and frauds. It is for the management to establish a good accounting and internal control system to prevent and detect errors and frauds. Incidental Objective of Audit: Detection of errors and frauds is only an object of audit incidental to the basic object of reporting whether the accounts are true and fair. The Auditor should plan and perform audit in such a way as to ensure that the accounts are free from major errors and frauds. Possibility of Non-detection: Due to inherent limitations of Auditing. It is possible that some errors or frauds may remain undetected. This does not imply that the auditor has failed in his duty. So long as the auditor has taken reasonable care and followed the basic Principles of Auditing, the auditor is not to be held responsible for any error or fraud remaining undiscovered. When Circumstances Indicate Error or Fraud: When circumstances indicate existence of errors or frauds, the auditor should take additional steps to detect them and to ensure that the final accounts and are free from errors and frauds. If the error is confirmed, he should see that it is rectified. If a fraud is detected and is material, he should report it to the owners or shareholders. CARO 2003: In the case of a Company, its auditor is required, under Companies Auditor Report Order (CARO) 2003, to report whether any fraud on or by the company has been noticed or reported during the year; if so, the nature and the amount involved is to be indicated. PRINCIPLES OF AUDIT [AAS-1]: The Institute of Chartered Accountant of India (ICAI) has laid down the basic principles which govern an audit [Auditing and Assurance Standard (AAS) - 1]. Basic principles of audit guide an auditor as to how to conduct an audit and give an audit report. Integrity, Objectivity and Independence: The Auditor should be honest and sincere in his audit work. He must be fair and objective. He should also be independent. Confidentiality:

A. 1. 2. 3. 4. 5. B. 1. 2. 3. 4. 5. C. 1. 2. 3. D. 1. 2. 3. 4.

1. 2.

3.

4.

5.

1. 2.

3.

4. 1. 2. 3. 4. 5. 5. 6. 7. 8. 9.

The auditor should keep the information obtained during audit, confidential. He should not disclose such information to any third party. He should, it is said, keep his eyes and ears open but his mouth shut. Skill and Competence: The auditor should have adequate training, experience and competence in auditing. He should have a professional qualification (i.e. be a Chartered Accountant) and practical experience. He should be aware of recent developments in the field of auditing such as statements of ICAI, changes in company law, decisions of Courts etc. Work Performed by Others: The auditor should carefully direct, supervise and review the work of his assistants [AAS 17]. He should satisfy himself that work done by an internal auditor is reliable [AAS 7]. He should satisfy himself that work done by another auditor (e.g. a branch auditor) is reliable [AAS 10]. He should satisfy himself that work done by a joint auditor is reliable [AAS 12]. He should satisfy himself that work done by an expert (lawyer, valuer, etc.) is reliable [AAS 9]. Working Papers: The auditor should maintain working papers of important matters to prove that audit was conducted with due care according to the basic principles. [AAS 3]. Planning: The auditor should plan his audit work. He should prepare an Audit Programme to complete the audit efficiently and in time. [AAS 8]. Audit Evidence: The report of the auditor should be based on evidence obtained in the course of audit. The evidence may be obtained through vouching of transactions, verification of assets and, liabilities ratio analysis etc. [AAS 5]. Evaluation of Accounting System and Internal Control : The auditor should ensure that the accounting system is adequate. He should see that all the transactions have been properly recorded. He should study and evaluate the Internal Controls.[AAS 6] Opinion and Report: The auditor should arrive at his opinion on the accounts on the basis of the audit evidence and submit his report. The opinion may be unqualified or qualified or adverse. The audit report should clearly express his opinion. The content and form of audit report should be as required by law (e.g. Companies Act). [AAS 28]. TYPES OF AUDIT: Audits can be classified into two main types: 1. Statutory Audits and 2. Non-statutory or voluntary Audits. Statutory Audit: Satutory audits are compulsory audits prescribed under a statute i.e. law. Such audits are governed by the provisions of the concerned law. In a statutory audit, the duties and rights of the auditor are laid down by law. STATUTORY AUDITS No. CONCERN ACT (1) Companies Companies Act, 1956 Financial Audit S.227 Special Audit S. 233A Cost Audit S. 233B (2) Banks Banking Companies Regulation Act, 1949 (3) Insurance Companies Insurance Act, 1938 (4) Co-operative Societies Respective State Co-operative Act (5) Public Charitable Trusts Indian Trust Act etc. (6) Statutory Corporations Special Act of Parliament, e.g. Life Insurance Corporation (7) Electricity companies Electricity Supply Act, 1948 (8) Registered societies Societies Registration Act (9) Tax payers Tax Audit under Income-Tax Act

1.

2. Non- statutory Audits:

Non-statutory audits are voluntary audits. These audits are not compulsory under any law e.g. financial audit of a sole trader (see Para 14) or a partnership firm. Voluntary audits also cover non-financial audits e.g. Internal Audit, Management Audit, Operational Audit, Social Audit, etc. AUDIT OF COMPANY Vs. FIRM: No. AUDIT OF COMPANY FIRM

1. 2.

Governed by Companies Act, 1956. Scope of audit cannot be restricted by Articles or instructions of Board of Directors. Auditor is normally appointed by shareholders; and sometimes by Board or Central Government. Format of final accounts must be in accordance with Schedule VI of the Companies Act. Scope and format of audit report must be as per the Companies Act.

Governed by terms of engagement with Firm. Scope of audit depends entirely on instructions of partners. Auditor is always appointed only by the partners. There is no statutory, prescribed format for final accounts. There is no statutory, prescribed format for the audit report.

3.

4.

5.

CONTINUOUS AUDIT: Meaning: Continuous audit is defined by R. C. Williams as one where the auditor is constantly or at (regular or irregular) intervals engaged in checking the accounts during the period. Continuous Audit means an audit at regular intervals throughout the accounting year. Generally, the audit work begins after the accounting year is over. But in case of Continuous Audit, the work begins in the accounting year itself. Thus in continuous Audit, accounting and auditing work is done almost side by side. Continuous Audit, however, does not mean the audit work goes on for 365 days of the year. The auditor may make periodical visits, say,- every two or three months during the year. At each visit, the work would be taken up from where it was left in the earlier visit. Advantages: Continuous Audit has the following advantages Quick Preparation of Final Accounts: Since, the routine audit is done continuously, the Final Accounts can be prepared immediately after the year end. Early Dividends to Shareholders: The shareholders would be happy as they receive dividends soon after the end of the financial year. The Company can prepare interim accounts and pay even interim dividends to the shareholders. Up-to-date Accounts for Banks / Investors: The up-to-date final accounts are useful to banks and investors for taking decisions regarding loans and investment. Check on Employees: Since the auditors visit regularly throughout the year, it acts as check on the employees to keep the accounts ready and up-to-date. Prevents Errors and Frauds: Constant checking by the auditors helps to detect and even prevent errors and frauds. Familiarity with Client's Business: Since the auditor spends more time at the client's place, he becomes familiar with all the aspects of client's business. This is a great help in audit work. Thorough Audit: The auditor has more time at his disposal to do a thorough checking of all transactions. This reduces the risk of missing any material items. Utilisation of Audit Staff: Audit Staff can be kept busy throughout the year. Audit work can be evenly distributed to avoid overwork after year end. Disadvantages and Precautions: Since the auditor spends more time on the audit work, the audit fees are much more. Continuous Audit is thus expensive and suitable to only a large organization. Audit in Instalments: Since the audit work is done at intervals and not at one go, audit may be inefficient. The queries during the last visit may remain unsolved. To overcome this disadvantage, audit should be well-planned. All queries should be noted in the Audit Note Book and cleared before taking up fresh work. Errors and Frauds In Books Already Checked: If an employee changes some figures in the books already checked by the auditor during his earlier visits, it would be difficult to detect such errors and frauds subsequently.

1. 2. 3. 4. 5. 6. 7. 8.

1. Expensive: 2.

3.

4.

5.

To overcome this disadvantage, the auditor should strictly prohibit any alteration in checked books. Any mistake in the checked entries should be rectified only by a Journal Entry passed subsequently and not by alteration of figures in books. The auditor can also put secret ticks to detect alteration of figures. Disrupts Accounts Work: Frequent visits by audit staff disrupts the work of accounts staff. The day-to-day accounting may suffer if the accountants have to attend to audit work every now and then. To overcome this disadvantage, the audit programme should be co-ordinated with the client to avoid disruption in routine accounts work. The client should appoint an employee specially to co-ordinate with and attend to the auditors. Undue Reliance on Auditors: The client and the accountant may become unduly dependent upon the auditor. Even small routine matters may be referred to the auditoRs.Continuous Audit may become a routine affair of a mere Vouch and Post Audit. This disadvantage can be overcome by making clear to the client the scope and nature of Continuous Audit. Auditor should keep his distance from the routine matters. FINAL OR PERIODIC OR ANNUAL AUDIT: Meaning: Spicer and Pegler define it as "an audit which is not commenced until after the end of financial year and then carried on until completed. Final or Periodic Audit means an audit taken up after the end of the accounting year. Advantages: Final Audits have the following advantages Inexpensive: Since the auditor spends normal time on the audit work, the audit fees are also normal. Final Audit is thus inexpensive. Even a small organisation (a sole trader or a firm) can opt for a Final Audit to obtain the advantages of an independent financial audit. Audit At a Stretch: Since the audit work is done at a stretch, without any gaps, audit is carried out efficiently. All queries are solved immediately. The audit planning and programme are simple. Less Errors and Frauds: Since the books are checked at a stretch, no employee can change any figures in the audited books. Does Not Disrupt Accounts Work: The accounts staff is not disturbed anytime during the accounting year. There is no need for the accountants to attend to audit work every now and then. Disadvantages: Final Audit has the following disadvantages Delay in Final Accounts: Since the routine audit is done after the year end, the Final accounts may be delayed and ready long after the year end. Late Dividends to Shareholders: The shareholders would be unhappy as they receive dividends long after the end of the financial year. It would be difficult for a Company to prepare interim accounts and pay interim dividends to the shareholders during the financial year. Stale Accounts for Banks/Investors: The final accounts are available long after the end of accounting year. Such stale accounts are not useful to banks and investors for taking decisions regarding loans and investment. No Moral Check on Employees: Since the auditors visit only at the end of the year, dishonest employees have a chance to commit frauds during the year and clean up the accounts just before the auditors arrive, e.g. teeming and lading. No Familiarity with Client's Business: Since the auditor spends little time at the client's place, he cannot become familiar with all the aspects of client's business. This may affect the quality of audit. Sample Check: Since the auditor has to complete the audit in a short time, he has to resort to sample checking. This increases the risk of missing material items. Uneven Work-load for Audit Staff: Audit staff is overworked immediately after year end and comparatively less busy at other times. INTERIM AUDIT: Meaning:

1.

2. 3. 4.

1. 2.

3. 4. 5. 6. 7.

Interim Audit is an audit conducted in between the annual audits. For example, an audit of accounts prepared for the period of six months from 1st April to 30th September, would be interim Audit. Advantages: Interim audit is similar to Continuous Audit and enjoys similar advantages 1. Quarterly Results: A public limited company listed on the stock exchange can comply with the statutory provision of declaring quarterly results. 2. Interim Dividends to Shareholders: The shareholders would be happy as the Company can pay interim dividends to the shareholders. 3. Quick Preparation of Final Accounts: Since the interim audit is already done, the Final Accounts can be prepared immediately after the year end. 4. Up-to-date Accounts for Banks/Investors: The up-to-date interim accounts are useful to banks and investors for taking decisions regarding loans and investment. 5. Check on Employees: Interim audit acts as check on the employees to keep the accounts ready and up-to-date. 6. Prevents Errors and Frauds: Checking by the auditors for the purpose of interim audit helps to detect and even prevent errors and frauds. 7. Thorough Final Audit: The auditor has more time at his disposal at the time of final audit, which reduces the risk of missing any material items. 8. Utilisation of Audit Staff: Audit staff can be utilised in a better manner. Interim audit is done when the audit staff is relatively free. Disadvantages and Precautions: 1. Expensive: Since the auditor does two audits in one year, the audit fees are more to that extent. Interim Audit is thus expensive. 2. Audit in Instalments: It is difficult at the time of final audit to take up the work precisely at the stage where it was left at the time of interim audit. To overcome this, audit should be well-planned. The work done upto end of the interim audit, relevant voucher numbers, totals etc. should be carefully noted in the Audit Note Book. 3. Errors and Frauds In Books Already Checked: If an employee changes some figures in the books already checked by the auditor during the interim audit it would be difficult to detect such errors and frauds subsequently. To overcome this disadvantage, the auditor should strictly prohibit any alteration in checked books. Any mistake in the checked entries should be rectified only by a Journal Entry passed subsequently and not by alteration of figures in books. The auditor can also put secret ticks to detect alteration of figures. 4. Disrupts Accounts Work: Interim audit disrupts the work of accounts staff. To avoid this disadvantage, the audit programme should be coordinated with the client to avoid disruption in routine accounts work. BALANCE SHEET AUDIT: Meaning: Balance Sheet Audit involves an in-depth examination of the various items in the Balance Sheet and the Profit and Loss Account. The original entries and vouchers are examined only to the extent necessary. Applicability: Balance Sheet Audits are conducted in case of very large organisation, banks etc. in the following circumstancesThe Internal Control System is very strong. The controls have been developed and tested over the years.The controls are capable of detecting and preventing errors and frauds. not possible if the final accounts are to be ready in time. work.

1.

2. The volume of transaction is so large that an in-depth checking is impossible. A detailed vouch-and-post audit is 3. The concern has its own internal audit department. The statutory auditor, therefore, need not duplicate this 4. The accounts staff is highly qualified, the management is professional and accounts computerised.
Method: Balance Sheet Audit is conducted in the following manner Review of Internal Controls: The auditor must evaluate the system of internal controls in the following respects

1.

a. whether the internal controls are effective: If the internal controls are effective, auditor can concentrate on
b. material items instead of checking arithmetical accuracy of vouchers and books. He should study the internal control system with the help of questionnaires, manuals, organisation charts and flow charts. whether the internal controls are in operation: He should carry out tests to ascertain that the controls are actually in operation. Based on his evaluation of the internal controls, the auditor should plan his audit programme. Verification of Items in the Final Accounts: He should verify the major items of assets and liabilities and income and expenditure appearing in the Final Accounts (Balance Sheet and Profit and Loss Account) in the following manner Verification: He should carry out physical verification of major items of assets and liabilities on sample basis. Inspection: He should inspect documents of title etc. in respect of major items on sample basis to verify whether an asset is owned by the concern; and whether a liability is an obligation of the concern. Vouching: He should vouch only the major transactions on sample basis to ascertain (i) whether such transactions actually occurred, and (ii) whether such transactions are recorded in the books for the right amount. Valuation: He should satisfy himself that the assets and liabilities are properly valued. Presentation and Disclosure: He should check whether the assets, liabilities, income and expenses are presented and disclosed in the Final Accounts properly, according to the recognised accounting policies and the requirements of law. Specific Items: The auditor should pay special attention to the following specific items in the Final Accountsverify fixed assets, investments physically. check the addition to and deductions from fixed assets and investments. check the amount of depreciation charged. check the accounts of major debtors and creditors and obtain confirmations and statement of accounts. verify cash and stocks physically. check valuation of stocks. ascertain amount of bad or doubtful debts. check estimates of contingent liabilities. Overall Checking of Final Accounts (Analytical Review): compare the amount of each item for the previous year with that of the current year. Investigate the reasons for abnormal variations. check major ratios e.g. (1) Current Ratio (2) Debt Equity Ratio (3) Gross Profit Ratio (4) Operating Ratio (5) Expenses Ratio (6) Stock Turnover (7) Net Profit Ratio (8) Return on Capital Employed (9) Debtors Turnover, etc. check quantitative ratios (input-output ratios), Material Consumption Ratio and quantity reconciliations. check all unusual or non-recurring transactions. check Statement of Sources and Application of Funds and Cash Flow Statement. check the Minute Books. ADVANTAGES OF INDEPENDENT AUDIT: Auditing has the following advantages. [Auditing is necessary for the following reasons]: Assurancee of True and Fair Accounts: Audit provides an assurance to the various users of final accounts such as owners, management, creditors, lenders, investors, Government etc. that the accounts are true and fair. Audit ensures that the final accounts are reliable and authentic. True and Fair Balance Sheet: The user of accounts can be sure that the assets and liabilities shown in the audited balance sheet show the true financial position of the concern as it is i.e. neither more nor less. Thus, there is neither any window-dressing nor any secret reserves in an audited balance sheet. True and Fair Profit and Loss Account: The user can be confident that the audited profit and loss account shows the true amount of profit or loss as it is i.e. neither more nor less. Tally with Books: The audited final accounts can be taken to tally with the books of account. Thus, the income-tax officer can start with the figure of audited book profit, make adjustments and compute the taxable income. An outside user need not go through the entire books. As per Law: The audited final accounts can be presumed to follow the rules and requirements laid down by law (e.g. Schedule VI of the Companies Act). As per Standard Accounting and Auditing Practices:

2. a. b.
c. d. e.

3.
a. b. c. d. e. f. g. h. 4. a. b. c. d. e. f.

1.

2.

3. 4.

5. 6.

The audited final accounts follow the standard accounting and auditing principles laid down by professional bodies. Thus audited accounts are based on objective standards and not on personal whims and fancies of a particular accountant or auditor. This makes the audited accounts more reliable for the users. 7. Disclose All Material Facts: The audited final accounts disclose all material facts. Thus, an user can rely on the audited accounts to disclose all material facts useful for making any decision of lending, investment, etc. 8. Detection and Prevention of Errors and Frauds: Audited Accounts can be assumed to be reasonably free from errors and frauds. The auditor with his expert knowledge would take due care to see that errors and frauds are detected so that the accounts show a true and fair view. He would also advise the management regarding the steps to be taken for prevention of errors and frauds in future. 9. Moral Check on Employees: Audit techniques such as vouching, verification of cash, stock, assets etc. act as a moral check on the employees forcing them to keep the accounts regular, up-to-date and free from any error or fraud. Audit keeps the staff on their toes. 10. Advice on System, Taxation, Finance: The auditor can also advise the client about the Accounting System, Internal Control, Internal Check, Internal Audit, Taxation, Finances, etc. 11. Facilitates Comparison: Audited Accounts of different years facilitate comparison over a period to determine trend in sales, etc. 12. Different Users: Due to the general advantages of audit listed above, audited accounts are relied upon by different users under various circumstances: (a) Valuation of goodwill on sale of business, admission, retirement or death of a partner. (b) Fixing sale price on sale of business. (c) Valuation of shares on amalgamation, absorption, reconstruction of company or on sale of a large block of shares. (d) Settlement of accounts among partners on admission, retirement, death. (e) Decisions regarding loans given by banks, financial institutions etc. (f) Ascertaining liability under income-tax, sale tax, excise, bonus etc. (g) Making a claim with Insurance Company for loss of an asset, stocks etc. (h) Computing cost of production of different products for cost control. INHERENT LIMITATIONS OF AUDITING: Following are the inherent limitations of Auditing: An auditor cannot check each and every transaction: He has to check only the selected areas and transactions on a sample basis. Audit evidence is not conclusive in nature: Thus, confirmation by a debtor is not a conclusive evidence that the amount will be collected. It is said that audit evidence is persuasive rather than conclusive in nature. An auditor cannot be expected to discover deeply laid frauds: Frauds usually involve acts designed to conceal them such as forgery, deliberate failure to record transactions, false explanations and so on, and hence are difficult to detect. Audit cannot assure the user of accounts about the future profitability, prospects or the efficiency of the management: Just because the accounts are audited does not mean that the user can take for granted the future profitability or prospects of the concern. Audit does not comment on whether the management is efficient or not. An auditor has to rely upon experts: Auditor may have to rely on experts in related fields such as lawyers, engineers, valuers etc. for estimating contingent liabilities, valuation of fixed assets, etc. An auditor is supposed to be but may not be independent: He is appointed by the owners and hence cannot be expected to report to the owners their own wrong-doings. Financeial Statements, though audited, have their inherent limitations: The figures in the final accounts depend on which facts are recorded and how such facts are reported. The recording and reporting depends on the accounting principles selected and the personal judgement of the accountant and auditor in applying the accounting principles to the facts of each case. Due to the entity concept, the accounts of a firm do not show the information about the personal wealth of the partner. Such information is useful for a lender to the firm, as in case of default by the firm, even the personal assets of the partners can be used to pay off the firm's loans. Accounts are based on historical costs and do not show the current value of the assets and liabilities. Many items in the accounts such as provision for doubtful debts, value of contingent liabilities are based on personal judgement. The accounts do not reveal facts which cannot be measured in terms of money e.g. the quality of management, social cost of pollution caused by the concern etc. To sum up, in view of the above limitations of auditing, an user of the audited accounts should not take the accounts at 'face value'.

1. 2. 3. 4. 5. 6. 7.

1.
2.

3.

4. 5.

QUALITIES OF AUDITOR: An auditor must have the following qualities: Chartered Accountant: A company auditor must be a practising chartered accountant. This is a qualification rather than a quality. Skills and Competence: An auditor must be an expert having professional training, experience and competence in the field of accounting, auditing, mercantile law, company law, income tax, costing etc. He should be aware of the latest developments in the field of accounting and auditing e.g. the standard accounting and auditing practices pronounced by the Institute of Chartered Accountants of India (ICAI), computerised accounts etc. Honest: An auditor must be honest. As remarked by Lord Justice Lindley in the famous case of London and General Bank - "an auditor must be honest that is he must not certify what he does not believe to be true. Further, he must exercise reasonable care and skill before he believes that what he certifies is true." Knowledge of Business: An auditor must have sound knowledge of business in general and of the client's business in particular. Confidential: He should keep the information obtained during the course of audit confidential and not divulge it to outsideRs.It is said that an auditor should keep his eyes and ears open, but his mouth shut. It is said that an auditor should act like a watchdog but not like a bloodhound. He should be alert but not suspicious. He has to safeguard the interest of the owners and the shareholders like a watchdog but he should not commence the audit with a suspicion of fraud. He should neither assume that the management is honest nor that it is dishonest. Independent: An auditor must be independent. He should be impartial as well as fearless in the discharge of his duties. He should not have any vested interest that would affect his independence as an auditor. Judgement: The entire audit process itself involves judgement at every stage. An auditor must know how to judge people. Because he has to rely upon different people during an audit. Like client, the client's staff, the joint auditor, branch auditor, and experts and his own audit staff. He has to judge and evaluate the accounting system, the internal control, the internal audit of the client. Finally, he has to judge and weigh the evidence obtained during audit and form his opinion whether the accounts are true and fair. Methodical: An auditor must be systematic arid methodical in his approach to work. He must plan the audit properly. He should prepare an audit programme covering all aspects of audit. He must maintain sufficient Working Papers to document the conduct of audit. He must carry out all normal audit procedures like vouching, verification etc. He must obtain sufficient and proper evidence in order to give an honest report on the accounts.

6. Watchdog But Not Bloodhound:

7. 8.

9.

ACCOUNTING Vs. AUDITING: No. Accounting 1 Meaning: Accounting is writing books of accounts and preparing final accounts. 2 Objective: Object is to prepare Balance Sheet to show financial position as at the year end and Profit and Loss A/c to show profit/loss for the year only. 3 Scope: Accounting is limited to books of accounts only. 4 Done by: Accounting is done by employees who need not have any special qualification. 5 Responsibility: Accountant is employed by and

Auditing Auditing is examination of accounts to report whether they are true and fair.

Object is to examine and report if Balance Sheet shows true and fair financial position and if Profit and Loss A/c shows true and fair profit/loss.

Auditing is not limited only to books of accounts. Audit is done by an independent expert who must be a practicing Chartered Accountant. Auditor is appointed by owners/

is responsible to management. Beginning and End: Accounting begins with vouchers and books of original entry and ends with preparation of final accounts. Nature of Work: Accountant records, posts and summarises current transactions. Accounts are checked by auditor.

shareholders and reports to them. Auditing begins where accounting ends i.e. with final accounts. Audit is complete when auditor submits his audit report. Auditor analyses past transactions. Auditing is thus analytical. Once audited, accounts are not re-audited.

AUDITING Vs. INVESTIGATION: No. Auditing 1 Meaning: Auditing is examination of accounts to report if they are true and fair. 2 Nature of Assignment: Audit is an annual recurring assignment. 3 Types: Audit may statutory or voluntary. It may be continuous, interim or final.

Investigation Investigation is examination of accounts for a specific purpose.

Investigation is a specific non-recurring assignment. Investigation may be statutory under companies Act, Income-tax Act or voluntary for valuation of shares, goodwill, fixing purchase consideration, detection of fraud, etc. Investigator may be appointed by outsider e.g. Income-tax Dept., Registrar of Companies, Investors, Lenders, purchaser of business/ shares. Investigaton may be limited to a particular item in accounts or may go much beyond accounts depending upon its purpose. Investigation may involve re-audit. Investigation is not compulsory.

Appointed by: Auditor is appointed by owners or shareholders.

Scope: Audit covers the entire accounts.

6 7

Re-audit: Audit does not involve re-audit. Compulsory: Audit is compulsory for companies. Qualifications: Auditor of a company must be a practicing Chartered Accountant.

No qualifications are prescribed by law for an investigator.

MATERIALITY (AAS 13): AAS 13: 1. Auditing and Assurance Standard -13 (issued by the ICAI) deals with the concept of materiality. 2. The auditor should consider materiality when conducting an audit. 3. Information is material if its misstatement (i.e., omission or wrong statement) could influence the economic decisions of users. 4. Material matters are those matters which, either individually or in the aggregate, are relatively important for true and fair presentation of financial information in accordance with recognised accounting policies and practices. 5. The basic factor on which materiality depends is the size and nature of the item. 6. Materiality provides a quantitative cut-off point. 7. The assessment of what is material is basically a matter of professional judgment.

1. 2. 3.

4.

Legal requirements: Materiality is many times influenced by laws (e.g. Schedule VI of the Companies Act) which require compulsory disclosure of all items which are material or non-recurring or which exceed fixed percentages or the previous year's figures and so on. Material Items: The detailed disclosure requirements of Schedule VI to the Companies Act, 1956 require the financial statements to disclose all material items so as to give a true and fair view of the state of affairs of the company. Non-recurring Items: Part II of Schedule VI requires that profit and loss account shall disclose every material feature including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature. Percentage Cut-offs: Part V of Schedule VI to the Companies Act, 1956 requires that any expense exceeding one percent of the total revenue of the company or Rs.5,000/ whichever is higher shall be shown as a separate and distinct item under an appropriate account head in the profit and loss account and shall not be combined with any other item to be shown under miscellaneous expenses. Similarly, if an item accounts for 10% or more of the total value of raw material consumed it has to be shown separately distinctively. Previous Year's Figure: Schedule VI makes it compulsory to disclose the corresponding figure for the previous year. This also helps to judge the materiality of the item. Suppose the item is of a low amount this year but it was of a much higher amount in the previous year then it becomes material when compared to the corresponding figure of the previous year.

GOING CONCERN (AAS-16): Meaning: AAS-16 'Going Concern" deals with this basic auditing concept. Going Concern is one of the fundamental Accounting Assumptions. It refers to the intention and ability of the entity to exist in 'near foreseeable future' i.e. the next one year. Relevance for Auditor: Generally, balance sheet discloses the book value of assets and liabilities assuming that entity continues to operate in future. If this assumption is wrong, then values of assets and liabilities should be changed. Otherwise, the financial statements cannot show true and fair view. Indicators of absence of going concern: Following factors indicate that an entity is not a going concern(a) Financial indicators: Negative net worth Negative Working Capital Adverse key financial ratios Negative cash flow positions Continuous operating losses Inability to pay the creditors Compromise with creditors Fixed term loan payable soon without possibility of renewal Change from credit purchase terms to cash purchase terms (b) Operating indicators: Loss of key management personnel without replacement Loss of a major market Loss of a major supplier or customer Labour unrest and problems (c) Other indicators Changes in government policies Pending legal proceedings Non- compliances of Statutory rules and regulations.

Auditors duty: Auditor should obtain sufficient audit evidence for deciding whether the entity is a going concern. Auditor should review the events occurred after the Balance Sheet date having an effect on the Going Concern assumption e.g. earthquake, fire, enemy attack etc. Auditor should review the agreement relating to long term debts including debentures and see whether there is any breach of conditions. Auditor should analyse the latest interim Financial Statements. Auditor should analyse and discuss the latest cash flow statement, operating budget and profit forecast. Auditor should review the minutes of Board of Directors, Shareholders and other committees. Auditor should obtain legal opinion regarding the pending cases. Auditor should review the management's future plans by studying the following

(a) Plans to liquidate the assets (b) Restructuring of debt and further borrowing of money (c) Cost reduction programs. (d) Deferring of major expenditure (e) Increase the ownership of equity
Auditor to obtain representation (management certificate) in written form in respect of above matters. Audit Report:

Where the Going Concern assumption is appropriate, auditor should issue unqualified report. Where there were doubts regarding the Going Concern assumption, but the same were cleared due to management explanation, auditor
should give an unqualified report provided adequate disclosure is made in Notes on Accounts stating.

(a) The condition which affected the Going Concern (b) The steps taken by the management. Auditor should invite the attention of shareholders to these notes. Where there were doubts regarding the Going Concern assumption and management explanation is not adequate, auditor
should issue qualified report stating the reasons. If the entity is not a Going Concern, the auditor should express an adverse opinion.

1) a) b) c) d) e) f) g)

TRUE AND FAIR VIEW: Accounts are prepared by the management but also used by outsiders like creditors, banks, income-tax department etc An audit of accounts by an independent expert assures the outside users that the accounts are proper and reliable. The outsiders can rely on the account if the auditor reports that the accounts are true and fair. The accounts are said to be true and fair (i) when the profit or loss shown in the profit & loss a/c is true and fair and (ii) also when the value of assets and liabilities shown in the balance sheet is true and fair. However, the accounts are true and fair if they are showing the following points/ details. Conform to accounting principles: The books of accounts must be kept according to the normally accepted accounting principles such as the concepts of Entity, Going concern, Accrual, Periodical Matching of Costs and Revenue, Conservatism, Materiality and Consistency, as explained below. Entity: The accounts should record and report the transactions only of the entity (concern) under audit. The accounts should not record entries relating to its owners or other associate concerns. Going Concern: The accounts should be kept on the basis that the concern will continue for a number of yeaRs.This concept lead to division of expenditure between revenue (expenses) and capital (fixed assets); provision for depreciation; deferred expenses or deferred income; valuation of fixed assets at historic cost and so on. Accrual: The income and expenses should be recorded as and when they arise (accrue). Periodic Matching: The income and expenses for the year should be matched to find out the profits. The income from sale of goods should be matched against costs of goods to find out the gross profit, Other income should be matched with other expenses t find out the net profits. Conservatism: The accounts should be kept on a conservative basis. Thus, only actual income should be recorded; future or estimated income should be ignored. Provision should be made for even expected losses (e.g. doubtful debts, valuation of stock at market price if it is lower than cost). Materiality: The accounts should record only the material details. A separate record should be kept for each particular debtor, creditor, item of income, item of expense, item of asset etc. in the books. The material details should be reported separately in the final accounts. Consistency: The same accounting policies should be followed consistently from year to year. The accounts must show the financial position and the profit or loss as they are, i.e. there is neither an overstatement nor an understatement. There should be, in other words, neither window-dressing nor secret reserves.

2) No window-dressing or secret reserves:

3) Disclose all material facts:

The books of accounts must disclose all material facts regarding revenues, expenses, assets and liabilities. It helps the users in taking business decisions. There should be neither suppression of vital facts nor mis-statements.

4) Comply with laws governing companies, societies, etc.:

In case of a limited company the accounts must disclose the matters required to disclosed under the Companies Act. The final accounts must be in the format prescribed under Schedule VI to the Companies Act., 1956. Special companies such as banks, insurance, electricity supply companies have to prepare accounts as prescribed under special laws. A co-operative society, a trust etc. must also prepare the accounts as required under the relevant laws.

5) Comply with guidelines of ICAI:

The accounts must also be in accordance with the various guidelines prescribed by the Institute of Chartered Accountants of India (ICAI).

AUDITING AND ASSURANCE STANDARDS [AAS] BY ICAI: Need: If audited financial statements are to enjoy credibility in the eyes of users of financial statements e.g. investors, creditors, revenue authorities, then it is necessary that all auditors follow uniform Standards. This will create confidence in the minds of the public that whoever audits the accounts, certain minimum level of care and skill will be taken before expressing an opinion. Such uniform Standards are known as Auditing and Assurance Standards (AAS). Meaning: The Inst, of C.A. of India set up the Auditing and Assurance Standards Board (AASB) To review the existing auditing practices in India and To develop Auditing and Assurance Standards (AASs). Auditors duty: AASs will apply whenever an independent financial audit is carried out. [Note: The AASs were earlier called Statements on Standard Auditing Practices (SAPs).] The members of the Institute (i.e. Chartered Accounts) must follow the AASs when they audit financial statements covered by their report. The auditors must draw attention to material departures from AASs in their Audit reports along with the reasons for such departures. Auditors should follow AASs in the audits commencing on or after the date specified in concerned AAS. LIST OF AUDITING AND ASSURANCE STANDARDS (AAS): AAS Description No.

a. b.

AAS-1 AAS-2 AAS-3 AAS-4(Rev.) AAS-5 AAS-6(Rev.) AAS-7 AAS-8 AAS-9 AAS-10(Rev.) AAS-11 AAS-12 AAS-13 AAS-14 AAS-15 AAS-16 AAS-17 AAS-18 AAS-19 AAS-20 AAS-21 AAS-22 AAS-23 AAS-24 AAS-25 AAS-26 AAS-27

Basic principles governing an Audit Objectives and scope of the audit of financial statements Documentation The auditors responsibility to consider fraud and error in an audit of financial statements Audit evidence Risk assessment and internal controls Relying upon the work of an internal auditor Audit planning Using the work of an expert Using the work of another auditor Representations by management Responsibility of joint auditors Audit materiality Analytical procedures Audit sampling Going concern Quality control for audit work Audit of accounting estimates Subsequent events Knowledge of the business Consideration of laws and regulations in an audit of financial statements Initial engagements- opening balances Related parties Audit considerations relating to entities using service organisations Comparatives Terms of audit engagement Communications of audit matters with those charges with governance

Effective for audit of accounting year beginning on or after date st 1 April, 1985 1st April, 1985 1st July, 1985 1st April, 2003 1st May, 1988 1st April, 2002 1st January, 1989 1st April, 1989 1st April, 1991 1st April, 2002 1st April, 1995 1st April, 1996 1st April, 1996 1st April, 1997 1st April, 1998 1st April, 1999 1st April, 1999 1st April, 2000 1st April, 2000 1st April, 2000 1st July, 2001 1st July, 2001 1st April, 2001 1st April, 2003 1st April, 2003 1st April, 2003 1st April, 2003

AAS-28 AAS-29 AAS-30 AAS-31 AAS-32

The auditors report on financial statements Auditing in a computer information systems environment External confirmations Engagements to compile financial information Engagements to perform agreed upon procedures on financial information EXERCISES

1st April, 2003 1st April, 2003 1st April, 2003 1st April, 2004 1st April, 2004

1. Multiple choice questions: 1. Financial statements need to be prepared in accordance with: (a) Relevant statutory requirements (b) Accounting standards issued by the Institute of Chartered Accountants of India (c) Guidance Notes issued by the Institute of Chartered Accountants of India (d) All the above

2. Objective of an audit of financial statements is to enable the auditor to express an opinion (a) Whether the financial statements are prepared in accordance with the system of double-entry book-keeping (b) Whether the financial statements are prepared in accordance with accounting policies laid down by the (c) Whether the financial statements are prepared in accordance with an identified financial reporting framework (d) Whether the financial statements are prepared in accordance with the provisions of the Income-tax Act 3. If the financial statements are prepared as per the financial reporting framework, the auditor gives an opinion that the
financial statements (a) Are true and correct (c) Give "a true and fair view" (b) Are correct and fair (d) Are reliable management

4. The term "General Purpose Financial Statements" never includes (a) A cash flow statement (b) Statements and explanatory notes which form part thereof (c) Statement by chairman (d) Supplementary schedules and information based on such statements Which of 5. The following errors is an error of omission? (b) Wages paid to Mohan have been debited to his account (c) The total of the sales journal has not been posted to the Sales Account (d) None of these 6. Which of the following errors is an error of principle? (a) Rs.600 received from Ganpat has been debited to his account (b) Purchase of Rs.2,000 has been entered in the sales journal (c) Repairs to building have been debited to Building Account (d) None of these 7. Errors of recording do not allow
(a) Correct totalling of the Balance Sheet (b) Correct totalling of the Trial Balance (c) The Trial Balance to agree (d) None of these (a) Sale of Rs.500 was written in the purchase journal

8. Which of the following errors will affect the Trial Balance? (a) Repairs to buildings have been debited to buildings (b) The total of purchases journal is Rs.2,000 short (c) Freight paid on new machinery has been debited to the Freight Account (d) None of these 9. Which of the following errors will not affect the Trial Balance? (a) Wrong balancing of an account (b) Writing an amount in the wrong account but on the correct side (c) Wrong totalling of an account (d) None of these 10. The total of Sales Book was not posted to the ledger. This is
(a) Error of Omission (b) Error of Commission

(c) Error of Principle (a) Error of Omission (c) Error of Principle

(d) None of the above (b) Error of Commission (d) None of the above

11. Sales Book was overcast by Rs.500. This is

12.

The total of a folio in the Sales Book Rs.1,000 was carried forward as Rs.100. This is (a) Error of Omission (b) Error of Commission (c) Error of Principle (d) None of the above

13.

Sales to Ram Rs.143 posted to his account as Rs.134. This is (a) Error of Omission (b) Error of Commission (c) Error of Principle (d) None of the above

14. Sales to Meena Rs.143 posted to Meenu as Rs.143. This is

(a) Error of Omission (c) Error of Principle was made in the books. This is (a) Error of Omission (c) Error of Principle (b) Error of Commission (d) None of the above

15. Goods of the value of Rs.376 were returned by Ram and were taken into stock on the same date but no entry
(b) Error of Commission (d) None of the above

16. A credit sale wrongly passed through the purchases book. This is (a) Error of Omission (b) Error of Commission (c) Error of Principle (d) None of the above

17. Repairs of newly purchased second-hand machinery debited to Repairs Expenses Account. This is
(a) Error of Omission (c) Error of Principle (b) Error of Commission (d) None of the above

18. Repairs to Machinery had been charged to Machinery A/c. This is (a) Error of Omission (b) Error of Commission (c) Error of Principle (d) None of the above 19. Cartage paid for newly purchased machinery, posted to Cartage Account. This is (a) Error of Omission (b) Error of Commission (c) Error of Principle (d) None of the above 20. Goods taken away by the Proprietor for personal use not recorded anywhere. This is (a) Error of Omission (b) Error of Commission (c) Error of Principle (d) None of the above 21. Which of the following errors will affect the trial balance. (a) Repairs to building wrongly debited to Building A/c (b) Total of purchase Journal is short by Rs.1000 (c) Freight paid on purchase of new machinery debited to freight account (d) None of the above 22. If a purchase return of Rs.84 has been wrongly posted to the debit of the sales return account, but had been correctly entered in the suppliers account, the total of the trial balance would show (a) the credit side to be Rs.84 more than debit side. (b) the debit side to be Rs.84 more than credit side (c) the credit side to be Rs.168 more than debit side. (d) the debit side to be Rs 168 more than credit side. 23. A purchase of Rs.1,870 by cheque has been wrongly posted in the cash book as Rs.1,780. This has the effect of (a) Increasing the bank balance by Rs.90 (b) Decreasing the bank balance by Rs.90 (c) Increasing the bank balance by Rs.180 (d) Decreasing the bank balance by Rs.180

24. After preparing the trial balance the accountant finds that the total of the credit side is short by Rs1,500. This difference will be (a) Credited to suspense account (b) Debited to suspense account (c) Adjusted to any of the debit balance a/c (d) Adjusted to any of the credit balance a/c 25. The accountant of the firm M/s ABC is unable to tally the following trial balance. No. Account heads Debit (Rs.) Credit (Rs.) 1 Sales 12,500 2 Purchases 10,000 3 Miscellaneous expenses 2,500 Total 10,000 15,000 The above difference in trial balance is due to wrong placing of sales account Incorrect totalling wrong placing of miscellaneous expenses account wrong placing of all accounts. 26. _____ is basically responsible for prevention and detection of errors and frauds. (a) Auditor (b) Accountant (c) Management (d) Cashier 27. Which of the following is not true about opinion on financial statements? (a) The auditor should express an opinion on financial statements (b) His opinion is no guarantee to future viability of business (c) He is responsible for detection and prevention of frauds and errors in financial statements (d) He should examine whether recognised accounting principles have been consistently followed 28. Which of the following statements is not true? (a) Management fraud is more difficult to detect than employee fraud (b) Internal control system prevents employee fraud and management fraud (c) The management is basically responsible for detection and prevention of errors and frauds (d) All statements are correct 29. As per AAS-4, if auditor detects an error then (a) He should submit his resignation (b) He should communicate it to the shareholders (c) The auditor should ensure financial statements are adjusted for detected errors (d) None of the above 30. Which of the following is not a limitation of audit as per AAS 4? (a) An auditor cannot rely upon experts (b) Auditor cannot check all transactions (c) Audit evidence is not conclusive (d) Auditor cannot discover all frauds

(a) (b) (c) (d)

31.
professional obligation? (a) Nine (c) Seven

How many principles are listed in AAS 1 which govern auditor's (b) Fourteen (d) Eight

32. The risk of fraud increases when (a) the working capital is high (b) the cash sales are high (c) the auditors remain the same (d) Management is in the hands of a single person

(a) The company is planning an initial public offer of shares to raise additional capital for expansion (b) Bank reconciliation statement includes cheques deposited but not credited (c) Lawyers are not changed frequently (d) There is under-payment for services
34. Professional skepticism requires that the auditor assume that management is (a) reasonably honest (b) Neither honest nor dishonest (c) Not necessarily honest (d) Dishonest unless proved otherwise 35. Audit of banks is an example of(a) Statutory audit (b) Balance sheet audit (c) Concurrent audit (d) All of the above

33. Which of the following factors likely to be identified as a fraud factor by the auditor?

(a) Assets (b) Liabilities (c) Income and expense accounts where appropriate (d) All of the above (a) It is conducted at regular interval (b) It may be carried out on daily basis (c) It is needed when the organization has a good internal control system (d) It is expensive
38. Balance sheet audit does not include (a) Verification of assets and liabilities (b) Vouching of income and expense accounts related to assets and liabilities (c) Examination of adjusting and closing entries (d) Routine checks 39. Which of the following statements is not correct about materiality? (a) Materiality provides a quantitative cut-off point (b) Materiality is a matter of professional judgement (c) AAS-13 deals with materiality (d) Auditor should consider materiality when drafting the audit report 37. Which of the following statements is not true about continuous audit ?

36. Balance sheet audit includes verification of -

40. State which of the following statements is false (a) The detection of errors and frauds is no longer an audit objective (b) An audit does not guarantee that the accounts are free from frauds and errors (c) The auditor is not primarily responsible for all the frauds in the accounts audited by him (d) The detection of errors and frauds is the primary audit objective 41. Audit under statute means: (a) An audit ordered by the Government (b) An audit where duties, rights etc. of the auditor are laid down by law (c) An audit ordered by the Courts (d) An audit under legal contract 42. In case of audit of partnership or sole proprietorship: (a) The auditor's duties are defined purely by the contract between him and the client (b) The auditor need not be as careful as in case of companies (c) The audit must be as extensive as in case of companies (d) The auditor can decide his own duties 2. Fill in the blanks: 1. 2. 3.
"Error" means a (bona fide / mala fide) mistake in financial information. "Fraud" means a (bona fide / mala fide) mistake in financial information. _____Audit means an audit at regular intervals throughout the accounting year.

4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36.

_____Audit means an audit taken up after the end of the accounting year. An audit of accounts prepared for the period of six months from 1 st April to 30th September, would be called _____ Audit. _____ audit is an audit of transactions as soon as a transaction takes place. Auditing and Assurance Standard _____ issued by the ICAI deals with the concept of materiality. Information is material if its _____ could influence the economic decisions of users. Material matters are those matters which, either individually or in the aggregate, are (relatively / absolutely) important for true and fair presentation of financial information in accordance with recognised accounting policies and practices. AAS _____ deals with Going Concern" concept. Negative net worth (is/is not) an indicator that the concern is not a Going Concern. Inability to pay the creditors is an indicator that the concern (is/is not) a Going Concern. The total of Sales Book was not posted to the ledger. This (will / will not) affect the trial balance. Sales Book was overcast by Rs.500. This (will / will not) affect the trial balance. The total of a folio in the Sales Book Rs.1,000 was carried forward as Rs.100. This (will / will not) affect the trial balance. Sales to Ram Rs.143 posted to his account as Rs.134. This (will/will not) affect the trial balance. Sales to Meena Rs.143 posted to Meenu as Rs.143.This (will / will not) affect the trial balance. Goods of the value of Rs.376 were returned by Ram and were taken into stock on the same date but no entry was made in the books. This (will / will not) affect the trial balance. A credit sale was wrongly passed through the purchases book. This (will / will not) affect the trial balance. Repairs of newly purchased second-hand machinery were debited to Repairs Expenses Account. This (will / will not) affect the trial balance. Repairs to Machinery had been charged to Machinery A/c. This (will / will not) affect the trial balance. Cartage paid for newly purchased machinery was posted to Cartage Account. This (will / will not) affect the trial balance. Goods taken away by the Proprietor for personal use were not recorded anywhere. This (will / will not) affect the trial balance. Recording a transaction in a wrong book of original entry with wrong amount (will /will not) affect the trial balance. Recording a transaction in a correct book of original entry but not posted in the ledger. This (will /will not) affect the trial balance. Wrong carrying forward of a balance to next page (will / will not) affect the trial balance. Writing an amount in the wrong account but on the correct side (will / will not) affect the trial balance. Wrong balancing of an account (will / will not) affect the trial balance. Wrong totalling of an account (will / will not) affect the trial balance. Treating a Capital Item as a revenue item (will / will not) affect the trial balance. Audit of Co-operative Societies is (voluntary / statutory) audit. In (Continuous / Periodic) Audit the Final Accounts can be prepared immediately after the year end. (Continuous / Final) Audit is known as Audit in Instalments. Public Limited Companies listed on the stock exchange have to declare their quarterly results. It is preferable to declare such results on the basis of (interim / in-depth) audit. Balance Sheet audit is done if the Internal Control System is very (strong / weak). (Periodical audit / Continuous audit) is less expensive and suitable for small business.

3. Match the following:

1. 2. 3. 4. 5. 6. 7. Column A Making less provision for bad debts Treating an item of income as capital receipt Tax audit Internal audit Basic principles listed in AAs-1 An auditor must be honest that is he must not certify what he does not believe to e true. An auditor is not bound to be a detective. a. b. c. d. e. f. g. h. Column B Voluntary audit Window dressing Kingston Cotton Mills case 11 Statutory audit 9 Secret reserve London and General Bank case

1. 2. 3. 4. 5.

Column A Intentional mistake Personal transaction of owner recoreded in business books Cheque recorded in cash column of cash book Total of sales book taken as Rs.1,000 instead of Rs.10,000 Errors of partial omission; Error of Posting and Casting error

a. b. c. d. e. f. g. h.

Column B Error of principle One sided errors Under-casting Two sided errors Fraud Suspense A/c Error of commission in Subsidiary book Over-casting

4. State whether True or False:

1. The term "General Purpose Financial Statements" includes a cash flow statement (wherever applicable). 2. The term "General Purpose Financial Statements" includes statements and explanatory notes which form part 3. The term "General Purpose Financial Statements" does not include supplementary schedules and information 4. The term "General Purpose Financial Statements" does not include Directors Report. 5. According to AAS-1, Auditing is the independent examination of financial information of any profit oriented 6. It is not the objective of the audit to give an opinion on the future prospects of business. 7. It is the objective of the audit to give an opinion on the efficiency or effectiveness of the management. 8. A clean audit report indicates that the business will continue to be profitable in future. 9. An agreed Trial Balance indicates error-free books. 10. Any type of error causes difference in the Trial Balance. 11. Two-sided errors do not affect the agreement of Trial Balance. 12. Casting error is a type of two-sided error. 13. Compensating error causes difference in the Trial Balance. 14. In book-keeping, errors are rectified by erasing the wrong figures and writing the correct figures instead. 15. Errors of omission do not allow the Trial Balance to agree. 16. Posting a correct amount in the wrong account on correct side does not affect the Trial Balance. 17. Errors of recording in the books of original entry will affect the Trial Balance. 18. Correct recording in the Journal Proper but not posted in the ledger at all will not affect the Trial Balance. 19. Correct recording in the Cash Book but not posted in the ledger will affect the Trial Balance. 20. Errors of principle will affect the Trial Balance. 21. If the amount is posted in the wrong account or it is written on the wrong side of an account, it is called an 22. The Trial Balance ensures the arithmetical accuracy of the book. 23. Wrong casting of subsidiary books does not affect the Trial Balance. 24. Rectification of errors will not necessarily balance a Trial Balance. 25. A tallied trial balance will not reveal compensating errors. 26. In window dressing, the net worth is understated in the final accounts. 27. Secret reserve arise when the profits are understated in the final accounts. 28. A secret reserve is legally allowed to be created by banks. 29. Balance Sheet Audit does not involve an examination of the various items in the Profit and Loss Account. 30. Audit evidence is not conclusive in nature. 31. An auditor cannot be expected to discover deeply laid frauds. 32. An auditor cannot take the help of experts such as valuers etc. 33. Auditing of accounts is compulsory in a partnership firm. 34. Auditing of accounts is undertaken to detect frauds in the books of accounts. 35. Audited accounts are free from errors and frauds. 36. Audit of accounts is optional in case of a private limited company. 37. The auditor must not disclose any information acquired by him in the course of his work without the written 38. The phrase used to express the auditor's opinion is "give a true and correct view". 39. Unless an auditor is able to discover all frauds and errors, he has not performed its main function. 40. There is little difference between auditing and accounting as both deal with financial statements. 41. The auditor compares entries in the books of account with the vouchers; and, if the two agree, his work is
done. permission of the Institute of C. A. of India. error of commission. entity. based on such statements. thereof.

42. Safeguarding the company's property is the function of management; hence the auditor is not concerned with 43. Auditor is not concerned with the compliance with the accounting principles. 44. Accounts become incorrect when the principle of double entry is not followed. 45. The auditor should act like a bloodhound and not a watchdog. 46. Interim audit of a company is compulsory under the Indian Companies Act, 1956. 47. Contiuous audit helps the company to present its audited accounts to the shareholders immediately after the close of the
financial year. CHECK YOUR ANSWERS 2. Fill in the blanks: (1)Bona fide (2) Mala fide (3) Continuous (4) Final or Periodic (5) Interim (6) Concurrent (7) 13 (8) Misstatement (9) Relatively (10) 16 (11) is (12) is not (13) will (14) will (15) will (16) will (17) will not (18) will not (19) will not (20) will not (21) will not (22) will not (23) will not (24) will not (25) will (26) will (27) will not (28) will (29) will (30) will not (31) Statutory (32) Continuous (33) Continuous (34) Interim (35) Strong (36) Periodical 3. Match the following: (1) (1) - (b); (2) - (g); (3) - (e); (4) - (a); (5) - (f), (6) - (h), (7) - (c) (2) (1) - (e); (2) - (a); (3) - (g); (4) - (c); (5) - (b) 4. True or False: True: 1, 2, 4, 6, 11, 16,18,19,21, 22, 24, 25, 27,28, 30, 31,44, 47 False: 3,5, 7, 8,9,10,12,13,14,15,17,20,23,26,29,32,33, 34,35,36,37,38,39,40,41, 42, 43, 45, 46 verification of assets and liabilities.

CH 2

AUDIT PLANNING , PROCEDURES AND DOCUMENTATION

1. STAGES / PROCESS / SCOPE OF AUDIT: The entire process of an audit can be briefly described as follows: A. Ascertain Object of Audit: Normally, the objective of an audit is to give an opinion whether the accounts are true and fair. B. Plan, Collect, Record & Evaluate Evidence: The audit opinion should be based on evidence collected. An Audit Programme is prepared to plan the details of such collection of evidence. Evidence is collected before commencing an audit to obtain knowledge of the business. Evidence is collected during the entire audit regarding Internal Controls, Transactions and year-end Balances. Such evidence is collected by adopting audit techniques of Inspection, Observation, Inquiry, Confirmation and analytical Review. These techniques are used step-by-step in various audit procedures of Internal Control Evaluation, Vouching, Ledger Scrutiny, Verification and Disclosure. The audit evidence is recorded in Audit Note Books and Working Papers. In the last stage, the auditor evaluates the entire audit evidence and gives his opinion based on such evidence whether the accounts are true and fair. Such written opinion is known as the Audit Report. 2. 1. 2. 3.
AUDIT PLANNING [AAS 8]

Reason: The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. Basis: Plans should be based on knowledge of the client's business. Coverage: Plans should be made to cover, among other things. a) acquiring knowledge of the client's accounting systems, policies and internal control procedures; b) establishing the expected degree of reliance to be placed on internal control; c) determining and programming the nature, timing, and extent of the audit procedures to be performed; d) coordinating the work to be performed. 4. Revision: Plans should be developed and revised as necessary during the course of the audit. 5. Overall Plan and Programme: Planning should be continuous throughout the engagement and involves: developing an overall plan for the expected scope and conduct of the audit; and developing an audit programme showing the nature, timing and extent of audit procedures. 6. Benefits: Adequate audit planning helps to: ensure that appropriate attention is devoted to important areas of the audit; ensure that potential problems are promptly identified; ensure that the work is completed expeditiously; utilise the assistants properly; and co-ordinate the work done by other auditors and experts. 7. Factors: In planning his audit, the auditor will consider factors such as complexity as the audit, the environment in which the entity operates, his previous experience with the client and knowledge of the client's business. 8. Responsibility: Though the auditor may discuss his overall plan with the client, the overall audit plan and the audit programme remain the his responsibility. 9. Knowledge of Client's Business: The auditor can obtain knowledge of the clients business from: The client's annual reports to shareholders. Minutes of meetings of shareholders, board of directors and important committees. The previous year's audit working papers. Discussions with client. 10. Previous Year's Matters: The auditor should pay particular attention to previous year's matters recorded in audit file that required special consideration for their effect on the work in the current year. 11. Discussions with Clients: Discussions with the client might include such subjects as: Changes in management, organisational structure, and activities of the client. Current Government legislation, rules, regulations and directives affecting the client. Current business developments affecting the client. Current financial difficulties or accounting problems. New or closed premises and plant facilities. Changes in technology, type of products or services and production or distribution methods. Changes in the accounting practices and procedures and in the system of internal control . Assistance of client personnel in data preparation. 12. Overall Audit Plan: The following matters help in developing the overall audit plan: The terms of his engagement and any statutory responsibilities.

The nature and timing of reports or other communication. The applicable legal or statutory requirements. The accounting policies adopted by the client and changes in those policies. The effect of new accounting or auditing pronouncements on the audit. The identification of significant audit areas. The possibility of material error or fraud or numerous related party transactions. The nature and extent of audit evidence to be obtained. The work of internal auditors and the extent of their involvement, if any, in the audit. The involvement of other auditors in the audit of subsidiaries or branches of the client. The involvement of experts. Establishing and coordinating staffing requirements. The auditor should document his overall plan including a time budget. AUDIT PROGRAMME: MEANING: Prof. Meigs defines an Audit Programme as "a detailed plan of the audit work to be performed, specifying the procedures, to be followed in verification of each item in the financial statements, and giving the estimated time period. Audit programme is an outline of how the audit is to be conducted by the audit staff, who is to do what work and within what time. It is a Time Table of what work is to be done by whom, how and when. FACTORS TO BE CONSIDERED: In preparing the audit programme, the auditor should consider 1. extent of reliance on internal controls 2. the timing of the procedures 3. the coordination of any assistance expected from the client 4. the availability of assistants, and 5. the involvement of other auditors or experts. CONTENTS: The auditor should prepare a written audit programme before commencing the audit containing the following details(1) Client & Accounting Year: The heading of the Audit Programme contains the Name of the Client and the Accounting Year in respect of which the audit is to be conducted. (2) Audit Procedures: The main part of the Audit Programme contains detailed instructions regarding how the audit is to be conducted right from the first step of evaluation of internal controls to the last step of submission of the audit report. It lays down the specific audit procedures to be followed step by step viz. evaluation of the internal control. ascertaining arithmetical accuracy of books by checking posting, casting, carry- forwards, totalling and so on. vouching of transactions in books such as Sales, Purchase, Cash, Bank, Journal, etc. verification and valuation of assets and liabilities. scrutiny of ledgers - general and parties, etc. (3) Distribution of Audit Work: The Audit Programme shows against each audit procedure the name of the person expected to perform it. It specifies the allocation and distribution of audit work among Senior Auditor, Junior Auditors and Assistants so that each one knows what work is to be done by whom. In case of a Joint Audit or Branch Audit, the Audit Programme specifies the areas for which such Joint Auditor or Branch Auditor is responsible. (4) Time Table The Audit Programme gives the schedule of audit work. It contains the Time Table for each job. It shows the time expected to be taken and the actual time taken for carrying out each audit procedure described above. TYPES: An Audit Programme may be (a) Fixed or (b) Flexible. A Fixed Audit Programme is fixed once and for all in the beginning and must be followed strictly throughout the audit. A Flexible Audit Programme, on the other hand, is reviewed constantly as the audit goes on. A Flexible Audit Programme is suitably modified in the light of actual audit work. ADVANTAGES: An Audit Programme has the following advantages 1. Guidance to Assistants: Audit Programme contains detailed guidance to audit assistants regarding what work is to be done, how the work is to be done, who is to do what work and when the work is expected to be done.

2. No Omission or Repetition of Work: An Audit Programme ensures that no important area of audit is left out. It also avoids the same job being done twice. 3. Delegation and Supervision of Work: Audit Programme enables the senior auditor to delegate the audit work to others in a systematic manner. It helps the senior auditor to supervise and control such delegated work. 4. Allocation and Responsibility of Work: Audit Staff can be properly utilised as each person knows what work to do. Audit Programme helps to fix the responsibility of each audit assistant in case of any mistake or negligence. Since each assistant puts his signature against the jobs done by him, it is easy to fix the responsibility. 5. Evidence in Court: An Audit Programme is a good evidence for the auditor in case any suit is filed against him in Court of Law for negligence in audit. He can prove what work was done by him in what manner and on whom he had relied upon and so on. 6. Timely Completion of Audit: Since the Audit Programme contains the Time Table for each task, audit can be completed in time. 7. Flexible Audit Programme: A Flexible Audit Programme is preferable to a Fixed one. Flexible Programme is based on the current conditions such as current laws, current accounting or auditing standards laid down by ICAI etc. and hence is more relevant. It is also constantly reviewed and modified. DISADVANTAGES: Audit programme has the following disadvantages 1. Mechanical Work: Since an Audit Programme contains detailed instructions, the audit work becomes mechanical and routine. 2. Work To Rule': The audit staff may resort to work to rule, i.e. each one does only the work allocated to him and no more. The audit staff loses its initiative. The aspects of quality and creativity are neglected. 3. Defence Against Deficiencies: Inefficient audit assistants may take shelter behind the programme to defend their negligence. They can maintain that they have strictly followed the programme and the deficiencies in their work are due to absence of specific instructions. 4. Insufficient Evidence in Court: An Audit Programme is at best an evidence for the quantitative aspects of an audit i.e. prove what work was done, when and by whom. It cannot reveal the quality of audit, or an error of judgement. 5. Rigid Time Table: Since the Audit Programme contains a strict Time Table for each task, audit becomes merely a race to complete each job in time. Work may be hurried in order to meet the dead-line. This affects the quality of audit. PRE-COMMENCEMENT CONSIDERATIONS: Before commencing an audit, the auditor must take the following steps and procedures. 1. Ascertain the type of audit i.e. statutory, continuous etc. 2. Obtain necessary documents such as list of books, employees etc. 3. Obtain sufficient knowledge of client's business, and 4. Give instructions for preparations to be made by the client. This will help the auditor to (1) develop the overall audit plan (2) prepare the audit programme and (3) identify areas of audit requiring special emphasis. The actual audit should be started only after dealing with above "pre-commencement considerations". 1. Ascertain Type of Audit: The first step before commencing an audit is to ascertain the type of the audit assignment i.e. statutory, voluntary, continuous or final. a. Statutory or Voluntary: The auditor should ascertain whether the audit is statutory or voluntary. If the audit is statutory, e.g. financial audit under the Companies Act, the audit must be conducted in accordance with the provisions of the Companies Act. If the audit is voluntary, e.g. audit of a sole trader or a partnership firm, the auditor must know why the audit is being conducted e.g. for valuation of business at the time of sale, admission of partner and so on. This helps in defining the scope and procedure of audit. b. Continuous or Final: The auditor should ascertain whether the audit is continuous or final. This enables the auditor to decide the extent of checking and the type of audit procedures to be adopted.

2. Documents to be obtained from Client:

The auditor should obtain the following documents from the client before commencing the audit. 1. Letter of Appointment. 2. Memorandum and Articles of Association in case of a Company. 3. Partnership deed in case of a firm. 4. Organisation Chart showing different departments and sections in the organisation the persons in charge. 5. List of directors, partners and officers entitled to sanction payment, sign cheques and offer explanation to auditors. 6. List of places of business, i.e. offices, branches and factories. 7. List of books of accounts and other relevant records. 8. Internal Control Manual and Internal Auditor's Reports.

9. Draft Final Accounts, Trial Balance, Groupings and Schedules. 10. Past Annual Accounts and Annual Reports. 11. Extracts from Minute Books. 12. List of products manufactured and raw materials purchased. 13. List of relatives of directors, interested persons etc. 3. Knowledge of Client's Business: The auditor can obtain knowledge of the clients business from: The client's annual reports to shareholders. Minutes of meetings of shareholders, board of directors and important committees. The previous year's audit working papers. Discussions with client. 4. Instructions to Client:
Before actually commencing the audit, the auditor should issue detailed instructions to the client to prepare and keep ready1. All registers such as Cash Book, Bank Book, Sale Register, Purchase Register, Journal, etc. along with Voucher Files. 2. All ledgers duly posted and balanced. 3. Trial balance duly tallied. 4. Draft Final Accounts with schedules and groupings. 5. Schedule of Fixed Assets and Computation of Depreciation. 6. Details of Investments. 7. Details of cash-in-hand, cheques in transit at year end. 8. Bank Reconciliations and Bank Balance Confirmations. 9. Confirmation of balances from parties, lenders etc. 10. Bills-wise statement of debtors and creditors balances. 11. Quantity Reconciliations and Statement of Closing Stock. 12. Details of pre-paid and outstanding expenses. AUDIT PROCEDURES (STEPS): Audit Procedures mean the steps taken to obtain audit evidence [AAS 5]. Audit procedures can be classified basically into (1) Compliance Procedures and (2) Substantive procedures. 1. COMPLIANCE PROCEDURES: Compliance Procedures are the steps taken to obtain evidence regarding the internal controls, viz. that the internal controls exist, that they are effective, and that they were actually in operation during the accounting year.

2. SUBSTANTIVE PROCEDURES
Substantive Procedures are the steps taken by the auditor to obtain evidence regarding (a) the transactions during the year and (b) the balances of the assets and liabilities as at the year end. Following are the main substantive procedures used in an audit: a) Vouching: Vouching is the audit procedure used in order to obtain evidence regarding the transactions during the accounting year. Vouching involves the steps taken by the auditor to obtain evidence prove that (i) the transactions actually occurred (ii) all transactions that occurred have been recorded (iii) transactions are recorded for the right amount and (iv) transactions are accounted and disclosed properly. b) Checking: Posting checking is the procedure to check that the entries from Journals and Registers are properly posted in the Ledgers. Auditor has to check whether the right amount is posted in the right account and on the right side of the account. c) Casting Checking: Casting Checking is the procedure to check the totals of the books, ledgers etc. Auditor also checks whether the totals are carried forward correctly. d) Ledger Scrutiny: Ledger Scrutiny is the procedure to check and review the accounts of parties, assets, liabilities, income and expenses in the Debtor's ledger, Creditors' ledger, and the General ledger. e) Verification: Verification is the audit procedure to check the balances of various accounts as at the end of the year. Verification involves physical inspection, confirmation and valuation of assets and liabilities as at the end of the year. f) Grouping and Disclosure: This procedure involves checking the ledger balances with the trial balance, ch ecking whether similar accounts are grouped correctly, and finally checking whether the items are properly disclosed in the final accounts. AUDIT TECHNIQUES (METHODS):

Audit techniques mean the methods used to obtain audit evidence [AAS 5]. These methods are used in both the compliance and substantive audit procedures. Audit techniques are of the following typesa) Inspection: Inspection consists of examining records, documents or tangible assets. Thus, the procedure of vouching may use the technique of inspection to examine vouchers and supportings. The procedure of verification may use this technique of inspection to physically verify a fixed asset. Inspection consists of examining (i) records and documents, or (ii) tangible assets. (i) Inspection of records and documents provides evidence of varying degrees of reliability depending on their nature and source and the effectiveness of internal control over their processing. There are four major categories of documentary evidence, which provide different degrees of reliability to the auditor viz.: a. Documentary evidence originating from and held by third party; b. Documentary evidence originating from third parties and held by the entity; c. Documentary evidence originating from the entity and held by third parties; and d. Documentary evidence originating from and held by the entity. (ii) Inspection of tangible assets (physical verification) is one of the methods to obtain reliable evidence with respect to their existence but not necessarily as to their ownership or value.

b) Observation: Observation consists of observing a procedure being performed by others. Thus, auditor may observe the
procedure of physical inventory being taken by the client's staff.

c) Inquiry: Inquiry consists of seeking information from others. Thus, auditor may seek information or explanation from
employees of the client. He may also seek information from outsiders e.g. bankers, lawyers, customers, suppliers.

d) Confirmations: Confirmation is a formal inquiry from outsiders. Thus, auditor may seek confirmations from banks,
suppliers, debtors etc. regarding their balances with the concern.

e) Computation: Computation consists of checking the arithmetical accuracy of vouchers, documents and accounting
records by performing independent calculations.

f) Analytical Review: Analytical Review consists of study of various accounting ratios (e.g. Gross Profit to Sales, Input
- Output Ratio, Debtors' Turnover Ratio). It also consists of comparison of figures of current year with those of past to ascertain unusual differences. Audit Principles Vs. Audit Techniques: Audit Principles 1. Audit principles guide an auditor as to how to conduct an audit and give an audit report. 2. Following are the audit principles as listed in AAS 1: Integrity, Objectivity, Skill, Competence, Work performed by others, Planning audit evidence, Evaluation of accounting system & control, Conclusion & reporting. 3. Principles are of fundamental nature and do not change frequently.

Audit Techniques 1. Audit techniques mean the methods used to obtain audit evidence. 2. Following are the audit techniques listed in AAS 5: Inspection, Observation, Inquiry, Confirmation, Computation and Analytical review.

4. Principles do not change from organization to organization.

3. Techniques may change depending on circumstances, e.g. techniques of verification of cash is different from that of verification of debtors. 4. Techniques may change depending on the nature of organization, e.g. manufacturing, trading, professional, etc.

AUDIT WORKING PAPERS/ AUDIT FILE:

Statement on Documentation (AAS 3) published by the Institute of Chartered Accountants (ICAI) contains detailed discussion on the form, contents and custody of Working papers. MEANING: Audit Working Papers mean a record of (a) the audit plan (b) the audit procedures performed and (c) the conclusions drawn from the evidence obtained. Working papers is the link between the client's records and the auditor's report. CONTENTS OF PERMANENT AUDIT FILE: A Permanent Audit File contains the following details 1. Memorandum and Articles of Association of the company or the Partnership Deed in case of a Firm, the Trust Deed in case of a Trust. 2. Study and Evaluation of Internal Control System by way of questionnaires, flow charts, etc. 3. Description of accounting policies and system. 4. Copies of audited accounts of earlier years. 5. Analysis of Ratios, Trends etc. in earlier years. 6. Letters to management by the auditor containing observations on earlier audits. 7. Communication with the previous auditor and his reply. 8. Notes on discussions with the client in respect of nature of business, management, organisation and activities. laws, rules, regulations etc. applicable to the client. financial or accounting problems. nature of accounting system, policies or internal control. scope and timing of audit examination. CONTENTS OF TEMPORARY AUDIT FILE: A Current Audit File contains the following details1. Letter of Appointment for the current year and its acceptance. 2. Documents obtained from the client before commencement of audit e.g. Organisation Chart, List of Authorised Officers, List of places of business, List of books, Internal Control Manual and Internal Auditor's reports, List of products, List of relatives etc. 3. Audit Plan. 4. Audit Programme. 5. Analysis of transactions and balances. 6. Audit procedures (vouching, verification etc.) performed, the points raised (queries), how the points were solved, the explanation or documents obtained while solving the queries and the conclusions drawn. This forms the major part of the file or the "Audit Note Book". 7. Evidence of review and supervision of the work of the assistants. 8. Letters of confirmation from parties, banks, lenders etc. 9. Trial Balance, Final Accounts, Schedules and Groupings for current year. OWNERSHIP, CUSTODY AND ACCESS: 1. Working Papers are the property of the auditor. 2. Auditor should take precautions for custody and safe preservation of the Working Papers. 3. Auditor should keep the Working Papers confidential, i.e. secret from third parties. AUDITORS RIGHT OF LIEN: Meaning of Lien: A lien is "the right of one person to satisfy a claim against another by holding the other's property as security." If an auditor is not paid his audit fees, the question arises as to whether in order to recover his fees A. An auditor has a right of lien in respect of the books of accounts and vouchers of a company, and B. An auditor has a right of lien in respect of his working papers. AUDIT NOTEBOOK: Meaning: Audit Note Book is a part of the current audit file. It contains the 'notes made by the audit team for recording special points which have been observed during the course of audit. Form: Audit Note Book is usually in the form of a bound book. However, loose sheet may be used for entering queries and notes which subsequently, on being punched may be filed in a special file maintained for each client.

Contents: The Audit Note Book contains The Audit Programme. Analysis of transactions and balances. A record of the nature, timing and extent of auditing procedures performed (vouching, verification, etc.), and the results of such procedures i.e. the points raised (queries), hoe the points were solved, the explanation or documents obtained while solving the queries and the conclusions drawn. This forms the major part of the Audit Note Book. Evidence that the work performed by assistants was supervised and reviewed. Copies of letters or file notes concerning audit matters communicated to or discussed with the client. Conclusions reached by the auditor concerning significant aspects of the audit, including the manner in which exceptions and unusual matters, if any, disclosed by the auditor's procedures (i.e. queries) were resolved or treated. Importance: The audit notes, constitute important evidence of matters considered by the auditor during the course of the audit. Audit notes can be an important defence for the auditor in a court case for negligence against him. EXERCISES: MULTIPLE CHOICE QUESTIONS: 1. The auditor should plan his work to enable him to conduct an effective audit in _____ manner. (a) A professional (b) A proper (c) A confident (d) An efficient and timely

2. Audit plans should be based on knowledge of the clients _____. (a) Profits (b) Net worth (c) Business (d) Reputation 3. An audit programme may be (a) Statutory (b) Permanent (c) Fixed or Flexible (d) Standard 4. ______ papers is the link between clients records and auditors report. (a) News (b) Working (c) Loose (d) Ruled 5. Working papers are the property of the (a) Client (b) Client and the auditor (c) Auditor (d) None of the above 6. Which of the following Auditing Assurance Standard deals with Audit planning? (a) AAS 7 (b) AAS 8 (c) AAS 9 (d) AAS 3 7. Audit programme is prepared by (a) The client (b) The client and the auditor (c) The auditor and his assistants (d) The chief accountant 8. (a) (c) (d)
Audit working papers recordThe audit plan (b) The audit procedures performed The conclusions drawn from the evidence obtained All of the above

9. Current audit file relating to audit of a partnership firm will not contain (a) Audit plan (b) Audit programme (c) Partnership deed (d) Letters of confirmation 10. Which of the following is not an advantage of the preparation of working paper? (a) To provide a basis for review of audit work (b) To provide a basis of subsequent audits (c) To ensure audit work is being carried out as per programme (d) To provide guide for advising another client on similar issues 11. An auditor cannot have any lien on the books of accounts of the company audited by him, (a) As laid down in section 224 of the Companies Act (b) As laid down by the rules of the Inst. of C.A. of India (c) As laid down in AAS 3 (d) Since the books cannot be removed from the registered office of the company

12. Consider the stages in audit given below 1. Ascertain type of audit 2. Vouch receipts and payments 3. Obtain documents from client 4. Prepare audit programme
What is the correct sequence of the above stages (a) 1,2,3,4 (b) 1,3,4,2 (c) 2,3,1,4 (d0 1,4,3,2

13. Current and permanent file are together known as (a) Audit plan (b) Audit programme (c) Audit procedures (d) Audit working papers 14. Consider the following documents 1. Audit notebook 2. Audit report 3. Audit programme 4. Audit plan
What is the current sequence in which the documents are prepared? (a) 1,2,3,4 (b) 3,1,4,2 (c) 2,3,1,4 (d) 4,3,1,2 FILL IN THE BLANKS: 1. AAS _____ deals with audit planning. 2. The auditor should plan his work to enable him to conduct an _____ audit in an efficient and timely manner. 3. Working papers are the property of the _____. 4. AAS _____ deals with Audit Working Papers. 5. Audit plans should establish the expected degree of _____ to be placed on internal control. 6. Audit plans should determine the nature, timing, and extent of the audit _____ to be performed. 7. Audit planning should be _____ throughout the audit engagement. 8. Adequate audit planning helps to ensure that appropriate attention is devoted to (all/important) areas of the audit. 9. Adequate audit planning helps to ensure that (potential problems/ frauds) are promptly identified. 10. Audit planning involves developing (an overall plan/ audit techniques) for the expected scope and conduct of the audit. 11. Audit planning involves developing (a flow-chart/ an audit programme) showing the nature, timing and extent of audit procedures. 12. Adequate audit planning helps to co-ordinate the work done by (other auditors and experts/ audit assistants and accountants). 13. The auditor should document his overall plan including a (time/ cost/ fee) budget. 14. Copies of audited accounts of earlier years will be filed in the (permanent/ current) audit file. 15. Trial balance for year under audit will be filed in the (permanent/ current) audit file. 16. Working papers are the property of the (auditor/ client). 17. Audit (plan/ evidence) will enable the auditor to conduct an effective audit in an efficient and timely manner. 18. Audit _____ mean the steps taken to obtain audit evidence. 19. Audit procedures can be classified basically into _____ procedures and _____ procedures. 20. _____ procedures are steps taken to obtain evidence regarding the internal controls. 21. The steps taken by the auditor to obtain evidence regarding the balances of the assets and liabilities as at the year end are known as _____ procedures. 22. The steps taken by the auditor to obtain evidence regarding the transactions during the year are known as _____ procedures. 23. Evidence obtained from _____ procedures determines the nature, timing and extent of the _____ procedures. 24. _____ is the substantive audit procedure used in order to obtain evidence regarding the transactions during the accounting year. 25. _____ checking is the procedure to check the totals of the books, ledgers, etc. 26. _____ is the substantive audit procedure to check and review the accounts of parties, assets, liabilities, income and expenses in the debtors ledger, Creditors ledger, and the General ledger. 27. _____ is the audit procedure to check the balances of various accounts as at the end of the year. 28. Audit _____ mean the methods used to obtain audit evidence. 29. Audit technique of _____ consists of examining records, documents or tangible assets. 30. Audit technique of _____ consists of observing a procedure being performed by others. 31. Audit technique of _____ consists of seeking information from others. 32. Audit technique of _____ means a formal inquiry from outsiders.

MATCH THE FOLLOWING: Column A 1. AAS dealing with the audit planning 2. Knowledge of clients business 3. Discussions with the client 4. AAS dealing with working papers 5. Permanent audit file 6. Current audit file 7. Overall audit file 8. Audit programme

a. b. c. d. e. f. g. h.

Column B Memorandum and Articles of Association Changes in management AAS 8 Expected scope and conduct of the audit Nature, timing and extent of audit procedures Visits to clients premises and factories Audit programme AAS 3

STATE WHETHER TRUE OR FALSE: 1. Audit Plans once developed should never be revised during the course of the audit. 2. After the auditor discusses his overall plan with the client, the overall audit plan and the audit programme become their joint responsibility. 3. Auditor should develop a Standard Audit programme applicable to all audits permanently. 4. An auditor cannot have any lien on the books of accounts of the company audited by him. 5. An Audit Programme should not be in writing as it is confidential. 6. An Audit Programme serves as an evidence of a true and fair view of the state of affairs of the company. 7. An Audit Programme shows the programme for preparation of the financial statements of the company. 8. Audit Programme helps to fix the responsibility of each audit assistant in case of any mistake or negligence. 9. Distribution of duties to audit staff for checking of accounts must be made in consultation with the management of the company so that they work together to complete the audit in time. 10. An Audit Note Book is the property of the audit assistants and need not be s hown to the auditor. 11. Material errors and frauds discovered during the audit should be recorded in the Audit Note book. 12. A copy of the Audit Working Papers should also be given to the company for their reference. 13. The purpose of Audit Working Papers is served as soon as the audit report for the year is submitted; they need not be retained for the future. 14. An Audit Programme is at best an evidence for the quantitative aspects of an audit but it cannot reveal the quality of audit or an error of judgement. 15. Audit Plan should be primarily based on knowledge of Accounting Standards. 16. Audit Plans are confidential and should never be discussed with the client being audited. 17. AAS 8 recommends that Audit Programmes should be fixed and Auditor should not change the audit programme once the audit commences. 18. Electronic records (e-mails) obtained by auditor from client form part of working 'papers'. 19. Internal audit report is the property of the internal auditor and the statutory auditor has no right inspect the same. 20. The old auditor must hand over his working papers to the new auditor appointed in his place. 21. Audit techniques mean the steps taken to obtain audit evidence. 22. Audit Procedures mean the methods used to obtain audit evidence. 23. Audit techniques can be classified basically into (1) Compliance techniques and (2) Substantive techniques. 24. Substantive Procedures are the steps taken to obtain evidence r egarding the internal controls. 25. Compliance Procedures are the steps taken by the auditor to obtain evidence regarding the transactions during the year and the balances of the assets and liabilities as at the year end. 26. Verification is the audit procedure used in order to obtain evidence regarding the transaction during the accounting year. 27. Vouching is the audit procedure to check the balances of various accounts as at the end of the year. 28. The audit technique of Observation consists of examining records, documents or tangible assets. 29. The audit technique of Inspection consists of observing a procedure being performed by others. 30. The audit technique of Inquiry consists of seeking formal confirmation from outsiders. 31. The audit technique of Confirmation is a formal inquiry from insiders. CHECK YOUR ANSWERS: Multiple choice questions.

1. 2.

(d) (c)

3. 4.

(c) (b)

5. 6.

(c) (b)

7. 8.

(c) (d)

9. (c) 10. (d)

11. (d) 12. (b)

13. 14.

(d) (d)

Fill in the blanks. (1) 8 (2) Effective (3) Auditor (4) 3 (5) Reliance (6) Procedures (7) Continuous (8) Impor tant (9) Potential problems (10)Overall plan (11) Audit programme (12) Other auditors and experts (13) Time (14) Permanent (15) Current (16) Auditor (17) Plan (18) Procedures (19) Compliance Substantive (20) Compliance (21) Substantive (22) Substantive (23) Compliance; Substantive (24) Vouching (25) Casting (26) Ledger Scrutiny (27) Verification (28) Techniques (29) Inspection (30) Observation (31) Inquiry (32) Confirmation Match the following. (1) - (c); (2) - (f); (3) - (b); (4) - (h); (5) - (a), (6) - (g), (7) - (d), (8) - (e) True or False. True: 4, 8,11,14, 18 False: 1, 2,3, 5, 6, 7,9, 10,12,13,15, 16,17, 19,20,21,22, 23, 24,25,26,27,28, 29, 30, 31

CH 3 AUDITING TECHNIQUES AND INTERNAL AUDIT

TEST CHECK: INTRODUCTION: Auditor's basic duty is to judge the quality of the final accounts. He has to judge whether the accounts are true and fair. For this purpose, he has to obtain audit evidence. He uses various audit techniques like vouching the

transactions and verifying the assets and liabilities to obtain audit evidence. He can obtain maximum audit evidence by vouching all transactions and by verifying all assets and liabilities. However, such 100% checking is neither possible nor necessary. He can select only a few sample transactions for vouching. Similarly, he can select only a few items of assets for verification. Such test check enables an auditor to judge whether the remaining entries are correct or not. From an examination of a representative sample, auditor can form an opinion about the entire class of transactions or balances. AAS 28 (Audit Report) also mentions that an audit includes examination, on a test basis, of evidence supporting the amounts and disclosures in the financial statements. MEANING:

1. Prof. Meigs: Test Checking means to select and examine a representative sample from a large number of
similar items.

2. ICAI : AAS 5 issued by the Institute of Chartered Accountants of India (ICAI) states that in forming an opinion an
auditor may obtain audit evidence on a selective basis. The selection may be based on the auditor's personal judgement or statistical sampling technique. TEST CHECKING VS. STATISTICAL SAMPLING: When items are selected and checked on the basis of the personal judgement of the auditor, it is called Test Checking. When items are selected by applying statistical techniques of sampling, random selection etc., it is called Statistical Sampling. EXAMPLE: The following audit instructions illustrate how test checking is used in an actual audit to obtain evidence about purchase transactions and creditor's balances: 1. Check 25% of Purchase Vouchers. 2. Check 25% of Postings from Purchase Journal into Creditors Ledger. 3. Check Totals of 25% of Accounts in Creditors' Ledger. 4. Check 25% of balances of creditors into Creditors Schedule. 5. Send Letters of Confirmation to 25% of the total creditors. Thus, if the auditor is satisfied about 25% of the purchase transactions and creditors' balances, he may conclude that the remaining 75% of the transactions and balances are correct. UNSUITABLE: The following transaction/balances are not suitable for test checking. 1. Opening and closing entries. 2. Reconciliation Statements. 3. Items requiring calculations/estimates e.g. depreciation, royalty etc. 4. Very important/material transactions/ balances. 5. Transactions on which auditor must report under the Companies Act etc. e.g. managerial remuneration. 6. Seasonal, non-recurring or exceptional transactions which cannot be test-checked on yearly basis. NEED / IMPORTANCE:

1. Full Checking Impossible : When the number of transactions is large the auditor cannot check all the
transactions 100%. Thus, in case of an audit of a bank, it would be physically impossible for an auditor to check all the payments made by the bank during a year. In such cases, auditor has to resort to test checks.

2. Full Checking Unnecessary : In most cases, 100% checking is unnecessary. Detailed checking
becomes routine and mechanical. Test checking allows an auditor to concentrate on important areas of audit . HOW TO SELECT A SAMPLE: Auditor should consider the following points while selecting a sample for test check: 1. 100% Coverage in 3-5 Years: Items should be selected in such a way that audit programme for 3 to 5 years would cover 100% of the transactions and balances. Thus, if Purchase vouchers of January to April are checked in the one year, the purchase vouchers of May to August should be checked in the next year and the vouchers of September to December should be checked in the third year. Similarly, if confirmation letters are sent to parties whose names begin with A to G in the first year, in the next year letters should be sent to parties whose names begin with H to N and so on.

2. Surprise: Selection of items to be checked must contain an element of surprise. The staff and management
should not be able to guess what items will be checked in a particular audit. The selection should not be predictable or mechanical.

3. Extent of Checking: In the example above, it was stated that 25% of purchase transactions should be
checked. This percentage or extent of checking depends upon the personal judgement of the auditor. Thus another auditor may check only 10% or yet another may check even 50% of the transactions. The extent of checking should be based on the following factors: Possibility of errors, frauds and mis-statements in accounts. Nature and materiality of the item being checked. Nature of the business and size of the company. The system of accounting, whether well established or not. Internal controls, whether effective or weak. Internal audit, whether operative and effective or not. Experience gained in previous audits. Results of checking done till date. Type of information available. Trend indicated by accounting ratios and analysis. DRAWBACKS:

1. Arbitrary Selection: The items to be checked and the extent of checking are select ed on an arbitrary basis.
The selection depends upon the personal judgement of the auditor.

2.

Ignores Statistical Techniques: Test checking ignores statistical techniques of sampling, random selection, risk assessment etc. Thus, auditor cannot be confident that he has selected the right sample.
only the simple entries or the confirmation letters may be sent only to the parties whose balances are good and so on. from those based on 100% checking. Sampling risks are of the following types may not rely on the controls, when the controls were, actually, reliable.

3. Ignores Quality : Test checking emphasises quantity rather than quality of checking. The audit assistant may check 1. Sampling Risks : Sampling risk means the possibility that conclusions based on sample may be different (a) Reliance on Internal Controls: Auditor may rely on the controls when he should not have so relied. Or, he (b) Wrong Conclusions: Auditor may draw wrong conclusions from test checking. Thus, if he vouches 25%
of Purchase transactions, he may conclude that (a) balance 75% transactions are proper or (b) he may conclude that balance 75% transactions are not proper. Both these conclus ions may be wrong. PRECAUTIONS: Test checking is an accepted auditing procedure which should be adopted for audit work after taking the following precautions. 1. Classify Transactions: The transactions of the concern should be classified under proper heads.

2. Systems and Procedures: Systems and procedures for a transaction right from the beginning to the
end should be studied in their sequence. It involves factors of authorisation, documentation and recording and evidencing the same.

3. Internal Controls: The whole of the system of internal control in the areas of accounts, and finance
should be studied and evaluated for its efficiency, soundness and capability for producing reliable accounting and financial data.

4. Test Check Plan: A properly thought-out test check plan should be prepared. The objective of each check
should be clearly understood by the auditing staff. For example, cash vouchers may be checked by the test check method for a number of objectives- one may be to ensure that the cash payments are properly authorised and acknowledged, other may be to see whether the payment has been debited to the proper account

5. No Bias in Selection: The transactions falling under each tests-check plan should be selected in such a
manner that bias cannot enter in the selection.

6. Avoid Unsuitable Areas: Auditor should identify the areas where test check may not: suitable. For example,
if there are only 10 export sales in the year, it would be preferable to have them all thoroughly checked.

7. Decide No. of Transactions: The number of transactions to be selected for each test check plan
should be predetermined. This can be done by deciding upon the degree of reliance that should be placed on the test-check result and the confidence that can be placed.

8. Decide Significance of Errors: Errors that may be found may be material or immaterial in the
particular audit. Investigation of immaterial error may be avoided and only the material errors may be properly and thoroughly investigated. TEST CHECKING VS ROUTINE CHECKING Routine Checking is the checking of casts, sub-casts (totals, sub-totals), carry-forwards, extensions and calculations etc. in subsidiary books, checking of postings into the ledgers, casting of ledger account and extraction of their balance etc. This work is usually done by junior members of the auditor's staff. Distinctive 'ticks' are used in routine checking for different purposes e.g. for totals, for posting etc. Hence 'Routine Checking' is also called 'tick-work'. Routine Checking is of a mechanical nature. But it should be done thoroughly and intelligently as it will help to discover many errors of posting, wrong totals etc. The main objects of routine checking are: (a) To verify the arithmetical accuracy of the entries, (b) To verify the accuracy of postings to Ledgers, (c) To check that the ledger accounts have been correctly balanced, and (d) To ensure that no figures after checking have been altered. Therefore, test checking involves all elements of routine checking restricted to limited number of transactions but the extent of checking is quite wide. AUDIT SAMPLING: MEANING: According to AAS-15, 'Audit Sampling" means the application of audit procedures to less than 100% of the items within an account balance or class of transaction to enable the auditor to obtain and evaluate audit evidence about some characteristic of the items selected in order to form or assist in forming a conclusion concerning he population. PURPOSE: When using sampling methods, the auditor should design and select an audit sample, perfo rm audit procedures thereon, and evaluate sample results so as to provide sufficient appropriate audit evidence. FACTORS FOR DESIGNING AUDIT SAMPLE: When designing an audit sample, the auditor should consider following factors: 1. Audit Objectives: The auditor would first consider the specific audit objectives to be achieved and the audit procedures which are likely to best achieve those objectives.

2. Population: The population is the entire set of data from which the auditor wishes to sample in order to
reach a conclusion. The auditor will need to determine that the population from which the sample is drawn is appropriate for the specific audit objective.

3. Audit Evidence: The individual items that make up the population are known as sampling units. The
population can be divided into sampling units in a variety of ways. For example, if the auditor's objective were to test the validity of accounts receivables, the sampling unit could be defined as customer balances or individual customer invoices. SAMPLING RISK:

Meaning:

Sampling risk arises from the possibility that the auditor's conclusion, based on a sample, may be different from the conclusion that would be reached if the entire population were subjected to the same audit procedure. The lower the risk the auditor is willing to accept, the greater the sample size will need to be. The auditor is faced with sampling risk in (i) tests of control and (ii) substantive procedures. i. Sampling Risks in Tests of Control: The auditor faces the following sampling risk in tests of controla. Risk of Under Reliance: The risk that, although the sample result does not support the auditor's assessment of control risk, the actual compliance rate would support such an assessment. b. Risk of Over Reliance: The risk that, although the sample result supports the auditor's assessment of control risk, the actual compliance rate would not support ach an assessment.

ii.

Sampling Risks in Substantive Procedures: The auditor faces the following sampling risk in

a. Risk of Incorrect Rejection: The risk that, although the sample result supports the conclusion that a recorded account b. Risk of Incorrect Acceptance: The risk that, although the sample result supports the conclusion that a recorded account
balance or class of transactions is not materially mis-stated, in fact it is materially misstated. Effects of Sampling Risks on Audit: Following are the effects of sampling risks on auditi. The risk of over reliance and the risk of incorrect acceptance affect audit effectiveness and are more likely to lead to an erroneous opinion on the financial statements than either the risk of under reliance or the risk of incorrect rejection. ii. The risk of under reliance and the risk of incorrect rejection affect audit efficiency as they would ordinarily lead to additional work being performed by the auditor or the entity, which would establish that the initial conclusions were incorrect. TOLERABLE ERROR: 1. Tolerable error is the maximum error in the population that the auditor would be willing to accept, and still conclude that the result from the sample has achieved the audit objective. Tolerable error is considered during the planning stage. balance or class of transactions is materially misstated, in fact it is not materially mis-stated.

substantive procedures-

2. Tolerable error for substantive procedures is related to the auditor's judgment about materiality. The smaller the
tolerable error, the greater the sample size will need to be. In substantive procedures, the tolerable error is the maximum monetary error in an account balance or class of transactions that the auditor would be willing to accept so that when the results of all audit procedures are considered, the auditor is able to conclude, with reasonable assurance, that the financial statements are not materially misstated.

3. In tests of control, the tolerable error is the maximum rate of deviation from a prescribed control procedure that the
auditor would be willing to accept, based on the preliminary assessment of control risk. EXPECTED ERROR: If the auditor expects error to be present in the population, a larger sample than wh en no error is expected ordinarily, needs to be examined to conclude that the actual error in the population is expected to be error free. In determining the expected error in a population the auditor would consider such matters as error levels identified in previous audits, changes in the entity's procedures, and evidence available from other procedures. METHODS OF SELECTING SAMPLE ITEMS: While there are a number of selection methods, three methods commonly used are: (1) Random Selection (2) Systematic Selection (3) Haphazard selection. 1. Random Selection: This method of selecting sample ensures that all items in the population have an equal chance of selection, for example, by use of random number tables. Random Sampling may be (i) Simple Random Sampling; or (ii) Stratified Sampling.

2. Systematic Selection: This method of sample selection is also known as Interval Sampling. It involves
selecting items using a constant interval between selections, the first interval having a random start. The interval might be based on a certain number of items (every 20th voucher number) or on monetary totals (every Rs.1,000 increase in the cumulative value of the population).

3. Haphazard selection: Haphazard selection, which may be an acceptable alternative to random

selection, provided the auditor attempts to draw a representative sample from the entire population with no intention to either include or exclude specific units. When the auditor uses this method, care needs to be taken to guard against making a selection that is biased, for example, towards items which are easily located, as they may not be representative. INTERNAL CONTROL: MEANING: 1. AAS 6 issued by the Institute of Chartered Accountants of India (ICAI) deals with the study and evaluation of Internal Control in connection with an audit. It defines Internal control as "all the policies and procedures adopted by the management of a concern to ensure the orderly and efficient conduct of its business." 2. W. W. Biggs defines Internal Control as "the whole system of controls, financial or otherwise, established by the management, in the conduct of a business, including internal check, internal audit and other forms of control."

PURPOSE AND ADVANTAGES: The objectives of Internal Control i.e.; Accounting Controls and Operational Controls are as follows-

(1) Accounting Controls :

Accounting Controls aim to ensure that 1. All transactions are duly authorised. 2. All transactions are properly recorded. 3. All transactions are recorded promptly as soon as they occur. 4. The accounting policies adopted by the management in respect of stock valuation depreciation etc. are implemented. 5. The assets of the concern are safeguarded, the assets are not used or sold without proper authorisation and are verified regularly. 6. Errors and frauds are prevented and detected. 7. The books of accounts are complete and accurate. 8. The final accounts are reliable and ready in time.

(2) Operational or Administrative Controls:

Operational Controls aim to ensure that the management po licies in respect of the operations and administration of the concern are implemented. This in turn ensures that the business conducted in an orderly and efficient manner. Examples of operational controls are Quality Control, Budgetary Control, Internal Check, Internal Audit, Quantitative Controls etc. REVIEW OF INTERNAL CONTROL:

1. Why Auditor should review internal controls: The auditor's objective in studying and evaluating 2.
internal controls is to establish the reliance he can place thereon in determining the nature, timing and extent of his substantive audit procedures. How Auditor should review internal controls: Auditor should review the internal controls in the following manner-

(a) The auditor should acquaint himself with the important features of the business carried on by the concern, the
nature of the activities and the system followed in the entire process of manufacturing, trading and administration. Such knowledge will give the auditor an awareness of the physical realities behind the book entries and records which he examines. (b) He should also find out the basis on which the control and procedures are laid down by the management. He can always obtain this knowledge by having discussion with the various managers of the organisation. (c) He should also study the company's procedures, manuals, organisation flow charts to ascertain the character, scope and efficacy of the control system. (d) Sometimes, manuals and charts are not available or very little information is available. In that case, the auditor should contact the right officers and employees to get the desired information.

3. How Auditor should obtain information for review of internal controls The auditor can (a) (b) (c) (d)
use one of the following to obtain correct and necessary information. Narrative record; Check List Questionnaire; and Flow chart

AUDITOR'S DUTIES: AAS 6 makes the following recommendations in this regard: 1. Responsibility of Management: Basically, the management is responsible for establishing and operating the Internal Control System. 2. Auditor's Duty: The auditor's duty is to study the system, check whether the system was actually in operation during the year and evaluate the system to ascertain how much he can rely upon it. 3. Need for Evaluation: An auditor needs to evaluate the Internal Control System for the following reasons A. Establish Reliability of Internal Control: An auditor has to ascertain whether he can rely upon the Internal Controls, so that he can be sure that a) All transactions are authorised and recorded properly and in time. b) The accounting policies of management are actually followed. c) The assets of the concern are safeguarded and verified regularly. d) The accounts are free from errors and frauds. e) The books of accounts are complete and accurate.

B. Decide What, When, How and How Much to Check: It is not possible to do a detailed vouch-and-post audit when the number of transactions is large. In such cases, study of Internal Control helps an auditor to decide the nature, timing and extent of vouching, verification etc. If the Internal Controls are reliable, he can use Test Checks and concentrate on only the important areas of audit.

4. Steps in Evaluation: In order to evaluate the system of Internal Control, the auditor should take the a. Understand the System: In the first stage, the auditor should understand the system of Internal Control. He can
understand the system with the help of manuals, discussions with managers or the technique of Flow Charts. He can also trace a few transactions through the system to understand the control procedures. following steps -

b. Test Application: He should check whether the controls were actually applied in practice. He can check some
transactions in depth. Thus, he can take up some sales transactions and check all the documents right from the sales order to the receipt from the debtors. At each stage, he should check whether the prescribed controls and procedures were observed or not. He can also use the technique of questionnaires to test the system.

c. Evaluate the System: He should judge, on the basis of above tests, whether he can rely on the system and if so to
what extent.

5.

Communicate Weakness to Management:

a. The material weaknesses in internal controls should be communicated to the management by the auditor. Material weaknesses mean the absence of adequate controls that increase the possibility of errors and frauds in the financial statements. b. Such communication should be in writing. Such 'letter of weakness or Management Letter has the following features. 1. Lists areas of weaknesses. 2. Offers suggestions for improvements. 3. Clarifies that the list is not exhaustive and complete. 4. Helps the management to rectify the weaknesses. 5. Helps the auditor to minimise his legal liability.

6. Under CARO 2003, auditor had to report, regarding Internal control over purchase of inventory and fixed assets and the sale of goods:
(a) Whether the internal control procedure is commensurate with the size and na ture of the company and its business. (b) Whether there is a continuing failure to correct major weakness in internal con trol. INHERENT LIMITATIONS OF INTERNAL CONTROL: All the objectives of internal control, listed above, may not be actually achieved, because of its following limitations. 1. Costs: Cost of implementing a control procedure may be much more than its benefits. 2. Human Error : A control procedure may not prove effective due to human errors e.g. carelessness of employees, mis-understanding of instructions, wrong judgements etc. 3. Collusion: Even if duties are divided among different employees, they may collude (work together fraudulently). 4. Misuse: An employee responsible for a particular function may misuse his authority. 5. Manipulation by Management: Manipulation and misappropriation by top management will defeat the very purpose of internal control. INTERNAL CONTROL FOR SALES: 1. Division of Work : Work relating to sales and debtors should be divided among different departments and employees. Thus Sales and Debtors would involve the Sales Department, the Stores and the Accounts Department. Different persons should deal with sales orders, despatch goods and receive payments from debtors.

2. Procedures: Sales Department should obtain Sales Orders and issue Despatch Orders to the stores.

Material should be despatched from the godown only on the basis of such despatch orders and after preparing delivery challans. The Sales Bills should be raised and the cash or cheques from debtors should be received by the Accounts department.

3. Cross-Check : The work should be divided in such a way that the Despatch Orders, Delivery Challan, Sales
Bill, Receipt for Collection etc. are prepared by different persons and are automatically checked by another employee.

4. Change in Duties: The duties of the concerned employees (salesmen, storekeeper) should be rotated
from time to time. They may be transferred to a different location. One employee should not do the same work for a long time.

5. Annual Leave: The concerned employees (especially the storekeeper) should be asked to go on leave at
least once every year, to enable detection of errors or frauds.

6. Access to Books: The Sales Staff or Storekeeper should not have access to the books of account, such as
Sales Journal or Ledgers.

7. Proper Recording: All goods despatched should be properly recorded i.e. the right quantity should be entered,
against the right party and on the right date, in the Delivery Challan, Sales Invoice and the Stock Book.

8. Prompt Recording: The Delivery Challans should be recorded in the Stock Book immediately. The Sales
Invoices should be recorded in the Sales Journal as soon as possible. The postings in the debtors ledger should also be in time. Thus the Stock Book, Sales Journal and the Debtors Ledger should always be up-to-date.

9. Accounting Policies: The sales should be recorded on the basis of the accounting policies adopted by the
management e.g. treatment of cut-off transactions, of debit notes / credit notes, discounts, exports, changes in prices, warranty etc.

10. Safeguarding : The stock in hand should be safeguarded i.e. stored safely and properly. Stock in hand should
be verified regularly.

11. Errors and Frauds: Sales Journal and Stock Books should be checked to detect errors in recording sales
and goods despatched e.g. errors of commission, errors of omission or errors of principle etc. Stock Books should be frequently reconciled with the physical stocks to detect frauds e.g. misappropriation of goods by inflating despatches.

12. Reconciliation and Confirmations: The Debtors accounts should be reconciled regularly. Confirmation
of balances should be obtained from them at least once during the year. INTERNAL CONTROL FOR DEBTORS: In addition to the points discussed above under sales, the following aspects of in ternal control on debtors should also be kept in mind: 1. Credit Limits: The credit limits for debtors should be (a) fixed on a basis which clearly laid down (b) approved by an officer independent of the sales department (c) checked before accepting orders from customer, and (d) reviewed from time to time.

2. Prompt Recording: The procedures should ensure prompt recording of the amo unts due from debtors and
the amounts received from debtors.

3. Prompt Adjustment : The amount received from a debtor should be promptly adjusted against the relevant
bill. Unadjusted amounts should be reconciled regularly.

4. Age-wise Schedule: There should be a procedure for preparing age-wise schedule of debtors (e.g. Debts
Due for 1 month, Debts due for 2 months, Debts due for 3 months and above etc.). The schedules should be reviewed by a senior officer. Necessary action should be taken to recover overdue amounts.

5. Statements of Accounts: Statements of accounts should be prepared and sent periodically to all debtors.
They should be prepared by a person other than the ledger- keeper and sent by yet another person. The debtors should be requested to check the statements with their own records. Debtors should be requested to confirm the balance or point out the differences, if any. The replies from debtors should be reviewed by a senior manager. The differences pointed out by the debtors should be reconciled and adjusted in the accounts.

6. Discounts & Write-offs: All material adjustments in the debtors accounts such as discounts, allowances,
rebates, bad debts written off etc. should be approved by senior manager.

7. Reconcile Control Accounts: There should be a system of periodic reconciliation of debtors' balances
with the related control accounts. INTERNAL CONTROL FOR PURCHASES: 1. Division of Work: Work relating to purchases should be divided among different departments. Thus purchases would involve the Purchase Department, the Stores and the Accounts Department. Even the work within a department should be further divided among different employees. Different persons should place purchase orders, receive goods and make payments to creditors.

2. Procedures: Purchase Department should invite tenders on the basis of purchase requisitions received
from the factory or stores. Material should be received in the godown and property inspected before acceptance. Payments should be made by the Account department only after verifying the Goods Received Note and the Inspection Report.

3. Cross-Checking : The work should be divided in such a way that the Purchase Orders, Goods Received

Note, Inspection Report etc. are prepared by different persons and are automatically checked by another employee. from time to time. They may be transferred to a different location.

4. Change in Duties: The duties of the concerned employees (purchase officer, storekeeper) should be rotated 5. Annual Leave: The concerned employees (especially the storekeeper) should be asked to go on leave at least
once every year, to enable detection of errors or frauds.

6. Access to Books: The Purchase Officer or Storekeeper should not have access to the books of account, such
as Purchase Journal or ledgers.

7. Proper Recording: All goods received should be properly recorded i.e. the right quantity should be entered,
against the right parry and on the right date, in the Goods Received Note, Purchase Invoice as well as the Stock Book.

8. Prompt Recording: The Goods Received Notes should be recorded in the Stock Book immediately. The

Purchase Invoices should be recorded in the Purchase Journal as soon as possible. The postings in the creditors ledger should also be in time. Thus the Stock Book, Purchase Journal and the Creditors Ledger should always be up-todate. management e.g. treatment of cut-off transactions, of shortages, of debit notes/credit notes, discounts etc.

9. Accounting Policies: The purchases should be recorded on the basis of the accounting policies adopted by the 10. Safeguarding: The stock in hand should be safeguarded i.e. kept in safe custody, stock in hand should be
verified regularly.

11. Errors and Frauds: Purchase Journal and Stock Books should be checked to detect errors in recording
purchases and goods received e.g. errors of commission, errors of omission or errors of principle etc. Stock Books should be frequently reconciled with the physical stocks to detect frauds e.g. misappropriation of goods by omitting receipt of goods etc.

12. Reconciliation and Confirmation: The Creditors accounts should be reconciled regularly. Confirmation of
balances should be obtained from them at least once during the year. INTERNAL CONTROL FOR CREDITORS: In addition to the points discussed above under Purchases, the following aspects of internal control on creditors should also be kept in mind: 1. Prompt Recording: The procedures should ensure prompt recording of the amounts due to creditors and the amounts paid to creditors.

2. Prompt Adjustment: The amount paid to a creditor should be promptly adjusted against the relevant bill.
Unadjusted amount should be reconciled regularly.

3. Age-wise Schedule: There should be a procedure for preparing age-wise schedule of creditors (e.g. Amount
Outstanding for 1 month, Outstanding for 2 months, Outstanding for 3 months and above etc.) The schedules should be reviewed by a senior officer.

4. Statements of Account: Statements of accounts should be prepared and sent periodically to all creditors.
They should be prepared by a person other than the ledger-keeper sent by yet another person. The creditors should be requested to check the statements with their own records. Creditors should be requested to confirm the balance or point out the differences, if any. The replies from creditors should be reviewed a senior manager. The differences pointed out by the creditors should be r econciled and adjusted in the accounts. allowances and rebates received, amounts not payable written back, etc. should be approved by a senior manager. the related control accounts. INTERNAL CONTROL FOR SALARIES AND WAGES: 1. Division of Work : Work relating to payment of salaries and wages should be divided among different employees. Different persons should employ the staff and workers, record the attendance, prepare the Pay Sheet, check the Pay Sheet, make the payment and record the entries.

5. Discount & Write-backs: All material adjustments in the creditors accounts such as discounts received, 6. Reconcile Control Accounts: There should be a system of periodic reconciliation-creditors' balances with

2. Procedure for Payment : The employees should sign on the Pay Sheet or Vouchers in acknowledgment of
payment received. Payment to representatives of absent employees should be made only after verifying their authorisation. If salaries are paid by cheques, they should be crossed "A/c Payee" to prevent misuse.

3. Cross-Check : The work should be divided in such a way that the Attendance Record, Pay Sheets, Cheques
and Vouchers prepared by one person (Security, Personnel Department, Cashier) are automatically checked by other persons (e.g. the book-keeper and the accountant).

4. Change in Duties: The Security Staff, the Personnel Staff and the Cashier should be changed from time to
time.

5. Annual Leave: The security staff and the cashier should be asked to go on leave at least once every year, to
enable detection of errors or frauds.

6. Access to Books: The Security staff should not have access to the Pay Sheets. The Personnel Staff or
Cashier should not have access to the books of account, such as cash book, bank book or ledgers.

7. Proper Recording: The attendance should be recorded in the Attendance Records properly. Mechanical
Time Clocks should be used to prevent errors and frauds. All payments should be properly recorded i.e. the right amount should be entered against the right employee and on the right date, in the Cheque Counter-foil, Payment Voucher as well as the Cash Book or the Bank Book.

8. Prompt Recording: The Attendance records should always be up-to-date. Pay Sheets should be prepared in
time. The payments should recorded in the Cash or Bank Book as soon as possible i.e. the Cash or Bank Book should be always up-to-date.

9. Accounting Policies: The payments should be recorded on the basis of the accounting policies adopted by
the management e.g. adjustment of staff loans and advances etc .

10. Safeguarding: The cheques signed but not handed over to the employees who may be absent should be kept
in safe custody. Such cheques or cash vouchers for unpaid salaries should be verified immediately after the 'pay-day'.

11. Errors and Frauds: Pay Sheets, Cash Book and Bank Book should be checked to detect errors in
recording payments of salaries and wages e.g. errors of commission, errors of omission or errors of principle etc. These books should be checked to detect frauds by inflating payments, by showing payments to dummy workers etc. Payment to dummy persons may be detected by checking the attendance record, making surprise checks on attendance, or by making payment only in the presence of the supervisor. INTERNAL CHECK: MEANING: 1. Dr. L. R. Dicksee: Internal Check is such an arrangement of book-keeping routine, that errors and frauds are likely to be prevented or discovered by the very operation of book-keeping system itself.

2. Inst. of C.A. of England and Wales: Internal Checks are checks on day to day transactions which
operate continuously as a part of routine system, whereby work of one person is proved independently or is complementary to the work of another, the object being prevention or early detection of errors and frauds. FEATURES: Thus Internal Check has the following features 1. Internal Check is part of the system of Internal Controls. 2. Internal Check is the system of allocation of responsibility and division of work. It is peculiar (special) arrangement of book-keeping routine. 3. The work is divided in such a way that the work of one employee is independently cross-checked with the work of other employees. It is a kind of Internal Audit carried out by the staff itself at the very stage of doing the work. 4. The work is divided in such a way that no employee has exclusive control over any transactions. A single employee deals with only one aspect and not the entire transaction. 5. Internal Check aims to detect and prevent errors and frauds. AUDITOR'S DUTY REGARDING INTERNAL CHECKS AAS 6 makes the following recommendations in this regard: 1. Responsibility of Management: Basically, the management is responsible for establishing and operating the Internal Checks.

2. Auditors Duty: The auditor's duty is to study the checks, verify whether the checks were actually in
operation and evaluate the checks to ascertain how much he can rely upon them.

3. Need for Evaluation: An auditor needs to evaluate the Internal Checks to ensure that they can prevent
and detect errors and frauds. Study of Internal Checks helps the auditor to decide what to check, when to check, how to check and how much to check. If the Internal Checks are reliable, he can use Test Checks and concentrate on only the important areas of audit.

4.

Steps in Evaluation: In order to evaluate the system of Internal Checks the auditor should take the
following steps -

a. Understand the System: In the first stage, the auditor should understand the system of Internal Checks. He
can trace a few transactions through the system to know the procedures. He can understand the system with the help of manuals, discussions with managers or the technique of Flow Charts. b. Test Application: He should verify whether such checks were actually applied in practice. He can verify some transactions in depth. He can use the technique of questionnaires to test the Internal Checks. c. Evaluate the System: He should judge, on the basis of above test etc., whether he can rely on the checks and if so to what extent. CONSIDERATIONS IN INTRODUCING CHECKS AND CONTROLS: The following aspects must be considered while introducing an effective system of I nternal Checks and Internal Controls on various transactions in an organisation. 1. Division of Work: Work of the entire organisation should be divided into different departments and sections. The work in a section should be divided among different employees. Different persons should deal with different aspects of a transaction.

2. Procedures and Documents: The procedures and documents (receipts, vouchers, challans, bills etc.) to be
prepared should be laid down precisely.

3. Cross-Check : The work should be divided in such a way that the documents prepared by one person are
automatically checked by other persons (e.g. the book-keeper and the accountant).

4. Change in Duties: The duties of the employees should be changed from time to time. This is a must in case
of employees handling cash, stock etc. to prevent misuse and frauds.

5. Annual Leave: The employees should be asked to go on leave at least once every year to enable detection of
errors, frauds and misuse.

6. Access to Books: All employees should not have access to books of Account. 7. Proper Recording: All transactions should be properly recorded i.e. the right amount should be entered,
against the right account and on the right date, in the Vouchers, the Journals or Ledgers.

8. Prompt Recording: The transactions should be recorded in the books promptly. Mechanical devices such as
Cash Registers, Time Clocks should be used to prevent errors and frauds. The records should always be up-to-date.

9. Accounting Policies: The transactions should be recorded on the basis of the accounting policies adopted
by the management e.g. treatment of revenue or capital expenses, depreciation etc.

10. Safeguarding: The assets like cash, stock etc. should be safeguarded i.e. kept in sa fe custody. These assets
should be adequately insured. Such assets should be verified regularly.

11. Errors and Frauds: The books should be checked to detect errors in recording transactions e.g. errors of
commission, errors of omission or errors of principle etc. The books should be checked to detect frauds.

12. Complete and Accurate: All records should always be complete and accurate, An effective system of
internal control on various transactions is described in detail below. Internal control Vs. Internal check: Internal control 1. It is the entire system of controls to carry on business efficiently. 2. It includes internal check as well as internal audit. 3. It is established by higher management at the planning stage. 4. It aims to prevent errors and frauds, as well as to detect them afterwards. Test check Vs. Internal check: Test check 1. It means checking less than 100% of the items. 2. Not all transactions are suitable for test checking. 3. Test checking is used by auditor. 4. Test checking aims to detect errors. INTERNAL AUDIT: MEANING:

Internal check 1. It is one of the internal controls which divides the work to help cross-checking. 2. It is a part of internal controls. 3. It is done by actual administrative staff during day-to-day operations. 4. It aims to prevent errors during the work itself.

Internal check 1. It is one of the internal controls which divides the work to help cross- checking. 2. All transactions should be subjected to internal check. 3. Internal check is used by the management / employees. 4. Internal check aims to prevent errors.

1. Prof. Meigs: Internal Auditing is a continuous, critical review of financial and other operating activities by a
staff of auditors, functioning as full time salaried employees.

2. AAS 7 issued by the Institute of Chartered Accountants of India (ICAI) defines Internal audit as follows: Internal
Audit is a separate component of Internal Control established to determine whether other Internal Controls are well designed and properly operated.

Thus- (1) Internal Auditing is normally done by the employees of the concern. (2) It is part of the system of
internal controls. (3) It is a critical review of other internal controls i.e. of (i) accounting controls and (ii) operational controls. (4) The review is done by normal auditing techniques such as vouching, verification etc. OBJECTIVES / IMPORTANCE: The scope and objectives of Internal Audit are:

1. Review of Accounting System and Internal Controls: Management is responsible for

establishing a reliable accounting system and internal controls. Management in turn expects the Internal Auditor to review the accounting system and Internal Controls, check that they are effective and suggest improvements.

2. Examination of Accounting Controls: Internal Auditor has to review the operations of Accounting
Controls to see that a. all transactions are duly authorised. b. all transactions are properly recorded. c. all transactions are recorded promptly as soon as they occur.

d. e. f. g. h.

the accounting policies adopted by the management are implemented. the assets of the concern are safeguarded. errors and frauds are prevented and detected. the books of accounts are complete and accurate. the final accounts are reliable and ready in time. Controls to see that the management policies in respect of the operations and administration of the concern are implemented. This ensures that the business is conducted in an orderly and efficient manner.

3. Examination of Operational Controls: Internal Auditor must review the working of the Operational

4. Physical Verification: Internal Auditor should physically verify the assets of the concern such as fixed
assets, cash, inventory etc. BASIC PRINCIPLES OF ESTABLISHING INTERNAL AUDIT : 1. Independent, High Status: The internal audit department should have an independent status in the organisation. The internal auditor must have sufficiently high status in the organisation. At times, he may be required to report directly to the Board of Directors.

2. Comprehensive Scope & Authority: The scope of internal audit department must be specified in a
comprehensive manner to the extent practicable. In fact the department must have authority to investigate from financial angle every phase of organisational activity under any circumstance.

3. Clear Objectives: It must have an unambiguous and clear understanding of the objectives on each
assignment given to it from time to time.

4. No Executive Functions: The internal audit department should not be involved in the performance of
executive actions.

5. Staffing: The management should take care in selecting the staff of the internal audit department. The size
and qualification of staff of the internal audit department should be commensurate with the size of the business organisation. In any case, the cost of internal audit department should not exceed the benefits to be derived from it.

6. Programme and Reporting: Programme of the internal audit should be time bound with the provision
for periodic reporting. The programme of the Internal audit should be so passed as to give a sufficient scope for the follow up action on the various points raised in its report.

7. Copy to Statutory Auditor: The copy of the report of the internal auditor should be made available to
the statutory auditor.

8. Follow-up: There must exist a specific procedure to follow up the report submitted by the internal audit
department. Internal audit Vs. External audit: Internal audit (IA) 1. Voluntary / compulsory: IA is voluntary. 2. Appointment: Internal auditor is appointed by management itself. 3. Status: Internal auditor is an employee of the concern. 4. Responsible & reports to: Internal auditor is responsible & reports to management. 5. Scope of duties: Management decides the scope of duties of internal auditor. It includes non-accounting

Statutory audit (SA) 1. SA is compulsory under law, e.g. under Companies Act. 2. Statutory auditor is appointed by the shareholders of a company. 3. Statutory auditor is an independent outside expert. 4. Statutory auditor is responsible and reports to shareholders. 5. Duties of statutory auditor are laid down by law (e.g. Companies Act), its scope limited

matters. 6. Removal: Internal auditor can be removed by the management on its own. 7. Objectives: IA aims to review the internal control system of the concern. 8. Period: IA is continuous. 9. Qualifications: No qualifications are prescribed by law for an internal auditor. 10. Liability for Negligence: Internal auditor is liable only to management and not to shareholders or third parties. Internal audit Vs. Internal check: Internal audit 1. Aims to determine whether other internal controls are working properly. 2. Part of internal control. 3. Separate staff is appointed to carry out internal audit. 4. Internal audit is done after the work is complete. 5. Internal audit may detect errors or frauds.

to accounting matters. 6. Statutory auditor can be removed by shareholders only if approved by Central Government. 7. SA aims to report to shareholders whether the accounts are true and fair. 8. SA is normally periodical or annual. 9. Qualifications are prescribed by law for a Statutory auditor. 10. Statutory auditor is liable to shareholders and in some cases to third parties also.

Internal check 1. Aims to distribute responsibilities and work to help cross-checking. 2. Part of internal control. 3. No separate staff is appointed to carry out Internal check. 4. Internal check is done during the work. 5. Internal check may prevent errors or frauds.

AUDIT IN DEPTH : Spicer and Pegler have defined Audit-in-depth or Detailed Audit as - "an audit which starts with books of prime
entry and ends with the balance sheet. The checking sequence is arranged in order of recording the transaction in the primary books."

Taylor and Perry have defined Auditing in Depth as: "the examination of the system applied within a business
entailing the tracing of certain transactions from their origin to their conclusion, investigating at each stage the records created and their authorisation. It is a method according to which a few selected transactions are subjected to a thorough scrutiny, in forming an opinion as regards the accuracy of the date so scrutinised." Audit in depth does not mean 100% checking. It is a detailed examination of the selected transactions from the beginning to the end. Thus, it is used along with test checking. For example, if the auditor has decided to check 25% of purchase transactions, these transactions should be checked in depth. Auditor should check the Purchase Requisition, Tenders, Purchase Orders, Purchase Bills, Goods Received Note, Inspection Note, Purchase Journal, Stock Register, Bin Card and so on. Thus, the auditor should check the purchase transaction right from the beginning to the end. Such examination-in-depth helps in tracing back the audit trail. This enables him to study and evaluate the accounting system and internal controls, and decide about further checking what, when how and how much to check. Thus, audit- in-depth is suitable in the case of the large concerns. EXERCISES: MULTIPLE CHOICE QUESTIONS 1. 'Audit Sampling' enables the auditor to _____audit evidence about some characteristic of the items selected. (a) Ignore (b) Obtain and evaluate (c) Manipulate (d) None of the above

2. When designing an audit sample, the auditor should consider (a) The specific audit objectives (b) The population from which the auditor wishes to sample (c) The sample size

(d) AH the above 3. The risk that, although the sample result does not support the auditor's assessment of control risk, the actual compliance
rate would support such an assessment, is known as (a) Risk of Over Reliance (b) Risk of Under Reliance (c) Risk of Incorrect Rejection (d) Risk of Incorrect Acceptance

4. The risk that, although the sample result supports the auditor's assessment of control risk, the actual compliance rate
would not support such an assessment is known as (a) Risk of Under Reliance (b) Risk of Incorrect Rejection (c) Risk of Incorrect Acceptance (d) Risk of Over Reliance

5. The risk that, although me sample result supports me conclusion that a recorded account balance or class of transactions
is materially misstated, in fact it is not materially mis-stated is known as(a) Risk of Incorrect Rejection (b) Risk of Over Reliance (c) Risk of Under Reliance (d) Risk of Incorrect Acceptance

6. The risk that, although the sample result supports the conclusion that a recorded account balance or class of
transactions is not materially mis-stated, intact it is materially misstated is known as(a) Risk of Over Reliance (b) Risk of Incorrect Acceptance (b) Risk of Under Reliance (d) Risk of Incorrect Rejectio n

7. The risk of over reliance and the risk of incorrect acceptance (a) Affect audit effectiveness (b) May lead to an erroneous opinion on the financial statements (c) Both (a) and (b) above (d) None of (a) or (b) above 8. The risk of under reliance and the risk of incorrect rejection (a) Affect audit efficiency (b) Lead to additional work being performed by the auditor, or me entity (c) Neither (a) nor (b) above (d) Both (a) and (b) above 9. Tolerable error is the _____error in the population that the auditor would be willing to accept, and still conclude that
the result from the sample has achieved the audit objective. (a) Minimum (b) Reasonable (c) Maximum (d) Insignificant

10. In substantive procedures, the tolerable error is the (a) Maximum rate of deviation from a prescribed account balance that the auditor would be willing to accept (b) Minimum monetary error in an account balance that the auditor would be willing to accept (c) Minimum rate of deviation from a prescribed account balance that the auditor would be willing to accept (d) Maximum monetary error in an account balance that the auditor would be willing to accept 11. In tests of control, the tolerable error is the (a) Maximum rate of deviation from a prescribed control procedure that the auditor would be willing to ignore (b) Minimum rate of deviation from a prescribed control procedure that the auditor would be willing to accept (c) Maximum rate of deviation from a prescribed control procedure that the auditor would be willing to accept (d) Minimum rate of deviation from a prescribed control procedure that the auditor would be willing to ignore
12. This method of selecting sample ensures that all items in the population have an equal chance of selection. (a) Random Selection (b) Systematic Selection (c) Haphazard selection (d) None of above 13. This method of sample selection involves selecting items using a constant interval between selections, the first interval having a random start. (a) Random Selection (b) Systematic Selection (c) Haphazard selection (d) None of the above

14. Letter of Weakness deals with weakness in

(a) Statutory Audit (c) Financial Position

(b) Internal Controls (d) None of the above

15. The following is suitable for test checking. (a) Opening and closing entries (b) Bank Reconciliation Statement (c) Transactions on which auditor must report under the Companies Act (d) Payments made by a bank, during audit of a bank 16. AAS which deals with Audit Sampling
(a) 15 (c) 7 (b) 6 (d) None of the above

17. Internal auditors are appointed by (a) Board of Directors in a Board meeting (b) Shareholders in annual general meeting (c) The management (d) The central government 18. What is the correct sequence of the following stages 1. Statutory Audit 2. Internal Audit 3. Internal Check (a) 1, 2, 3 (b) 2, 3, 1 (c) 3, 2, 1 (d) 3, 1, 2
FILL IN THE BLANKS: 1. _____ Checking means to select and examine a representative sample from a large number of similar items. 2. Opening and closing entries (are / are not) suitable for test checking. 3. Bank Reconciliation Statements (are / are not) suitable for test checking. 4. _____ Checking is the checking of totals and calculations etc. in subsidiary books, checking of posting into the ledger, etc. 5. Vide AAS 15, Audit _____ means the application of audit procedures to less than 100% of the items within an account balance. 6. The _____ is the entries set of data from which the auditor wishes to sample in order to reach a conclusion. 7. The individual items that make up the _____ are known as sampling units. 8. _____ error is the maximum error in the population that the auditor would be willing to accept, and still conclude that the result from the sample has achieved the audit objective. 9. The (Smaller/ greater) the tolerable error, the greater the sample size will need to be. 10. The smaller the tolerable error, the (smaller/ greater) the sample size will need to be. 11. In tests of control, the _____ error is the maximum rate of deviation from a prescribed control procedure that the auditor would be willing to accept. 12. The auditor should select sample items in such a way that the sample can be expected to be _____ of the population. 13. _____ method of selecting sample ensures that all items in the population have an equal chance of selection. 14. (Operational / Accounting) controls aim to ensure that the management policies in respect of the operations and administration of the concern are implemented. 15. _____ is a separate component of Internal Control established to determine whether other Internal Controls are well designed and properly operated. 16. The internal audit department (should be / should not be) involved in the performance of executive actions. 17. The copy of the report of the internal auditor (should be / should not be) made available to the statutory auditor. 18. The Inertnal Audit work (should be / should not be) planned in consultation with the external auditor. 19. Internal Auditor is appointed by the (management / shareholders). 20. Internal auditor can be removed by the (management / Central Government). 21. Division of work is an integral aspect of (internal check / test check). 22. In (routine check / internal check) the work is divided in such a way that the documents prepared by one person are automatically checked by other persons. 23. In (internal audit / internal check) the duties of the employees are changed from time to time. MATCH THE FOLLOWING:

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Column A AAS which deals with Audit sampling AAS which deals with study and evaluation of Internal Control AAS which deals with Internal Audit Accounting controls aim to ensure that Operational controls aim to ensure that Letter of weakness Operational control Report to shareholders Report to management System of allocation of responsibility

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l)

Column B Management policies in respect of the operations and administration of the concern are implemented AAS 15 Letter from audit assistant for sick leave Statutory auditor Internal check AAS 6 Budgetary control AAS 7 Accounting control The accounting policies adopted by the management are implemented From the auditor to the management regarding internal controls Internal Auditor

STATE WHETHER TRUE OR FALSE: 1. In test checking, the selection of sample depends upon the personal judgement of the auditor. 2. Test checking emphasises quantity rather than quality of checking. 3. Test checking does not reduce auditor's liability. 4. The higher the risk the auditor is willing to accept, the greater the sample size will need to be. 5. Tolerable error is the minimum error in the population that the auditor would be willing to accept, and still conclude that the result from the sample has achieved the audit objective. 6. Tolerable error is the maximum error in the population that the auditor would be willing to ignore, and still conclude that the result from the sample has achieved the audit objective. 7. Tolerable error is the reasonable error in the population that the auditor would be willing to accept, and still conclude that the result from the sample has achieved the audit objective. 8. The smaller the tolerable error, the greater the sample size will need to be. 9. Three methods of sampling commonly used are: (1) Random Selection (2) Simple Random Sampling and (3) Stratified Sampling. 10. Random Selection method of Sampling is known as Interval Sampling. 11. Systematic Selection may be of the following types - (i) Block Sampling (ii) Cluster Sampling. 12. Basically, the management is responsible for establishing and operating the Internal Control System. 13. The responsibility of the statutory auditor is to some extent reduced if he has relied upon the Internal Audit. 14. Internal auditor must be a qualified chartered accountant. 15. Once internal control system is implemented, there can be no fraud or error. 16. Internal control is part of the broader system of internal audit. 17. Separate staff is appointed to conduct internal checks. 18. Internal check is carried out after the work is done. 19. Internal check helps to prevent rather than detect errors. 20. An essential feature of internal check is that an employee has an exclusive control over a specific work without any fear of external check. 21. Internal Audit is done by actual administrative staff during day-to-day operations. 22. Internal audit is carried out during the work itself. 23. Internal audit helps to detect rather than prevent errors. 24. Internal auditor reports to the shareholders whether the internal controls are true and fair. 25. Statutory auditor reports to the management whether the internal controls are true and fair. 26. Internal auditor of a Company whose Managing Director committed a fraud is liable to the shareholders for negligence. 27. The rights and duties of internal auditor are laid down in the Companies Act. 28. Internal Auditor must be appointed as the Chairman of the Audit Committee of a public company as per s. 292A of the Companies Act. 29. Internal auditor is responsible for establishing the system of internal controls. 30. The first internal auditor must be appointed within 30 days of the incorporation of the company. 31. The internal auditor of a company must be appointed in the annual general meeting every year. 32. The internal auditor of a company must be appointed bypassing a special resolution. 33. If an internal auditor resigns, the casual vacancy must be filled in by passing a resolution in an extraordinary general meeting of the company. 34. The internal auditor must inform the registrar of companies of his appointment within 30 days.

35. A person who is indebted to the company for an amount exceeding Rs. 1,000 cannot be appointed as the 36. A relative of a director cannot be appointed as internal auditor of a company. 37. A shareholder of a company cannot be appointed as the internal auditor of the company. 38. Schedule VI to the Companies Act requires that the remuneration of internal auditor must be disclosed 39. Internal auditor has the right to attend the annual general meeting of the company u/s 231 of the Companies 40. Internal auditor cannot carry out internal audit of more than 20 concerns belonging to the group. 41. Internal auditors are appointed by the statutory auditors. 42. Auditor must do a 100% checking of all transactions and balances. 43. Statutory audit cannot start unless internal audit is complete.
CHECK YOUR ANSWERS: 1. Multiple choice questions: 1. (b) 4. (d) 7. (c) 2. (d) 5. (a) 8. (d) 3. (b) 6. (c) 9. (c) Act. separately in the final accounts of the company. internal auditor of the company.

10. 11. 12.

(d) (c) (a)

13. 14. 15.

(b) (b) (d)

16. 17. 18.

(a) (c) (c)

2. Fill in the blanks: (1) Test (2) are not (3) are not (4) Routine (5) Sampling (6) Population (7) Population (8) Tolerable (9) Smaller (10) Greater (11) Tolerable (12) Representative (13) Random (14) Operational (15) Internal Audit (16) should not be (17) should be (18) should be (19) Management (20) Management (21) Internal check (2 2) Internal check (23) Internal check.

3. Match the following:

(1) - (b); (2) - (f); (3) - (h); (4) - (j); (5) - (a), (6) - (k), (7) - (g), (8) - (d), (9) - (1), (10) (e)

4. True or False:

True: 1, 2, 3,8, 11, 12, 19, 23, False : 4,5,6,7,9,10,13,14,15,16,17,18,20,21,22,24,25,26,27,28,29,30,31, 32, 33, 34, 35, 36, 37, 38,39, 40,41, 42, 43

CH 4 VOUCHING OF INCOME AND EXPENDITURE

MEANING OF VOUCHING: Vouching is an important procedure for obtaining audit evidence. Normally, entries in the books of account are made on the basis of documentary evidence such as bills, receipts, cheque counter-foils, pay-in-slips, pay roll and so on. Such documentary evidence is called a voucher. Vouching means the critical examination of such vouchers. So, Vouching is the inspection of documents supporting an entry in accounts. DEFINITION OF VOUCHING: Prof. Dicksee has defined Vouching as comparing the entries in books of accounts with documentary evidence in support thereof. AIMS AND IMPORTANCE: Vouching is important as it achieves the following aims 1. TRUE AND FAIR: Vouching enables the auditor to ascertain whether the entries in the books are true and fair, which is the basic objective of auditing: Vouching provides audit evidence in respect of the following matters: 1) Occurrence: Vouching helps the auditor to ascertain whether the transaction actually occurred.

2) Amount: Vouching helps the auditor to check whether the transaction is recorded for the right amount. 3) Relevant Entries: Vouching helps the auditor to ascertain whether the entries recorded in the books are relevant i.e. they
relate to the concern and to the current accounting year. Through vouching, the auditor can ascertain whether the entries for income, expenses, assets or liabilities recorded in the books are relevant, i.e. they pertains to the current year.

4) As per Standards: Vouching enables the auditor to verify whether an item is accounted as per the recognised accounting
Standards, policies and practices.

5) As per Law: Vouching ensures that the transaction complies with the provisions of Law e.g. the Companies Act, the Incometax Act etc.

6) Disclosure: Vouching enables the auditor to ensure that an item is properly disclosed in the final accounts as required by
Schedule VI of the Companies Act, 1956.

2. ERRORS AND FRAUDS:

Another important objective of auditing is to detect errors and frauds in the accounts. Vouching helps an auditor to achieve this object also. Thus, vouching helps an auditor to detect errors in recording transactions e.g. errors of commission, errors of omission or errors of principle etc. Vouching ensures the arithmetical accuracy of books of accounts. Vouching also enables detection of frauds by manipulation of records. VOUCHERS, SUPPORTING DOCUMENTS AND ENTRIES:

1. Voucher: As soon as any transaction takes place, a voucher is prepared giving details of the transaction. Thus as soon as cash
is paid, a Cash Payment Voucher is prepared. The voucher is prepared on a printed form with the name of the concern printed on top. It contains details such as the Serial Number of Voucher, Date of Payment, Name of Payee, Head of Account to be debited, Description of Transaction, Amount etc. The Cash Payment Voucher is signed by the Payee to acknowledge receipt of cash, by the, authorised officer to indicate approval of payment and by the person preparing the voucher.

2. Supporting Documents: If there is any document to support the payment e.g. a bill from the supplier, it is attached
to the voucher as an evidence. The supporting documents may be external or internal. External documents are obtained from outsiders e.g. purchase bills, debit notes etc. Internal documents are prepared by the client himself (e.g. Pay Roll), which are not supported by any external evidence. According to AAS-5: (i) Documents provide more reliable evidence than oral explanations; (ii) Internal documents are more reliable when internal controls are strong; (iii) External documents are more reliable than internal documents.

3. Entries: The voucher is then passed on to the book-keeper to make an entry in the Cash Book. The Cash Book also contains
details such as Serial Number of Voucher Date of Payment, Name of Payee, Head of Account and Amount.

4. Missing Vouchers: 1. When no supporting documentary evidence for an entry in the accounts is available, it is noted down in the Audit 2. Some missing vouchers may be available in a separate file (e.g. agreements share certificates etc.) 3. If missing vouchers pertain to important transactions, it may indicate possibility of fraud [AAS 4]. 4. Such mere book entries, without supporting evidence, may be prejudicial to the interests of the company and hence 5. If the auditor doubts the genuineness of such transaction, he should qualify his audit report. If many or all vouchers
are missing (e.g. destroyed by flood or seized by Excise Dept. etc.), auditor should give a 'No opinion' report. POINTS TO BE CONSIDERED IN VOUCHING The following points should be noted or checked by the auditor in vouching: 1. Checking the Voucher 2. Checking the Supporting Documents and 3. Checking the Entry in the Books. required to be reported in the audit report u/s 227 (1A) (b) of the Companies Act. Note Book under a list of 'Missing Vouchers'.

1. CHECKING OF VOUCHER:
The auditor should see that the voucher shows the following details:

1) Name of the Concern: Name of the concern on top of the voucher is a proof that the transaction pertains to the client and not
to any other concern (e.g. another group concern).

2) Date of the Voucher: This is a proof that the transaction pertains to the current year and not to the earlier or the next year. 3) Serial Number of Voucher: This helps to cross-check that all transactions are properly recorded, i.e. no transaction is
omitted. The auditor can make a note of missing vouchers in the Audit File, to be checked later on.

4) Heads of Account Debited and/or Credited: This is the key aspect of vouching. The auditor should check whether the
head of account is correct according to the basic principles of accounting e.g. Debit the Receiver and Credit the Giver etc.

5) Description of transaction and Name of Parties Involved: This helps the auditor to understand the nature of the
transaction.

6) Amount in Figures and Words: The amount in words helps to prevent alteration of amount in figures. The amount should
tally with the amount as per the supporting sent.

7) Signature of Authorised Official: This proves that the transaction and the entry is valid. 8) Signature of Person Preparing the Voucher: This helps to fix the responsibility for any errors in the voucher. 9) Signature of Person Making Entry in the Day-book: This helps to fix the responsibility for any error in making the
entries.

10) Signature of the Payee: This is a proof that the amount was actually received by the payee. The payee should sign on a
revenue stamp, if the payment exceeds Rs.500. This helps to prevent misappropriation of cash.

2. CHECKING SUPPORTING DOCUMENTS:

Supporting external documents e.g. supplier's bill should be checked in respect of the following points:

1) Pertains to Client: The bill should be raised on the client and not on any other person or concern (e.g. director or
another group concern).

2) Pertains to Current Year: The date on a bill is a proof that the bill pertains to the current year and not to the earlier or the next
year.

3) Serial Number of Bill: This helps to cross-check the corresponding entry for payment in ledger account. It also helps to
detect entry of duplicate bill in the register.

4) Details of Transaction: The contents of the bill e.g. nature of items purchased helps the auditor to understand the transaction
and determine the proper head of account.

5) Quantity: The auditor should check that the quantity mentioned in the bill tallies with other documents such as Delivery
Challan, Excise Gate Pass, Octroi Receipt, etc. The quantity should also tally with the Goods Received Note prepared by the stores.

6) Amount: The auditor should carefully check that the amount as per the bill etc. tallies with the amount mentioned in the
voucher.

7) Signature of Party: The bill should be properly signed on behalf of the supplier, etc. This proves that it is a valid bill.

8) Approval of Bill: The bill should bear a stamp APPROVED showing that it is approved for payment by an authorised official
of the client. A purchase bill may bear a stamp RECEIVED of the Stores denoting receipt of goods. The bill after payment should also bear a stamp PAID to avoid duplicate payment.

3. CHECKING ENTRY IN BOOKS:

The auditor should check that the entry in books tallies with the voucher in the following respects:

1) Client's Books: The auditor should check that the books bear the name of the client on the first page. This is a
proof that the books pertain to the client and not to any other concern (e.g. another group concern).

2) Date of Entry: This is a proof that the entry was made on the same day as that of the voucher. This helps to prevent and detect
frauds in the nature of teeming and lading.

3) Serial Number of Voucher: The Books should have a column to indicate the serial number of vouchers. This helps to crosscheck that all vouchers are properly recorded i.e. no voucher is omitted. The auditor can make a note of missing vouchers or entries, in the Audit file, to be checked later on.

4) Heads of Account Debited and/or Credited: The auditor can check that the heads of accounts in the voucher and the
book are the same. This helps to detect errors of commission and omission i.e. wrong heads of account, omitting an account in the book, etc.

5) Quantity: The Quantity entered in the Stock Book should tally with the quantity mentioned in the bill and supporting
documents such as challan, gate pass, etc. This helps to prevent errors of commission or frauds (misappropriation of goods).

6) Amount: The amount in the book should tally with the amount in the voucher. This helps to ensure the arithmetical accuracy
of books i.e. to ensure that there are no errors of commission, omission, transposition of figures etc. in the books. AUDIT OF INCOME:

1. AUDIT OF RECEIPTS:
The auditor should vouch the receipts (in cash or by cheque) in the following manner

(A) Checking Voucher and Entry:

The auditor should check the receipt vouchers and the entries in Cash Book in the following respects-

1) Name of the Concern on top of the Vouchers and the Cash Book should be checked to confirm that the transactions pertain to
the client only.

2) Date of the Vouchers and date of entry in the Cash Book should be checked to confirm that both are the same and fall
within the current accounting year.

3) Serial Number of Vouchers should be continuous, i.e. no vouchers or entries should be missed out. 4) Heads of Account Credited: This is the key aspect of vouching the receipts. The auditor should check whether the head of
account is correct according to the basic principles of accounting e.g. classification of receipts into revenue and capital. The head of account should follow the classification prescribed by Schedule VI in case of a company. The head of account in the voucher and the book should be the same.

5) Narration or description of the transaction and names of parties involved: This helps the auditor to understand
why and from whom the amount is received.

6) Amount in Figures and Words: The amount in words should tally with the amount in figures and there should be no
alterations. The amount in the voucher should tally with the amount as per the supporting document and the amount entered in the Cash Book.

7) Signature of Authorised Official: This proves that the transaction and the entry is valid and genuine. 8) Signature of Person Preparing the Voucher: This helps to fix the responsibility for any errors in the voucher. 9) Signature of Person Making Entry in the Cash Book: This helps to fix the responsibility for any error in making the
entries.

10) Signature of the Receiver: This is a proof that the amount was actually received by the concern. The signature should be on
a revenue stamp, if the amount exceeds Rs.500. (B) Checking Supporting Documents: The following points should be checked in respect of the supporting documents (pay-in-slip, cash-memo etc.).

1) Pertains to Client: The document should pertain to the client and not to any other person or concern (e.g. director
or another group concern).

2) Date of Document: This is a proof that the transaction pertains to the current year and not to the earlier or next year. 3) Reference or Serial Number of Document: This helps in reconciliation of account with the party and to detect duplicate
entry in the register.

4) Details of Transaction: The contents of the document help the auditor to understand the transaction and determine the
proper head of account.

5) Amount: The auditor should carefully check that the amount as per the document tallies with the amount mentioned in the
voucher.

6) Signature of Party: The document should be properly signed on behalf of the party. This proves that it is a valid (genuine)
bill.

2. SALES (CREDIT AND CASH):

The auditor should check the following points while vouching the sales:

1) Supporting Documents: The Sales transactions should be supported by (1) Copy of the Cash Memo or Sales Bill
of the Client (2) Copy of the Delivery Challan, Excise Gate Pass (3) Transporter's Bill and Octroi Receipt, if paid by client. (4) In case of Exported items, Bill of Lading, Customs Duty Receipt and Bank Advice showing the remittance received in rupees after conversion of the foreign currency at exchange rate.

2) Name: Name of the Concern on the Sales Bills, on the Sales Register and in the Supporting Documents should be of the client. 3) Date: Date on the Sales Bill, in the Sales Register and in the Supporting Documents should tally and pertain to the current year. 4) Sr. No.: Serial Numbers on the Sales Bills should be continuous and tally with those in the Sales Register.

5) Amount: Amount in Figures and Words on the Sales Bill should be the same and tally with the amounts in the Sales Register
and the supporting documents.

6) Quantity: The quantity mentioned in the Sales Bills should tally with that in the supporting documents and the entry in Books. 7) Signatures on Bills: The Sales Bills should be signed by (a) an Authorised Official of the client to indicate approval, and (b)
the person preparing the Bills and by the person making entry in the Sales Register so as to fix the responsibility for any error.

8) Signature and Stamp of Party: The Receiver should have signed on a copy of the Bill and Delivery Challan as a proof that
the bill and the goods were actually received. Other supporting documents such as Transporters' Bill, Octroi Receipt etc. should also have the signature, stamp or seal of the concerned party to prove that they are genuine.

9) Errors and Frauds: Auditor should ensure that there are no errors of commission or omission. He should pay particular
attention to the cut-off transactions i.e. goods despatched though sales bill not yet raised or sales bill raised though goods are yet to be despatched.

10) Proper Accounting: Auditor should see that sales are properly accounted in the books. The gross amount in the sales bill
should be debited to the Debtors. The Net Sale value should be credited to the Sales A/c and the Sales Tax should be credited to the Sales Tax A/c.

11) Guidelines by ICAI: According to the Statement of Auditing Practices issued by the Institute of Chartered Accountants of Sales should include sales of all products manufactured by the company including by-products. No adjustments should be made in Sales Account which do not relate to Sales. Sales Tax or Excise should not be adjusted in Sales Account. Trade Discount can be deducted from Sales. Commission to agents on sales should not be deducted from Sales. 12) Comply with Companies Act - Sales to Related Concern: The sales should comply with the provisions of the
Companies Act. Thus, the sales made to a concern in which a director is interested should be sanctioned by a resolution of the Board of Directors (S. 297), and the sale contract should be entered in the Register of Contracts (S. 301). The auditor should verify the Minute Books and the Contract Register, for this purpose. India:

13) Disclosure Vide Schedule VI: The value and quantities of items sold should be disclosed as per the requirements of
Schedule VI. The details regarding earnings in foreign exchange from exports have to be disclosed separately.

14) Audit Report Under CARO 2003: a. Internal Controls: Under the Companies Act (CARO, 2003), the auditor has to report whether there are adequate internal
controls on sale of goods. Auditor should note down in the Audit File, his observations on this point, to be used for preparing the audit report.

b. Rates Charged to Group Concerns: The auditor has also to comment in his report, in case of sales to group concerns
whether (i) the transaction is recorded in the Register kept u/s 301 of the Companies Act, and (ii) whether the rates charged to such group concerns are reasonable or not with regard to the prevailing market prices at the relevant time. Auditor should make a note of the rates charged in his Audit File and compare them later with the market rates.

3. SALES ON APPROVAL:
The goods may be sold subject to inspection or installation or approval. In such cases, sale is to be booked only when the inspection or installation is complete and the buyer has accepted the goods. If the buyer has not formally sent a letter of acceptance, the sale can be booked if the buyer has not sent back the goods within a reasonable period.

4. CONSIGNMENT SALES:

When the goods are sent to an agent on consignment basis, sales should be booked only when the agent has actually sold the goods to a third party.

5. SALES RETURNS:
Auditor should vouch Sales Returns in the following manner: 1) Supporting Documents: The Sales Returns should be supported by - (1) Copy of Credit Note of the Client or Debit Note of the customer. (2) Copy of Delivery Challan, Excise Gate Pass of the customer. (3) Transporter's Bill and Octroi Receipt.

2) Name: Name of the Concern on the Credit Notes, on the Sales Return Register and in the Supporting Documents
should be of the client.

3) Date: Date on the Credit Notes, in the Sales Return Register and in the Supportin Documents should tally and
pertain to the current year.

4) Sr. No.: Sr. Numbers on the Credit Notes should be continuous and tally with those in the Books. 5) Amount: Amount in Figures and Words on the Credit Note should be the same and tally with the amounts in the Book and the
supporting documents.

6) Quantity: The quantity mentioned in the Credit Notes should tally with the supporting documents and the entry in Stock
Books.

7) Signatures on Credit Notes and GRN: The Credit Notes should be signed by an Authorised Official of the client to
indicate approval. Similarly the Goods Received Notes (GRN) should be signed by the Storekeeper to indicate receipt of goods.

8) Signature and Stamp of Party: The Customer should have signed on a copy of the Credit Note as a proof that the
Credit Note was actually received. Other supporting documents such as Transporter's Bill, Octroi Receipt etc. should also have the signature, stamp or seal of the concerned party to prove that they are genuine.

9) Errors and Frauds: Auditor should ensure that there are no errors of commission, omission etc. If the amount of sales returns
is heavy in the beginning of the year, it may indicate that fictitious sales were booked last year. Auditor should also carefully verify the sales returns from group concerns.

10) Proper Accounting: Auditor should see that the sales returns are properly accounted in the books. The gross value of goods
returned should be credited to the Debtors account. The Net Sales value should be debited to the Sales Account and the amount of Sales Tax should be debited to the Sales Tax Account. If the goods are returned because they are defective, the valuation of stocks should be made accordingly. The value and quantities of items returned should be deducted from the value and quantities of gross sales and need not be disclosed separately in the profit and loss account.

6. RECOVERY OF BAD DEBTS WRITTEN OFF:

Auditor should check the following points

1) Supporting Documents: The Bad debts recovered should be supported by- (1) Pay-in-slips for deposit in bank. (2) The debt
might have been written off because the debtor had become bankrupt (insolven). Subsequently the liquidator or official Receiver managing the debtor's property may give some amount to the creditors. Such amount is called dividend from the estate of the bankrupt person. In such case dividend warrant from the Official Receiver will be the supporting document. (3) The debt might be recovered in some cases by obtaining an order from the Court.

2) Date: Date on the Pay-in-slip, in the Bank Book and in the supporting Documents should tally and pertain to the
current year.

3) Sr. No.: Serial numbers on the Bank Receipt Vouchers should be continuous and tally with those in the Bank Book. 4) Amount: Amount in Figures and Words on the Bank Receipt Vouchers should be the same and tally with the amounts in the
Bank Book and the supporting documents.

5) Errors: Auditor should ensure that there are no errors of commission and omission, while recording the transaction. 6) Reconciliation: The bad debts recovered should be reconciled with the Debtor's Account and the entry passed in the earlier
year for writing off the debt.

7) Proper Accounting: The auditor should check whether the entry is correct according to the basic principles of accounting
e.g. recovery should be credited to the Profit and Loss Account or to the Reserve for Bad Debts Account etc.

8) Disclosure Vide Schedule VI: If the amount recovered is material, it should be disclosed separately. 7. RENTAL RECEIPTS:
Auditor should check the following points:

1) Supporting Documents: The rent received should be supported by - (1) Copies of Rent Receipts (2) Pay-in-slips for
deposits in bank Account. (3) Rent Agreement.

2) Name: Name of the Concern on the Rent Receipt, on the Rent Agreement, on the Bank Book and in the Pay-in-slip should be
of the client.

3) Date: Date on the Rent Receipt, in the Bank Book and in the Pay-in-slip should tally and pertain to the current year. 4) Sr. No.: Serial Numbers on the Rent Receipts and Bank Vouchers should be continuous and tally with those in the
Bank Book.

5) Amount: Amount in Figures and Words on the Bank Receipt Voucher should be the same and tally with the amounts in the
Bank Book and the Rent Receipt / Pay-in-slip.

6) Period: The period of occupation mentioned in the Rent Receipt should tally with the period mentioned in the Rent
Agreement.

7) Signatures: (a) The Rent Agreement and Rent receipts should be signed by an Authorised official of the client to indicate
approval (b) The Pay-in-slips and Bank Receipt Vouchers should be signed by the person preparing the documents and by the person making entry in the Bank Book so as to fix the responsibility for any error.

8) Errors: Auditor should ensure that there are no errors of commission or omission. He should pay particular attention to the
transaction close to the year-end, i.e. the cut-off and see that the amounts accrued or received in advance are properly adjusted.

9) Proper Accounting: The auditor should check whether the entry is correct according to the basic principles of accounting
e.g. rent in respect of vacant property is not as due.

10) Reconciliation: The rents should be reconciled with the details of property as per the Property Register maintained. 11) Disclosure Vide Schedule VI: Rent should be shown separately. 12) Income-tax Act: Under the Income-tax Act rent is taxed as Income from house property and not as business income.
Deduction for expenses is allowed on notional and not actual basis. The auditor has to note the effect of these provisions while ascertaining the amount of provision for income-tax in the accounts.

8. INTEREST RECEIVED: 1) Inspect the counterfoil or carbon copies when receipts are issued. Trace the same into the cash/bank book to
ascertain that entry has been passed for the correct amount. Trace entry into borrower's account from cash book.

2) Examine the agreement, if any, which may be in the form of a letter or even a receipt received from the borrower.
The receipt or the letter would normally mentioned the terms regarding interest.

3) If installments are also received alongwith interest, see that, only the interest element is credited to the interest
account.

4) In case of companies, see whether the interest and principal are regularly recovered on due dates. If not, report the
same in audit report to shareholders pursuant to CARO, 2003.

5) In case of companies, see whether loans given to other companies are at rate of interest not less than the bank rate as per section
372A of the Companies Act, 1956.

6) In case of companies, see whether rate of interest charged on loans to parties listed in S. 301 register, and on loans given on the
basis of security are prejudicial to the interests of company as required by CARO, 2003.

7) If interest is received net of TDS, see that interest is shown in the accounts gross of TDS so that the amount of TDS is shown as
advance tax. See that the TDS certificates are received.

8) Obtain the schedule of loans and advances. With reference to the schedule, ensure interest is received on all loans and advances
on which interest is receivable. If it is not received on any such loan, make enquiries. If received, but entry is omitted, entry should be made. If outstanding, see that accrued interest is brought into account. If doubtful of recovery, suitable provision should be made.

9. DIVIDENDS RECEIVED:
Auditor should check the following points:

1) Supporting Documents: The dividend received should be supported by- (1) Counterfoils of Dividend Warrants, (2)
Pay-in-slips for deposits in bank Account and (3) Bank Receipt Voucher.

2) Name: Name of the Concern on the Dividend Warrants, on the Bank Book and in the Pay-in-slips should be of the
client.

3) Date: Date on the Pay-in-slip, in the Bank Book and in the Dividend Warrant should tally and pertain to the current
year.

4) Sr. No.: Serial Number on the Bank Receipt Vouchers should be continuous and tally with those in the Bank Book.

5) Amount: Amount in Figures and Words on the Pay-in-slip should be the same and tally with the amounts in the Bank Book and
the Dividend Warrant.

6) Errors and Frauds: Auditor should ensure that there are no errors of commission or omission. He should pay particular
attention to the dividend warrants received close to the year-end.

7) Accounting Principles and Practice: The auditor should check whether the entry is correct according to the basic
principles of accounting. Thus, the Bank Account should be debited and the Dividend received account should be credited for the amount of dividends received. Further, the entry in respect of dividends on shares purchased or sold ex-dividend or cumdividend should be passed properly.

8) Comparison with Investment Register: The dividends should be reconciled with the details of investments in the
Investment Register maintained as per the requirement of the Companies Act in case of a company.

9) Disclosure Vide Schedule VI: Dividends from trade investments and other investments should be shown separately.
Dividends from subsidiaries should be disclosed separately. The gross amount of dividend and the amount of tax deducted at source should be shown distinctly.

10) Income-tax Act: Under the Income-tax Act dividends from Indian Companies are exempt from tax. The auditor has to note
the effect of these provisions while ascertaining the amount of provision for income-tax in the accounts.

10. ROYALTIES RECEIVED: 1) Check Royalty agreement and provisions for calculating the royalty. 2) Check correspondence with the party. 3) Check calculations for the royalty received. 4) Check provisions as regards recovery of short working (e.g. in case of mines leased). See that provision as regards 5) Check counterfoils or carbon copies of the receipts issued, with the cash book.
AUDIT OF EXPENDITURE: short working recoverable by Licensee is made.

1. AUDIT OF PAYMENTS:
The auditor should vouch the payments (in cash or by cheque) in the following manner-

(A) Checking Voucher and Entry:

The auditor should check the cash payment vouchers (debit vouchers) and the entries in Cash Book in the following respects

1) Name of the Concern on top of the Vouchers and the Cash Book should be checked to confirm that the transactions pertain
to the client only.

2) Date of the Vouchers and date of entry in the Cash Book should be checked to confirm that both are the same and fall
within the current accounting year.

3) Serial Number of Vouchers should be continuous, i.e. no vouchers or entries should be missed out. 4) Heads of Account Debited: This is the key aspect of vouching the cash payments. The auditor should check whether the
head of account is correct according to the basic principles of accounting e.g. classification of payment into revenue and capital, etc. The head of account should follow the classification prescribed by Schedule VI in case of a company. The head of account in the voucher and the book should be the same.

5) Narration or description of the transaction and names of parties involved: This helps the auditor to understand
why and to whom the payment is made.

6) Amount in Figures and Words: The amount in words should tally with the amount in figures and there should be no
alterations. The amount in the voucher should tally with the amount as per the supporting document and the amount entered in the Cash Book. The Income-Tax Act disallows 20% of a payment in cash exceeding Rs20,000 for expenses. The auditor should make a note in his Audit file of such payment to be used for calculating the provision for Income-Tax.

7) Signature of Authorised Official: This proves that the payment transaction and the entry is vaid and genuine. 8) Signature of Person Preparing the Voucher: This helps to fix the responsibility for any errors in the voucher. 9) Signature of Person Making Entry in the Cash Book: This helps to fix the responsibility for any error in making the
entries.

10) Signature of the Payee: This is a proof that the amount was actually received by the payee. The payee should have signed
on a revenue stamp, if the sum exceeds Rs.5,000. (B) Checking Supporting Documents: The following points should be checked in respect of the supporting documents (bills, etc.)

1) Pertains to Client: The bill should pertain to the client and not to any other person or concern (e.g. director or
another group concern).

2) Date of Document: This is a proof that the bill pertains to the current year and not to the earlier or next year. 3) Reference or Serial Number of Document: This helps in reconciliation of account with the party and to detect
duplicate entry in the register.

4) Details of Transaction: The contents of the bill help the auditor to understand the transaction and determine the
proper head of account.

5) Amount: The auditor should carefully check that the amount as per the bill tallies with the amount mentioned in the voucher. 6) Signature of Party: The bill should be properly signed on behalf of the party. This proves that it is a valid (genuine) bill. 2. PURCHASES (CREDIT AND CASH):
The auditor should vouch the purchases in the following manner

1) Supporting Documents: The Purchases should be supported by - (1) Purchase Vouchers (2) Cash memo or Bill of
the supplier (3) Delivery Challan, Excise Gate Pass of the Supplier (4) Transporter's Bill and Octroi Receipt (5) Goods Received Note and Inspection Report (6) In case of Imported items, Import Licence, Bill of Entry, Customs Duty Receipt and Bank Advice showing the payment in rupees after conversion at exchange rate.

2) Name: Name of the concern on the Purchase Bills, on the Purchase Register and in the Supporting Documents
should be of the client.

3) Date: Date on the Purchase Bills, on the Purchase Register and in the Supporting Documents should tally and pertain to the
current year.

4) Sr. No.: Serial Numbers on the Purchase Vouchers should be continuous and tally with those in the Purchase Register. 5) Amount: Amount in Figures and Words on the Purchase Voucher should be the same and tally with the amounts in the
Purchase Register and the supporting documents.

6) Quantity: The quantity mentioned in the Purchase Bills should tally with the supporting documents i.e. the delivery challan,
transporter's bill, octroi receipt, the Goods Received Note, the Inspection Note and the entry in Stock Books.

7) Signature on Vouchers and GRN: The Purchase vouchers should be signed (a) by an Authorised Official of the client to
indicate approval; (b) by the person preparing the Vouchers and by the person making entry in the Purchase Register so as to fix the responsibility for any error. The Goods Received Note and the Inspection Note should also be similarly signed.

8) Signature and Stamp of Party: The Purchase BUI should have the signature and stamp or seal of the supplier. Other
supporting documents such as Transporter's Bill, Octroi Receipt etc. should also have the signature, stamp or seal of the concerned party to prove that they are genuine.

9) Errors and Frauds: Auditor should ensure that there are no errors of commission or omission. He should pay particular
attention to the transactions close to the year-end, i.e. the cut-off date to see that goods received but not billed and bills received without receiving the goods are properly adjusted in the books.

10) Reconciliation: Auditor should reconcile the raw materials stock account i.e. Opening Stock + Purchase - Consumption =
Closing Stock. He should also check that consumption of raw materials tallies with the production of finished goods.

11) Payment to Related Concern: The auditor should verify whether the provisions of the Companies Act are complied with.
Thus, if the purchases are made from a concern in which a director is interested, they should be sanctioned by a resolution of the Board of Directors (S.297), and the purchase contract should be entered in the Register of contracts (S.301). The auditor should verify the Minute Books and the Contract Register.

12) Disclosure Vide Schedule VI: The value and quantities of items purchased should be disclosed as per the requirement of
Schedule VI. The details regarding imported items have to be disclosed separately.

13) Audit Report Under CARO 2003: a. Internal Control: Under the CARO, 2003 auditor has to report whether there is an adequate internal control system for the
purchase of raw materials, stores etc. Auditor should note down in his Audit File his observations on the internal control system, while vouching the purchase transactions, to be used for preparing the audit report.

b. Rates Charged By Group Concerns: The auditor has also to comment in his report, in case purchases are from group
concerns whether (i) the transaction is recorded in the Register kept u/s 301 of the Companies Act, and (ii) whether the rates charged by such group concerns are reasonable or not with regard to the prevailing market prices at the relevant time. Auditor should make a note of the rates charged in his Audit File and compare them later with the market rates. 14) Income-tax Act: The income-tax Act disallows 100% of amounts paid in cash exceeding Rs.20,000 at a time. The auditor should check whether any single cash memo for cash purchase exceeds Rs.20,000. Such Cash memos have to be considered while determining the amount of provision for income-tax in the accounts.

3. PURCHASE RETURNS:
The auditor should vouch purchase returns in the following manner

1) Supporting Documents: The Purchase Returns should be supported by - (1) Copy of Debit Note of the Client or
Credit Note of the supplier (2) Copy of Delivery Challan, Excise Gate Pass of the client (3) Transporter's Bill and Octroi Receipt.

2) Name: Name of the Concern on the Debit Note, on the Debit Note Register and in the Supporting Documents should be of the
Client.

3) Date: Date on the Debit Note, in the Debit Note Register and in the supporting Documents should tally and pertain to the
current year.

4) Sr. No.: Serial Numbers on the Debit Notes should be continuous and tally with those in the Debit Note Register. 5) Amount: Amount in Figures and Words on the Debit Notes should be the same and tally with the amounts in the Register and
the supporting documents.

6) Quantity: The Quantity mentioned in the Debit Notes should tally with the Supporting documents and the entry in Stock
Books.

7) Signatures: The Debit Notes should be signed (a) by an Authorised Official of the client to indicate approval (b) by the
person preparing the Debit Note and by the person making entry in the Debit Note Register so as to fix the responsibility for any error.

8) Signature and Stamp of Party: The Supplier receiving the goods back, should have signed on a copy of the Debit Note and
Delivery challan as a proof that the Debit Note and the goods were actually received. Other supporting documents such as Transporters Bill, Octroi Receipt etc. should also have the signature, stamp or seal of the concerned party to prove that they are genuine.

9) Errors and Frauds: Auditor should ensure that there are no errors of commission or omission. He should pay
particular attention to the transactions close to the year-end, i.e. the cut-off date to see that goods returned for which debit notes are yet to be raised or debit notes raised for which goods are yet to be returned are properly adjusted. If the amount of purchase returns is heavy in the beginning of the year, it may indicate that fictitious purchases were booked last year. Auditor should also carefully verify the purchases returns to group concerns.

10) Reconciliation: The quantity of goods returned should be reconciled while reconciling the Raw Materials Quantity.
The Debit notes should be reconciled while reconcilng the creditors' accounts.

11) Disclosure: The value and quantities of items returned should be deducted from the value and quantities of gross purchases and
returns need not be disclosed separately.

4. SALARIES AND WAGES:

The auditor should vouch the amount of salaries and wages in the following manner:

1) Supporting Documents: Salaries and Wages payments should be supported by - (1) Pay Roll or Wage sheets (2)
Attendance and Personnel Records (3) Statutory Returns filed with Provident Fund, Income-tax etc. (4) Cheque Counter-foils.

2) Pertains to Client: The Pay Rolls etc. should pertain to the client and not to any other concern. 3) Pertain to Current year: The salaries and wages should pertain to the current accounting year and not to the earlier or next
year.

4) Details of Payment: The contents of the Pay Roll, Wage sheets, Statutory Returns etc. should be checked in the following
respectsa. Amount: The auditor should carefully check that the amount as per the Pay Roll, etc. tallies with the amount mentioned: in the voucher. b. Computation: The amount of gross salaries or wages should tally with the Attendance Record or the Personnel Record. The Attendance Records show the number of days an employee was present or on leave. The personnel records show the Basic Salary, Allowances etc. due to each employee. Auditor can check the computations on a sample basis. He should also check the calculations in respect of the deductions from salaries such as Provident Fund, Income-tax etc. He should cross-check that these deductions in the Pay Roll tally with the returns filed with the Provident Fund, etc. He should also check the totals, the cross- totals, carryforwards and castings. c. Signature of Receiver: The employees should have signed in the Pay Roll against their names on a revenue stamp to acknowledge receipt.

5) Accounting Principles and Practice: The auditor should check whether the entry is correct according to the basic
principles of accounting e.g. Gross Amount of Salaries and Wages should be debited to Salaries and Wages Account. The amounts of deduction should be credited to the respective accounts such as Provident Fund, Income-tax, and the net payments should be credited to Cash or Bank Account.

6) Disclosure Vide Schedule VI: Salaries and Wages should be disclosed separately in the profit and loss account and
classified as prescribed under Schedule VI. The Profit and Loss account should also disclose by way of a note the amount paid to employees earning Rs.1,00,000 or more per month. Remuneration to directors should be disclosed separately and should be within the limits prescribed under the Companies Act.

5. RENT:
Auditor should check the following points:

1) Supporting Documents: The rent paid should be supported by - (1) Copies of Rent Receipts from the landlord (2) Payment
vouchers (3) Rent Agreement.

2) Name: Name of the Concern in the Rent Receipt, in the Rent Agreement, in the Bank Book and in the Payment voucher should
be of the client.

3) Date: Date on the Rent Receipt, in the Bank Book and in the Payment voucher should tally and pertain to the current year. 4) Amount: Amount in Figures and Words on the Bank Payment Voucher should be the same and tally with the amounts in the
Bank Book and the Rent Receipt.

5) Period: The period of occupation mentioned in the Rent Receipt should tally with the period mentioned in the Rent
Agreement.

6) Signatures: (a) The Rent Agreement should be signed by an Authorised official of the client to indicate approval (b) The Rent
receipts should be signed by an Authorised official of the landlord which will indicate that it is genuine, (c) The Payment Vouchers should be signed by the person preparing the documents and by the person making entry in the Bank Book so as to fix the responsibility for any error.

7) Errors: Auditor should ensure that there are no errors of commission or omission. He should pay particular attention to the
transaction close to the year-end, i.e. the cut-off date and see that the amounts accrued or received in advance are properly adjusted.

8) Disclosure Vide Schedule VI: Rent paid should be shown separately.

6. INSURANCE PREMIUM:
Auditor should check the following points:

1) Supporting Documents: The insurance premium paid should be supported by- (1) Copies of Receipts from the
Insurance Company (2) payment vouchers (3) Insurance Policy.

2) Name: Name of the Concern in the Premium Receipt, in the Insurance Policy, in the Bank Book and in the Payment
voucher should be of the client.

3) Date: Date on the Premium Receipt, in the Bank Book and in the Payment Voucher should tally and pertain to the
current year.

4) Amount: Amount in Figures and Words on the Bank Payment Voucher should be the same and tally with the
amounts in the Bank Book and the Premium Receipt.

5) Period: The period of insurance mentioned in the Premium Receipt should tally with the period mentioned in the Insurance
Policy.

6) Signatures: (a) The Insurance Policy should be signed by an Authorised official of the client to indicate approval,
(b) The Insurance Policy should be signed by an Authorised official of the Insurance Company which will indicate that it is genuine. (c) The Payment Vouchers should be signed by the person preparing the documents and by the person making entry in the Bank Book so as to fix the responsibility for any error.

7) Errors: Auditor should ensure that there are no errors of commission or omission. He should pay particulars attention to the
transaction close to the year-end, i.e. the cut-off date and see that the amounts accrued or received in advance are properly adjusted.

8) Disclosure Vide Schedule VI: Insurance paid should be shown separately. 7. TELEPHONE EXPENSE:
Auditor should check the following points:

1) Supporting Documents: The telephone expenses paid should be supported by - (1) Copies of Bills from the
Telephone Company (2) Payment vouchers.

2) Name: Name of the Concern in the Telephone Bill, in the Bank Book and in the Payment voucher should be of the
client.

3) Date: Date on the Telephone Bill, in the Bank Book and in the Payment voucher should tally and pertain to the
current year.

4) Amount: Amount in Figures and Words on the Bank Payment Voucher should be the same and tally with the
amounts in the Bank Book and the Telephone Bill.

5) Period: The period mentioned in the Telephone Bill should pertain to the current accounting year. 6) Signatures: (a) The Telephone Bill should be signed by an Authorised official of the client to indicate approval for payment,
(b) The Telephone Bill should be signed by an Authorised official of the Telephone Company which will indicate that it is genuine, (c) The Payment Vouchers should be signed by the person preparing the documents and by the person making entry in the Bank Book so as to fix the responsibility for any error.

7) Errors: Auditors should ensure that there are no errors of commission or omission. He should pay particular attention to the
transaction close to the year-end, i.e. the cut-off date and see that the amounts accrued or received in advance are properly adjusted.

8) Disclosure Vide Schedule VI: Telephone expenses paid may be shown separately, if the amount is material or pertains to
the directors.

8. POSTAGE AND COURIER:

Auditor should check the following points:

1) Supporting Documents: The postage and courier expenses paid should be supported by - (1) Copies of Bills from the Post
Office / Courier Company (2) Payment vouchers.

2) Name: Name of the Concern in the Bills, in the Bank Book and in the Payment voucher should be of the client. 3) Date: Date on the Courier Bill, in the Bank Book and in the Payment Voucher should tally and pertain to the current year. 4) Amount: Amount in Figures and Words on the Bank Payment Voucher should be the same and tally with the amounts in the
Bank Book and the Courier Bill.

5) Period: The period mentioned in the Courier Bill should pertain to the current accounting year. 6) Signatures: (a) The Courier Bill should be signed by an Authorised official of the client to indicate approval for payment, (b)
The Courier Bill should be signed by an Authorised official of the Courier Company which will indicate that it is genuine, (c) The Payment Vouchers should be signed by the person preparing the documents and by the person making entry in the Bank Book so as to fix the responsibility for any error.

7) Errors: Auditor should ensure that there are no errors of commission or omission. He should pay particular attention to the
transaction close to the year-end, i.e. the cut-off date and see that the amounts accrued or received in advance are properly adjusted. He should see that postage stamps purchased in cash are properly recorded in the Postage register. He should ensure that the closing stock of stamps in hand is adjusted in the books.

8) Disclosure Vide Schedule VI: Postage and Courier expenses paid may be shown separately, it the amount is material. 9. PETTY CASH EXPENSES: 1) Trace the amounts advanced to the petty cashier for meeting petty expenses from the Cash Book in the Petty Cash
Book.

2) Vouch payments with docket vouchers which must be supported, wherever possible, by external evidence e.g.,
payee's receipted bill or invoices, cash memo, etc.

3) Trace payments made for the purchase of postage stamps recorded in the Postage Book. The totals of the Postage
Book should be test checked. The amounts of postage stamps in hand, at the end of the year, should be credited to Postage Account by debiting the amounts to Postage in Hand Account. It should be seen that the amount paid for postage stamps is not unduly large and the postage Book is normally checked by the petty cashier from time to time before the amount of imprest is reimbursed.

4) See, where a columnar Petty Cash Book is maintained, that the extension have been carried forward into
appropriate amount columns.

5) Check the column totals and cross totals. 6) Trace posting of the various columns in which payments are classified to the respective ledger accounts. 10. TRAVELLING:
Auditor should vouch the Travelling Expenses in the following manner:

1) Supporting Documents: The travelling expenses should be supported by - (1) Ticket for journey by rail, air etc. (2)
Bills for lodging and boarding in Hotels. (3) Statement of other expenses like conveyance, phone etc. (4) Sanction of Reserve Bank of India for expenses in foreign currencies.

2) Pertains to Client: The document should pertain to the client and not to any other concern (e.g. another group
concern).

3) Date of Document: The travelling should have occurred during the accounting year and not pertain to the earlier or next year. 4) Details of Travelling: The contents of the tickets, hotel bills and statements should be checked to understand the purpose of
travelling and determine the proper head of account. If the travelling appears to be for personal purpose, it should be recovered from the concerned person or director.

5) Amount: The auditor should carefully check that the amount as per the ticket, hotel bills, statement etc. tallies with the amount
mentioned in the voucher.

6) Period: If the Payment is in the nature of a fixed travelling allowance per day, the period of travel should be
computed.

7) Valid Documents: The tickets, hotel bills should be genuine and valid. 8) Accounting Principles and Practice: The auditor should check whether the entry is correct according to the basic
principles of accounting e.g. classification of travelling expenses into pre-paid or current expenses.

9) Disclosure Vide Schedule VI: If the travelling expenses are material (i.e. exceed 1% of the turnover ), they should
be disclosed separately. Directors' travelling expenses should be disclosed separately, whatever the amount involved. Travelling expenses in foreign currency should be disclosed by way of notes to account.

10) R.B.I. Sanction: Travelling expenses in foreign currencies must be sanctioned by the Reserve Bank of India. Auditof should
check the sanction given by the Reserve Bank of India for release of foreign exchange. He should also check the statement subsequently submitted to the Reserve Bank of India. 11. COMMISSION:

1) Ascertain agreement, if any, in respect of sales transaction actually occurred during the year carried out by
authorized parties on its behalf. If yes the commission should be in accordance with the terms and conditions as specified.

2) Check evidence of services rendered by the party to whom commission is paid with reference to correspondence
etc.

3) Ensure that the sales in fact have taken place and the same has been charged to profit and loss account. 4) Compare the amount incurred in previous years with reference to total turnover.
12. ADVERTISING: The auditor should vouch the amount of advertising expenses in the following manner:

1) Supporting documents: The advertisement payments should be supported by - (1) Bill of the advertising Agency (2) Proof
that the advertisement appeared in the Newspaper, Magazine, television etc. (3) contract with the agency containing terms and conditions.

2) Pertains to Client: The document should pertain to the client and not to any other concern (e.g. director or another group
concern).

3) Date of Document: The advertisement should have appeared during the accounting year and not pertain to the earlier or next
year.

4) Details of Transaction: The contents of the advertisement, contract etc. should be checked to understand the nature of
advertisement and determine the proper head of account.

5) Amount: The auditor should carefully check that the amount as per the bill tallies with the amount mentioned in the voucher. 6) Quantity: If the payment pertains to purchase of gift articles, sales promotion material etc. the auditor should check that the
quantity mentioned in the bill tallies with the quantity in the delivery challan, gate pass, transporter's bill, and lastly with the Goods Received Note and Inspection Note of the Client.

7) Signature and Stamp of Party: The Bill, delivery challan, etc. should be properly signed and stamped on behalf of the
party. The Goods Receipt Note should be signed and stamped by the Store-keeper. The Inspection Note should be signed and stamped by the Inspector.

8) Accounting Principles and Practice: The auditor should check whether the entry is correct according to the basic
principles of accounting e.g. classification of heavy advertisement expenses into revenue and deferred revenue expenditure, prepaid and outstanding expenses etc.

9) Payment to Related Concern: The expenses should be accounted as per the requirement of the Companies Act in case of a
company. Thus, if the payment is made to an advertising agency in which a director is interested, it should be sanctioned by a resolution of the Board of Directors (S.297), and the contract should be entered in the Register of contracts (S.301). The auditor should verify the Minute Books and the Contract Register. The auditor has to comment in his report, in case such advertisements expenses exceed Rs. 50,000 during the year, whether the rates charged by such advertising agency are reasonable or not. Auditor should make a note of the rates charged in his Audit File and compare them later with the market rates.

10) Disclosure Vide Schedule VI: If the advertisement expenses are material (i.e. exceed 1% of the turnover), they should be
disclosed separately. Deferred Advertisement Expenses should be disclosed under "Miscellaneous Expenditure" in the Balance Sheet.

11) Income-tax Act: The Income-tax Act disallows payment on advertisement in a souvenir of a political party. The auditor has
to note the effect of these provisions while verifying the amount of provision for income-tax in the accounts.

12) Other Related Matters: The contents of the advertisement help the auditor to verify other related matters e.g. whether
advertisement inviting public deposits or containing features of prospectus under the provisions of the Companies Act is proper or not.

13. INTEREST EXPENSE: 1) Inspect the receipts obtained from the receiver (lender). Trace the same into cash / bank book to ascertain that
entry has been passed for the correct amount. Trace entry into lender's account from cash book.

2) Examine the agreement, if any, which may be in the form of a letter or even a receipt issued to the lender. The
receipt or the letter would normally mention t regarding interest.

3) If instalments are also paid along with interest, see that only the interest element is debited to the interest account. 4) In case of interest on public deposits, see that directives of the RBI and provision of S. 58A and 58AA of the
Companies Act are complied with.

5) Default in payment of interest / instalment on loans due to a financial institution, bank, etc. is to be reported vide
CARO, 2003.

6) If interest is paid net of TDS, see that interest is shown in the accounts gross of TDS so that the amount of TDS is
shown as payable. See that the TDS certificates are given in time.

7) Obtain the schedule of loans and advances taken. With reference to the schedule, ensure interest is paid on all
loans and advances on which interest is payable. If it is not paid on any such loan, make enquiries. If paid, but entry is omitted, entry should be made. If outstanding, see that accrued interest is brought into account. EXERCISES

1. MULTIPLE CHOICE QUESTIONS:

1. The following points should be noted or checked by the auditor in vouching: (a) Checking the Voucher (b) Checking the Supporting Documents (c) Checking the Entry in the Books (d) All the above 2. Checking serial no. of vouchers during vouching helps the auditor to (a) Detect errors of principle (b) Detect errors of omission (c) Detect compensating errors (d) None of the above 3. Checking the head of account debited or credited during vouching helps the auditor to (a) Detect errors of principle (b) Detect errors of omission (c) Detect compensating errors (d) None of the above 4. Checking the amount in words during vouching of cash transactions helps the auditor to (a) Detect errors of principle (b) Detect errors of commission (c) Detect misappropriation (d) None of the above 5. Verifying the signature of the authorised official on the voucher during vouching helps the auditor to check the (a) Occurrence of the transaction (b) Validity of the transaction (c) Amount of the transaction (d) Period of the transaction 6. Checking the serial no. of vouchers on the voucher during vouching helps the auditor to obtain evidence that

(a) (b) (c) (d)

The transaction took place There are no unrecorded transactions The transaction is recorded in the books on the right date The transaction is valid

7. Checking the date of voucher on the voucher during vouching mainly helps the auditor to obtain evidence that (a) The transaction relates to current year (b) The transaction is legal (c) All the transactions are recorded in the books (d) Transactions take place every day 8. Verifying the signature of the person preparing the voucher helps the auditor to (a) Fix responsibility for errors in making entry of the voucher (b) Fix responsibility for errors in preparing the voucher (c) Ensure that the voucher is posted in the ledger (d) Ensure that the voucher has proper supporting documents 9. Checking the signature of the payee during vouching of cash payments helps the auditor to (a) Verify that the payment is properly authorised (b) Verify that the cheque was signed by an authorised person (c) Verify that the cash received is acknowledged (d) Identify from whom cash was received 10. Serial no. of supporting bill from supplier attached with a voucher helps the auditor to (a) Detect entry of duplicate bill in the register (b) Verify that all the bills are entered serially (c) Verify that all the vouchers are entered serially (d) None of the above 11. Verifying the signature on the supporting purchase bill attached to a voucher helps the auditor to (a) Identify the person who received the payment for the bill (b) Fix responsibility for errors in preparing the bill (c) Identify the person who made the payment for the bill (d) Prove that the bill is genuine and valid 12. Checking the date of entry of voucher in the books mainly helps the auditor to obtain evidence that (a) Entry was made on the same day as that of the voucher (b) There are no missing vouchers (c) The vouchers are filed every day (d) The accountant was not absent on that day 13. Which of the following documents is not relevant for vouching sales (a) Daily Cash Sales Summary (b) Delivery Challans (c) Credit Memos (d) Sale Dept. Attendance Record 14. To check whether all sales have been recorded, auditor should check (a) Salesmen's payroll (b) Sales bills (c) Sales orders (d) Goods Received Notes 15. In order to vouch which of the transactions, the auditor will examine Bill of Lading ? (a) Sales within the State (b) Sales outside the State (c) Exports (d) Sales on approval 16. In order to vouch which of the transactions, the auditor will examine Bill of Entry? (a) Local Purchases (b) Purchases on consignment basis (c) Imports (d) Cash Purchases

17. In case of sales return, the auditor should examine which documents? (a) Credit notes and delivery challans (b) Debit notes and cash memos

(c) Purchase invoices and goods received notes (d) Credit notes and goods received notes
18. Grade the following audit evidence in terms of reliability (starting with lowest reliability) 1. Oral explanations 2. Documents 3. External documents 4. Internal documents when internal controls are strong 5. Internal documents (a) 2,1,4,3,5 (b) 1,2,5,4,3 (c) 5,4,2,1,3 (d) 1,2,3,4,5

2. FILL IN THE BLANKS: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

_____ means comparing the entries in books of accounts with documentary evidence in support thereof. As soon as any transaction takes place, a _____ is prepared giving details of the transaction. Purchase bill is an example of (internal / external) document. Payroll is an example of (internal / external) document. Date of the Voucher is checked to see that the transaction pertains to the _____year. The amount in _____in a voucher helps to prevent alteration of amount in figures. The payee should sign on a_____ stamp, if the payment exceeds Rs.5,000. Checking the date of entry helps to prevent and detect frauds in the nature of _____and _____. The auditor of a company has to comment in his report, in case of sales to group concerns, whether the rates charged to such group concerns are _____ or not with regard to the prevailing market prices at the relevant time. The dividend received should be vouched from the following supporting documents: (i) _____ of Dividend Warrants, (ii) _____for deposits in Bank Account.

3. MATCH THE FOLLOWING:

Column A Transaction 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Sales Goods despatched Exports Sales return Recovery of bad debts written off Income from investments Royalty Cash payment exceeding Rs.5,000 Purchases Purchase Returns Salary Travelling expenses in foreign currency (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) Column B Supporting Document Debit note from Customer Dividend Warrants Signature of Payee on Revenue stamp Cash Memo Sanction from Reserve Bank of India Debit Note of auditee Dividend from Official Receiver Delivery Challan Lease Deed Pay rolls Bill of lading Goods Received Note Disallowed in Income-tax

4. STATE WHETHER TRUE OR FALSE: 1. When goods are sent on approval, sale is to be booked only when the inspection or installation is complete and the 2. Goods are sent on approval. If the buyer has not formally sent a letter of acceptance, the sale can be booked if the 3. When the goods are sent to an agent on consignment basis, sales should be booked when the agent actually 4. The Sales Returns should be supported by either the Copy of Credit Note of the Auditee or Debit Note of the 5. 6. 7. 8. 9.
customer. If the amount of sales returns is heavy in the beginning of the year, it may indicate that fictitious sales were booked last year. Auditor should ensure that the value of goods returned is disclosed separately in the profit and loss account. Auditor should ensure that the recovery of bad debt earlier written off is credited to the concerned Debtor's Account. A statutory auditor is not mainly concerned that prevailing market price is charged uniformly to all customers. The auditor has to comment in his report, in case of sales to group concerns, whether the rates charged to such group concerns are reasonable or not with regard to the prevailing market prices at the relevant time. receives the goods. buyer has not sent back the goods within a reasonable period. buyer has accepted the goods.

10. If tax is deducted at source (TDS) from interest, auditor should see that interest is shown in the accounts net of 11. Auditor should verify whether the payee has signed on a revenue stamp, if the sum exceeds Rs.50. 12. Auditor need not check the Goods Received Note in case of cash purchases. 13. The Purchase Returns should be supported by the Copy of Debit Note of either the auditee or the supplier. 14. While checking purchase returns, auditor should see that the Serial Numbers on the Credit Notes are continuous and 15. While checking purchase returns, auditor should check the corresponding Goods Received Note. 16. While checking sales returns, auditor should check the corresponding Delivery Challan. 17. Auditor should ensure that Remuneration to directors is disclosed separately and it is within the limits prescribed under 18. Deferred Advertisement Expenses should be disclosed under "Miscellaneous Expenditure" in the Balance Sheet.
5. CHECK YOUR ANSWERS 1. Mutiple choice questions: 1. (d) 4. (c) 7. 2. (b) 5. (b) 8. 3. (a) 6. (b) 9. the Companies Act. tally with those in the Credit Note Register. TDS.

(a) (b) (c)

10. 11. 12.

(a) (d) (a)

13. 14. 15.

(d) (b) (c)

16. 17. 18.

(c) (d) (b)

2. Fill in the blanks: (1) Vouching (2) Voucher (3) External (4) Internal (5) Current (6) Words (7) Revenue (8) Teeming; Lading (9) Reasonable (10) Counterfoils; Pay-in-slips 3. Match the following: (1) - (d); (2) - (h); (3) - (k); (4) - (a); (5) - (g), (6) - (b), (7) - (i), (8) - (c), (9) - (1), (10) - (f), (11) (j), (12) - (e) 4. True or False: True: 1,2,4, 5, 8,9, 17, 18; False: 3, 6, 7,10, 11, 12, 13,14,15,16

CHAPER 5 VERIFICATION OF ASSETS AND LIABILITIES Verification and Valuation: Meaning of Verification: Verification is defined by Spicer and Pegler as: an inquiry into the value, ownership title, existence and possession and the presence of any charge on the assets. Eric Kohler defines verification as: the process of substantiation involved in proving by customary audit procedure that a statement, account or item is accurate and properly stated or is within permissible or reasonable limit. According to AAS 5, Verification means to obtain and examine evidence in respect of an item of asset or liability that:

1. Existence: The Asset or Liability exists on a given date. 2. Ownership & Obligation: The Asset is legally owned by the concern or the Liability is a legal obligation of the concern. 3. Complete Record: There are no unrecorded Assets or Liabilities. 4. Disclosure: The Assets and Liabilities are disclosed, classified, and presented in accordance with recognised accounting policies and the
requirements of law. Objects of Verification/ Points to be Considered by Auditor :

1. Existence:
Auditor should confirm that all the assets of the concern physically exist on the date of the balance sheet.

2. Possession:

No. 1

Vouching [VO] Meaning: VO is comparing entries in books of accounts with documentary evidence in support thereof. Period: VO is done for all entries during accounting year. Items checked: VO covers income, expenses, assets purchased/ sold, liabilities incurred/ paid during accounting year. Aims and Importance: a. Whether the transaction actually occurred. b. Whether amount recorded in books is correct. c. Whether entries for income and expenses pertain to current year, and are for business. d. Whether entries for assets and liabilities pertain to current year and legally valid. e. Whether accounting is proper. f. Whether transaction complies with Law, Companies Act. g. Whether transaction is disclosed as per Law, Schedule VI to Companies Act. Errors and Frauds: a. Detection of errors & frauds in recording transactions. e.g. errors of commission, errors of omission or errors of principle. b. Ensures arithmetical accuracy of original books of entries. c. Detection of frauds by way of manipulation or records. e.g. deliberate errors. Audit Techniques: VO involves checking of Vouchers. Supporting Documents and entries in books.

Verification [VE] VE is checking existence, possession and ownership of assets and liabilities.

VE is done for assets/ liabilities as on the balance sheet date. VE covers only assets and liabilities as on the last day of accounting year.

a. Whether asset/ liability actually exists. b. Whether assets or liability is valued c. Whether asset is owned and liability is d. e. f. g.
owned as at year end and pertain to business. Whether balances of assets or liabilities as at year end are correct, true and fair. Whether balances are proper. Whether assets/ liabilities are legally valid. Whether balances are disclosed as per Law, Schedule VI to Companies Act. correctly at year end.

a. Detection of errors and frauds in year b. Ensures accuracy of Ledger Balances c. Detection of frauds by way of
misappropriation or misuse of assets. and Final Accounts. end balances of assets and liabilities.

VE involves scrutiny of ledger, physical verification, inspection of documents and confirmations from third parties.

Auditor has to verify that all the assets belonging to the concern are in its possession, i.e. no asset is misappropriated or misused or used for personal purposes by the officers of the concern.

3. Legal Ownership and Obligations:

Auditor should confirm that an asset is legally owned by the concern. Thus, in case of land etc. the title deed should be in the name of the concern. Auditor should confirm that a liability is the legal obligation of the concern.

4. Subject to Charge or Lien:

Auditor should ascertain whether the assets of the concern are subject to any charge, lien or encumbrances.

5. Complete Record:
Auditor should ascertain that there are no unrecorded assets or liabilities. He has to ascertain that no asset or liability is omitted from the books of the concern.

6. Audit Report:
Under CARO, 2003 the auditor has to report on whether management has conducted any physical verification of the fixed assets and stocks and the major differences between such physical inventory and the book records.

7. Events After Balance Sheet Date:

Auditor should ascertain whether any event after the date of the Balance Sheet has affected any item of asset or liability as at the year end (e.g. insolvency of a debtor). Techniques of Verification: Verification of Asset or Liability may be done by using the techniques of physical inspection, observation or confirmation. Inspection means physical inspection of asset e.g. counting the cash in the cash box, taking inventory of closing stock, etc. or inspection of documents (e.g. documents of title, supplier's invoices, Loan Agreement etc.) Observation means observing or witnessing the inspection of assets done by others. Thus, auditor may not himself take inventory, but only observe that the inventory is being taken by the staff of the concern in the right manner. Confirmation means obtaining written evidence from outside parties regarding existence of an asset e.g. obtaining balance confirmations from debtors. Vouching VS. Verification Valuation: Meaning: Valuation means finding out the proper value of the assets or liabilities for recording in the books and disclosure in the final accounts. Points to be considered / importance of valuation : In Valuation, auditor should consider the following points:

1. Method of Valuation:
Auditor should ascertain that the method of valuation is proper and recognised.

2. No Change in Method:
Auditor should see that the method of valuation is not changed, i.e. is the same as in the last year.

3. Correct Computation:
Auditor should verify that the arithmetical computation while finding out the value is correct.

4. Revaluation:

In case assets are revalued, auditor has to check the following points: a. Basis: Auditor has to check that the basis of revaluation is proper. b. Accounting: Auditor should see that the change in values is accounted in the books properly. c. Disclosure: Auditor has to ensure that the legal requirements of disclosure of revised values are followed.

5. Foreign Exchange:
In case foreign exchange is involved, auditor should see that the amounts are converted in rupees in a proper manner.

6. Recognised Accounting Practices:

Auditor must see that the assets and liabilities are valued and accounted in the books according to the basic principles of accountancy. The valuation and accounting must conform to the guidelines issued by the Institute of Chartered Accountants of India (ICAI).

7. Companies Act:
Auditor should see that the assets and liabilities are valued and accounted in accordance with the provisions of the Companies Act.

8. Schedule VI:
Auditor should ensure that the assets and Liabilities are classified, valued, disclosed and presented in the Balance Sheet as per the requirements of Schedule VI.

9. Audit Report:
Under CARO, 2003 Auditor has to report on the valuation or revaluation of the fixed assets and stock: a. Fixed Assets: Auditor has to report whether fixed assets have been revalued during the year and on what basis. b. Stocks: Auditor has to report whether the valuation of stocks is fair and proper in accordance with the normally accepted accounting principles and whether the basis of valuation is the same as in the previous year.

10. Events After Balance Sheet Date:

Auditor should ascertain whether any event after the date of the Balance Sheet has affected the value of any asset or liability as at the year end (e.g. insolvency of a debtor). Audit of Assets:

I. Book Debts/ Debtors:

The auditor should verify Debtors in the following manner.

1. Review of Internal Controls:

Auditor should study and review the system of internals controls relating to credit sales and debtors. He should ascertain how credit limit and terms are fixed and who are the persons authorised to sanction credit.

2. Scrutiny of Ledger Accounts:

Auditor can then begin the next procedure of Scrutiny of Debtors Ledger which involves the following steps.

A. Checking Opening Balances:

Opening Balances of the Debtors Ledger should be verified with reference to the audited accounts, the Debtors Ledger and the schedule of debtors for the last year.

B. Checking Posting: 1. In vouching, auditor checks the entry in the original books such as Cash Book, Sales Register, Bills Receivable Register, 2. 3. a. b. c.
Debit Note/Credit Note Register, Journal, etc. The next step is to check the posting from these books into the Debtors Ledger. Auditor should check that the correct amount is posted in the correct account on the correct side of the account. Posting may be checked on sample basis. Auditor may check either all the posting for say 3 months or check posting into selected accounts for the whole year. The following aspects should be checked. all entries are posted in sequence of dates i.e. chronological order. no entry is inserted in between two entries afterwards. no entry is altered.

3. Checking Summary and Grouping:

Auditor should check the balances of the Debtors Ledger into the Trial Balance and the Grouping. He should see that a. the total of individual balances in the Debtors Ledger tallies with the Debtors Control Account in the General Ledger, if any. b. no account in the nature of loan etc. is grouped under Debtors. c. the credit balances in the Debtors Accounts are shown on the Liabilities side of the Balances Sheet. Such credit balances should not be deducted from the gross debit balances in the Debtors Accounts.

4. Classification of Debtors vide Schedule VI:

While grouping the debtors accounts, care should be taken to classify them as required by Schedule VI to the Companies Act. Total amount of debtors should be classified into (a) debts considered secured (b) debts considered unsecured but good (c) debts unsecured and doubtful of recovery. The debts should be further classified into debts due for less than and more than 6 months as at the year end.

5. Letters of Confirmation: a. Obtaining direct confirmation from debtors is, in theory, the best method of verification. However, its drawbacks are: (i) b. c. d. e.
confirmation does not mean that the debt will be recovered; (ii) there may not be adequate response from debtors. Direct confirmation procedures must be carried out with the consent of the concern (auditee). The detailed procedure for obtaining confirmation (from whom, when, how, in what form etc.) is to be decided by the auditor. If balances on a date other than the year-end are confirmed, auditor should reconcile transactions in-between the two dates. In the positive form of confirmation, the debtor is asked to write back whether he agrees or not with the balance shown. In the negative form of confirmation, the debtor is asked to write back only if he disagrees with the balance shown.

6. Legal Debts:
Auditor should confirm that all outstanding debtor's balances are legally recoverable. The documents of sales, delivery etc. should confirm that the goods were properly transferred under the Sale of Goods Act so as to make the debts legally recoverable.

7. Subject to Charge or Lien:

Auditor should ascertain whether the Debtors of the concern are subject to any charge, lien, hypothecation or encumbrances. He should check the loan documents, the Registers of Charges, Resolution of Board or Shareholders' Meetings etc. in this regard.

8. Cut-off Transactions:
Auditor should ascertain that there are no unrecorded debtors. He has to ascertain that no debtors are omitted from the books of the concern. He has to carefully scrutinise the cut-off transactions in this respect. He should take the following steps: a. Auditor should examine the "cut-off procedures". These are the procedures to ensure separation of transactions of the current year from those of the next year. Thus, though transactions of sale are continuous, steps must be taken to divide and set apart the sales of current year from the sales of the next year. b. Auditor should ensure that sales bills are raised for all goods despatched till the last day of the accounting year, and no sales bills are raised unless the goods were actually despatched and sold during the accounting year.

9. Overall Checks:
Auditor should compare the details of sundry debtors for the current year with those of the previous year. He should also work out the debtors turnover ratios for both the current and the previous year. He should investigate the abnormal differences.

10. Bad and Doubtful Debts:

While making a scrutiny of the debtors account, auditor should watch for the following circumstances which indicate a bad or doubtful debta. the payments are always late i.e. beyond the credit allowed. b. payments are in the nature of on-account payments. c. an old bill has been partly paid (or is not paid at all), while subsequent bills are being settled. d. customers who earlier paid cash are now accepting bills of exchange. e. a suit has been filed against the customers for recovery, of debt. f. several reminders have been sent to the customers without any response. g. the debt is not recoverable due to law of limitation (e.g. a debt more than 3 years old). h. debtors have become insolvent or gone into liquidation, or are not traceable or have died. Auditor should ascertain whether the provision for bad or doubtful debts is adequate.

11. Events After Year End:

Auditor should check collection from debtors in the next year to judge whether the year end balances are good or not. If any debtor has become insolvent after the balance sheet date, such debts can be provided for as bad debts.

II. Stock- Auditors General Duties: A. Verification:

The auditor should verify the inventory in the following manner:

1. Verify Existence:
Auditor should confirm that the stocks physically exist on the date of the balance sheet. This may be done by using the techniques of physical inspection, observation, confirmation etc.

2. Possession:
Auditor has to verify that the entire stock belonging to the concern is in its possession, i.e. no item is misappropriated or misused.

3. Cut-Off Transactions:
Auditor should confirm that all the goods in stock are legally owned by the concern. Thus, for all the items in the closing stock, the corresponding purchase bills should have been properly accounted in the books. This involves checking the cut-off transaction as explained below. As on the last day of the accounting year, when stocks are verified, there may be a. some raw materials received, but not billed. b. some purchase bills entered in books for which goods are not yet received. c. some finished goods despatched, but not billed. d. some sales bills raised for which goods are yet to be despatched.

4. Subject to Charge or Lien:

Auditor should ascertain whether the Inventory of the concern is subject to any charge, lien or hypothecation. This may happen in case the bank loan is secured against stocks.

5. Audit Report Under Companies Act:

An auditor of a limited company has to report whether the company's final accounts are in agreement with the books including the stock books and inventory list (S.541). Under Schedule VI of the Companies Act, 1956 the auditor should ensure that the following details regarding stocks are disclosed in the final accounts: a. Closing Stock of stores and spare parts, loose tools, stock-in-trade and work-in-progress must be shown separately under "Current Assets". b. In the case of a manufacturing concern, the quantities of opening and the closing stocks of finished goods must be disclosed. In the case of a trading concern, the quantities of stocks of trading items must be disclosed.

B. Procedure for Stock-taking:

It is the duty of the auditor to ascertain that the procedures for stock taking followed by the management were effective and they were actually followed. The Statement on Auditing Practices has made the following recommendations in this respect:

1. Written Instructions:
The management should give written instructions to the staff concerned with the physical verification of stocks. The instructions should clearly mention the Date, Day, Timing of Commencement, list of persons in charge, location etc.

2. Note Quantity on Tags:

Each person should be given a bunch of tags, pen, measuring tape etc. Each one should count, measure or weigh the stock in a bin, box etc. and record the item, quantity etc. on the tag. The tag should be affixed to the concerned bin or box. The work should be done systematically so that no item is omitted to be recorded.

3. No Stock Movement:
There should be no movement of stocks during counting. No goods should be received or issued till the stock taking is complete.

4. Test Check:
The Supervisor or auditor may go around the location and test check whether tags are affixed to all the bins. They may check the Quantity of a few items with the tags on a sample basis.

5. Check All Tags:

In the end, all the tags must be collected together and handed over to the person in charge of stock taking. He would check the serial numbers of the tags to ascertain that all tags issued have been collected. The tags are sent to the Accounts department for preparing the Stock sheets.

6. Stock Sheets:
The Stock Sheets are prepared separately for (a) Finished Goods (b) Raw Materials (c) Stores, Spares parts etc. (d) Obsolete, Slow Moving, sub-standard etc. stocks.

7. Up to date Stock Books:

The stock record must be written and posted up to date to facilitate reconciliation of book stock with physical stock.

8. Reconciliation:
A list of excesses and shortages should be prepared on the basis of comparison between Stock Sheets and Stock Books. The opening balance of the stock book for the next year should, however, be the closing stock as per the physical inventory.

9. Stocks of Outsiders:
The stock belonging to any outsider, e.g. stock held on consignment, etc. should be separately shown in the Stock Sheets.

C. Valuation:
Valuation of Inventory means finding out the proper value of the closing stock for recording in the books and disclosure in the accounts. In Valuation, auditor should verify the following points:

1. Method of Valuation:
Auditor should see that the method of valuation is proper and recognised.

2. Change in Method:
Auditor should see that the method of valuation is not changed, i.e. is the same as in the last year.

3. Correct Computation:
Auditor should verify that the arithmetical computation while finding out the value is correct.

4. Foreign Exchange:
In case foreign exchange is involved (e.g. stock in a foreign branch), auditor should see that the amounts are converted into rupees in a proper manner.

5. Accounting:
Auditor must see that the value of inventory is recorded in the books according to the basic principles of accountancy. The accounting must conform to the guidelines issued by the Institute of Chartered Accountants of India (ICAI).

6. Companies Act:
Auditor should see that the valuation of Inventory is in accordance with the provision of the Companies Act. If the stocks are overvalued the profits and assets will be overstated; if the stocks are undervalued the profits and assets will be understated. Thus the stock must be properly valued to enable the auditor to report to the shareholders that the accounts are true and fair.

7. Schedule VI:
Auditor should ensure that the Inventory is classified, disclosed and presented in the Balance Sheet as per the requirements of Schedule VI. Schedule VI the Companies Act 1956 requires the disclosure of the mode of valuation of the various items of closing stock. If there is any change in the basis of valuation of stocks, auditor must see that such change and its effect on the profit for the year are disclosed in the accounts. In the case of a manufacturing concern, the value of the opening and closing stocks of goods produced and work-in-progress, if any, is to be disclosed separately.

8. Duty Prescribed By ICAI:

The auditor should check whether the valuation of stock is fair and proper in accordance with the normally accepted accounting principles. These principles are contained in the statements issued by the Institute of Chartered Accountants of India (ICAI), viz. (I) Statement on Auditing Practices (II) Accounting Standard 2 - Valuation of Inventory and (III) Guidance Note on Audit of Inventories.

D. Importance:
Verification and valuation of inventory is important because of the following:

1. To Show Proper Value of Assets:

A balance sheet is prepared at the end of every year, so that the owner of business knows the assets and liabilities of the business. The goods lying in stock at the end of the year are assets of business and hence must be shown in the balance sheet.

2. To Show Proper Profits:

Profits for a year are equal to Income during the year Less Costs during the year. This is known as the concept of periodical matching of costs and revenue. Gross profits are equal to Income from goods sold Less Cost of goods sold. The income is from goods sold. Hence, the cost includes only the cost of goods 'sold' and not the cost of goods unsold or in stock. The income from goods in stock will be received when these goods are sold in future. Hence the cost of closing stock is carried forward to be deducted from such future sales. For this purpose, the value of closing stock is credited to the Manufacturing or Trading Account. Thus, closing stock is brought into the books in order to compute the correct amount of profits in the current year as well as in the future.

E. Special Type of Stocks: 1. Stock of Goods on Consignment:

In addition to the above general points, auditor should examine the additional points described below: a. Such stock should be valued at cost. b. Such cost should include freight etc. incurred by the consignor. c. The stock should be cross-checked with the certificate obtained from the consignee. d. The stock should be adjusted for goods damaged and lying with the consignee. e. The market price of stock should not be lower than the cost.

2. Stock of Goods Sold on Hire Purchase:

In addition to the above general points, auditor should ensure that, in valuing such stocks, the proportionate estimated profit applicable to outstanding installments, is not added.

3. Stock of Goods Sent on Sale or Return:

In addition to the above general points, auditor should examine the additional points described below: a. If goods sent on "Sale or Return" have been treated as normal sales, auditor should check the list of stocks not yet approved but lying with the customers at the year-end. b. Auditor should ensure that an adjustment entry is passed debiting the Sales Account with the value of such goods.

c. Auditor should see that stock of such goods is valued at cost or market value, whichever is lower. III. Patterns, Dies and Loose Tools:
Auditor should verify this item keeping in mind AAS-5 and Guidance Note on Audit of Fixed Assets-

1. Verify the Records: a. Examine records, including the Fixed Asset Register, work order/physical verification reports, relating to opening balance, b. Obtain a certificate from a senior official that all loose tools sold, written off, scrapped etc. were recorded in the books. 2. a. b. c.
Verify the Existence: Observe the physical verification being conducted by the management wherever possible. Examine whether the method of verification and its frequency was reasonable. Test-check the book records of property with the physical verification reports, and adjustment of discrepancies. additions, self-construction, write-off, retirements of loose tools.

3. Verify the Valuation:

Verify that the loose tools have been valued and depreciated in accordance with professional pronouncements and prevailing practices. See that the cost of loose tools is properly ascertained and certified by the Chief Engineer or properly authorised person in case the organisation manufactures its own tools. Also ensure that no profit element is included in the cost so ascertained. Verify that the closing stock of loose tools has been valued at cost unless there are compelling reasons to write them down below cost. See that valuation has been done on a consistent basis taking into account obsolescence, damage, breakage, etc. due to lapse of time, use or wear and tear. Check the basis of valuation and computations involved.

4. Verify the Disclosure: a. Verify the compliance with the recommendations of Accounting Standard 10 and Accounting. Standard 2 as b. Verify the compliance with the provisions of Schedule VI of the Companies Act. See that Loose tools have been c. Verify the compliance with the provisions of CARO, 2003, depending on whether such loose tools are treated as fixed assets or as
inventory. disclosed separately as an item of current asset. clarified in Accounting Standard Interpretation 2 on 'Machinery Spares' relating to disclosure.

IV. Spare Parts:

Auditor should verify this item keeping in mind AAS-5 and Guidance Note on Audit of Fixed Assets-

1. Verify the Records: a. Examine records, including the Stock Register, work order/physical verification reports, relating to opening balance, b. Obtain a certificate from a senior official that all spare parts used, sold, written off, scrapped etc. were recorded in the books. 2. a. b. c.
Verify the Existence: Observe the physical verification being conducted by the management wherever possible. Examine whether the method of verification and its frequency was reasonable. Test-check the book records with the physical verification reports, and adjustment of discrepancies. additions, self-construction, write-off, retirements of spare parts.

3. Verify the Valuation:

Verify that the spare parts have been valued and depreciated in accordance with professional pronouncements and prevailing practices. See that the cost of spare parts is properly ascertained and certified by the Chief Engineer or properly authorised person in case the organisation manufactures its own spare parts. Also ensure that no profit elements is included in the cost so ascertained.

4. Verify the Disclosure: a. Verify the compliance with the recommendations of Accounting Standard 10 and Accounting Standard 2 as b. Verify the compliance with the provision of Schedule VI of the Companies Act. See that spare parts have been disclosed c. Verify the compliance with the provision of CARO, 2003, depending on whether such spare parts are treated as fixed assets or as
inventory. separately as an item of current asset. clarified in Accounting Standard Interpretation 2 on 'Machinery Spares' relating to disclosure.

V. Empties and Containers:

Auditor should verify this item keeping in mind AAS-5 and Guidance Note on Audit of Fixed Assets-

1. Verify the Records: a. Examine records, including the stock Register, work order/physical verification reports, relating to opening balance, b. Obtain a certificate from a senior official that all containers etc. used, sold, written off, scrapped etc. were recorded in the
books. additions, self-construction, write-off, retirements of containers etc.

2. a. b. c.

Verify the Existence: Observe the physical verification being conducted by the management wherever possible. Examine whether the method of verification and its frequency was reasonable. Test-check the book records with the physical verification reports, and adjustment of discrepancies.

3. Verify the Valuation:

Verify that the containers etc. have been valued and depreciated in accordance with professional pronouncements and prevailing practices. See that the cost of containers etc. is properly ascertained and certified by the Chief Engineer of properly authorised person in case the organisation manufactures its own containers etc. Also ensure that no profit elements included in the cost so ascertained.

4. Verify the Disclosure: a. Verify the compliance with the recommendations of Accounting Standard 10 and Accounting Standard 2 b. Verify the compliance with the provisions of Schedule VI of the Companies Act. See that containers etc. have been c. Verify the compliance with the provision of CARO, 2003, when such containers etc. are treated as inventory. VI. Investments: A. Verification:
The auditor should verify Investment in the following manner. disclosed separately as an item of current asset. relating to disclosure.

1. Review of Internal Controls:

Auditor should study and review the system of internal controls relating to investments: a. Control over Capital Expenditure: There should be effective control over investments by means of Capital Budgets. b. Records: The concern should maintain proper records (e. g. Investment Registers) to record the details of its investments. c. Possession and Custody: If there are proper procedures to control possession and custody of the investments, Auditor can be sure that no investment is misappropriated.

2. Scrutiny of Ledger Accounts:

Auditor should scrutinise the Ledger Accounts of Investments to ascertain the major transactions of purchase, sale etc. during

3. Physical Inspection:
Auditor should take the following steps in this regard: a. He should physically examine the investments i.e. share certificates etc. He should examine all the documents, if possible on the last day of the accounting year. b. If any securities are held by the bankers, depositor, custodian etc. auditor should obtain confirmation letters from the bank, etc.

4. Legal Ownership:
Auditor should confirm that all investments are legally owned by the concern. If the investments are not in the name of the concern, auditor should ascertain the reason. He should see whether declaration is made by a company for holding shares in the name of directors etc. U/S 187C of the Companies Act.

5. Subject to Charge or Lien:

Auditor should ascertain whether the investments of the concern are subject to any charge, lien or encumbrance. He should check the loan documents, the Register of Charges, Resolution of Board / Shareholders Meetings etc. in this regard.

6. Complete Record:
Auditor should ascertain that no investment is omitted from the books of the concern. He should take the following stepsa. He should check purchases / expenses vouchers to ensure that an item of investment is not wrongly charged as revenue expenses. b. He should check the sales bills / receipt vouchers to see that no sale of investment is shown wrongly.

7. Overall Checks:
Auditor should compare the details of investments for the current year with those of the previous year. He should also reconcile the income i.e. dividends, interest etc. with the investments.

8. Audit Report:
Under S. 227 (1A) (C) of the companies Act, auditor has to enquire whether shares, debentures, securities etc. were sold at a price lower than their cost. Under CARO, 2003 in case of a finance or investment company dealing in shares etc. auditor has to report whether proper records are kept regarding investment transactions.

B. Valuation: 1. Basis of Valuation:

Auditor should ascertain that the basis of valuation of investments is proper and recognised. Investments are normally valued at the gross cost as per the books i.e. the purchase cost plus brokerage, transfer charges etc.

2. Foreign Exchange:
In case foreign exchange is involved in purchase or sale of investments, auditor should see that the amounts are converted into rupees in a proper manner.

3. Correct Computation:
Auditor should verify that the arithmetical computation while finding out the value of purchases or sales of investments is correct.

4. Accounting:
Auditor must see that the investments are accounted in the books according to the basic principles of accountancy. The accounting must conform to the guidelines issued by the Institute of Chartered Accountants of India (ICAI) contained in Accounting Standard 13, "Accounting for Investments."

5. Companies Act:
Auditor should see that the investments are purchased or sold in accordance of the provisions of the Companies Act.

6. Schedule VI:
Auditor should ensure that the investments are classified, disclosed and presented in the balance sheet as per the requirements of Schedule VI to the Companies Act.

7. Events After Balance Sheet Date:

Auditor should ascertain whether any event after the date of the Balance Sheet has affected the value of any investments as at the year end.

VII.

Trade Marks/ Copyrights:

1. How to verify the records:

Obtain a Schedule of Trade Marks and Copyrights duly signed by the responsible officer and capitalize the same and confirm that all of them are shown in the Balance Sheet.

2. How to verify the ownership: Examine the written agreement in case of assignment of copyrights and the Assignment Deed in case of transfer of Trade Ensure that Trade Mark and Copyrights have been duly registered. 3. How to verify the existence: Verify existence of copyright by reference to contract with the author and the payment of royalty made. Ascertain that the legal life of the Trade Marks and Copyright has not expired. 4. How to verify the valuation: See that the value has been determined properly and the costs incurred for the purpose of obtaining the Trade Marks and Ensure that amount paid for both the intangibles and assets is properly amortised having regard to appropriate legal and
commercial considerations. Copyrights have been capitalised. Marks.

5. How to verify the disclosure: Verify the compliance with the recommendations of Accounting Standard 26 (Accounting for Intangible Assets) relating to
disclosure.

 Verify the compliance with the provisions of Schedule VI of the Companies Act. Verify the compliance with the provisions of CARO, 2003 viz. whether the company is maintaining proper records
showing full particulars, including quantitative details and situation of trademarks and copyrights.

VIII.

Patents/ Know-How:

1. Cost of Acquisition or Development:

Patents should be recorded in the books at their cost of acquisition or development. In case patents are acquired, auditor should verify the agreement for purchase with the vendors. In case patents were developed in-house, auditor should verify the cost of development from the accounting and costing records.

2. Write-off:
Patents should be written off over their legal period of validity or their working life, whichever is shorter. Auditor should ensure that the write-off is reasonable.

3. Disclosure:
Patents are shown separately in the Balance Sheet at their Gross Value Less Amount Written Off = Written Down Value.

4. Income-tax:
Under the Income-tax Act, deduction for cost of patents is subject to the prescribed rules and limits. Auditor should note the effect of these provisions while computing the liability for Income-tax for the year.

IX. Plant and Machinery: A. Verification: 1. Review of Internal Controls:

Auditor should study and review the system of internal controls relating to acquisition and use of plant and machinery viz. a. Control over Capital Expenditure: There should be effective control over capital expenditure on acquisition of machinery by means of Capital Budgets. b. Records: The concern should maintain proper records (e.g. Plant Register) to record the details of its machineries. c. Possession and Use: There should be proper procedures to control possession, custody and use of the machineries to ensure that no machinery is misappropriated or misused.

2. Scrutiny of Ledger Accounts:

Auditor should scrutinise the Ledger Account of Plant and Machinery to ascertain the major transactions of purchases, sales etc. during the year.

3. Legal Ownership:
Auditor should confirm that the machineries are legally owned by the concern whether purchased or fabricated. a. Purchased: In case of machineries purchased from outsiders, auditor should verify the suppliers' invoices and related documents. b. Fabricated: If the machineries are fabricated by the concern itself, auditor should obtain a certificate from an expert valuer or chartered engineer regarding the cost of fabrication, and ownership of machines.

4. Subject to Charge or Lien:

Auditor should ascertain whether the machineries are subject to any charge, lien or encumbrances. He should check the loan documents, the Register of Charges, Resolution of Board / Shareholders Meetings etc. in this regard.

B. Valuation: 1. Basis of Valuation:

Auditor should ascertain that the basis of valuation of the plant and machineries whether purchased or fabricated is proper and recognised.

a. Book Value: Plant and Machinery should be shown at book value and not the market or realisable value. Book Value may be the
historical cost or the new value after revaluation.

b. Cost: i. Cost of Purchase or Fabrication: In case of machineries purchased from outsiders, the cost of machineries can be verified from the
suppliers' bills, expenses of installation, freight charges, insurance etc. In case of machineries fabricated by the concern itself, the cost of fabrication can be determined from the costing records, certificate of an expert valuer etc.

ii. Repairs A/c: Auditor should scrutinise the Repairs and Renewals Account. Any expenditure on improvement or increasing the capacity iii. Interest: Interest on loans taken to purchase or fabricate the machineries upto the date of completion of the project should be included in
the cost of the machineries. of machineries should be capitalised and not charged as repairs.

c. Depreciation: Plant & Machinery should be depreciated at a reasonable rate. In case of a company the amount of depreciation should
be in accordance with the provisions of the Companies Act and Schedule XIV thereto.

2. Revaluation:
In case Plant and Machineries are revalued, auditor has to check the following points:

a. Basis: Auditor has to check that the basis of revaluation is proper. The new values should not be higher than the market
prices. Revaluation should be done by an expert valuer.

b. Accounting: Auditor should see that the change in values is accounted in the books properly. Increase in value due to revaluation should
be debited to the Plant & Machineries Account, and credited to Revaluation Reserve Account. Revaluation Reserve is not available for distribution i.e. payment of dividend. A decrease, on the other hand, should be debited to the Profit & Loss Account. Depreciation should also be properly adjusted.

c. Disclosure: Auditor has to ensure that the legal requirements of disclosure in the final accounts regarding revaluation are followed. 3. Foreign Exchange:
In case foreign exchange is involved, auditor should see the amounts are converted in rupees in a proper manner.

4. Correct Computation:
Auditor should verify that the arithmetical computation while finding out the value is correct.

5. Schedule VI:
Auditor should ensure that the plant and machineries are disclosed and presented in the Balances Sheet as per the requirements of Schedule VI.

6. Events After Balance Sheet Date:

Auditor should ascertain whether any event after the date of the Balance Sheet has affected the value of any fixed asset including plant as at the year end.

X. Freehold Land: A. Verification: 1. Possession and Use:

Auditor should ascertain that there are proper internal controls on the possession, custody and use of the land. Auditor should ensure that land is not misappropriated or used for personal purposes.

2. Scrutiny of Ledger accounts:

Auditor should scrutinise the Ledger account of Freehold Land to ascertain the major transactions of purchase or sale during the year.

3. Legal Ownership:
Freehold land is permanently owned by a concern, while leasehold land is taken on a lease for a number of years and returned back after the lease period is over. In case of freehold land, auditor should inspect the title deed and extracts of municipal records in respect of the Land. Auditor should confirm that the necessary stamp duty has been paid and the transfer agreement is duly registered.

4. Subject to Charge or Lien:

Auditor should ascertain whether the land is subject to any charge, lien or encumbrances. He should check the loan documents, the Register of Charges, Resolution of Board / Shareholder's Meetings etc. in this regard.

B. Valuation: 1. Basis of Valuation:

Auditor should ascertain that the basis of valuation of the freehold land is proper and recognised.

a. Book Value: Freehold land should be shown at book value and not at the market or realisable value. Book value may be the historical
cost or the new value after revaluation.

b. Cost: Cost of freehold land is its purchase price plus the legal expenses, stamp duty, registration charges, cost of development,
improvement etc. Land should always be valued at gross cost. No depreciation can be claimed in respect of land. If both land and building thereon are purchased for a lump sum amount, the cost should be divided on the basis of the Valuer's Report or on some other reasonable basis.

2. Revaluation:
In case freehold land is revalued, auditor has to check the following points:

a. Basis: Auditor has to check that the basis of revaluation is proper. The new value should not be higher than the market price. Revaluation
should be done by an expert valuer.

b. Accounting: Auditor should see that the change in values is accounted in the books properly. Increase in value due to revaluation should
be debited to the Land Account, and credited to Revaluation Reserve Account. Revaluation Reserve is not available for distribution i.e. payment of dividend. A decrease, on the other hand, should be debited to the Profit and Loss Account, and credited to Land Account.

c. Disclosure: Auditor has to ensure that the legal requirements of disclosure in the final accounts laid down in Schedule VI regarding
revaluation are followed.

3. Correct Computation:
Auditor should verify that the arithmetical computation while finding out the value of the land is correct.

4. Schedule VI:
Auditor should ensure that Freehold Land is disclosed and presented in the Balance Sheet as per the requirements of Schedule VI.

5. Events After Balance Sheet Date:

Auditor should ascertain whether any event after date of the Balance Sheet has affected the value of the land as at the year end.

XI. Leasehold Land: A. Verification: 1. Review of Internal Controls:

Auditor should study and review the system of internal controls relating to possession, custody and use of land to be sure that it is not misappropriated or used for personal purposes.

2. Scrutiny of Ledger Accounts:

Auditor should scrutinise the Ledger Accounts of Leasehold Lands to ascertain the major transactions during the year.

3. Legal Ownership:
Auditor should confirm that the leasehold land is legally held by the concern. Auditor should inspect the lease agreement. The Agreement should have been duly registered. Auditor should verify that the concern is complying with all the terms and conditions of the lease agreement. Thus, auditor should check that the lease rent is paid in time, property is insured, repairs are done regularly and so on.

4. Subject to Charge or Lien:

Auditor should ascertain whether the land is subject to any charge, lien or encumbrances. He should check the loan documents, the Register of Charges, Resolution of Board / Shareholders Meetings etc. in this regard.

B. Valuation: 1. Basis of Valuation:

Auditor should ascertain that the basis of valuation of the leasehold land is proper and recognised. a. Book Value: Leasehold Land should be shown at book value and not the market or realisable value. Book Value may be the historical cost or the new value after revaluation.

b. Cost: The premium paid to secure the lease and the expenses on acquisition legal expenses, registration charges etc. should be capitalised c. Write-off: The cost should be written off over the period of lease. Thus, the cost of Rs. 1,00,000 of a leasehold land on a 10
year lease, would be written off at the rate of Rs. 10,000 per year. The net written down value would be disclosed in the Balance Sheet. and shown as the cost of leasehold land in the balance sheet.

2. Revaluation:
In case such land is revalued, auditor has to check the following points: a. Basis: Auditor has to check that the basis of revaluation is proper. The new value should not be higher than the market prices. Revaluation should be done by an expert valuer. b. Accounting: Auditor should see that the change in values is accounted in the books properly. Increase in value due to revaluation should be debited to the Leasehold Land Account, and credited to Revaluation Reserve Account. Revaluation Reserve is not available for distribution i.e. payment of dividend. A decrease, on the other hand, should be debited to the Profit and Loss Account. Write-off should also be properly adjusted. c. Disclosure: Auditor has to ensure that the legal requirements as per Schedule VI of the Companies Act of disclosure in the final accounts regarding revaluation are followed.

3. Correct Computation:
Auditor should verify that the arithmetical computation while finding out the value of the land is correct.

4. Schedule VI:
Auditor should ensure that the leasehold land is disclosed and presented in the Balance Sheet as per the requirements of Schedule VI.

XII.

Buildings:

A. Verification: 1. Review of Internal Controls:

Auditor should study and review the system of internal controls relating to acquisition and use of buildings, viz. a. Control over Capital Expenditure: There should be effective control over capital expenditure on purchase or construction of building by means of Capital Budgets. b. Records: The concern should maintain proper records (e.g. Property Register) to record the details of its building etc. c. Possession and use: There should be proper procedures to control possession, custody and use of the buildings to ensure that no property is misappropriated or used for personal purposes.

2. Scrutiny of Ledger Accounts:

Auditor should scrutinise the Ledger Account of Buildings to ascertain major transactions during the year i.e. purchase, construction, addition or sale of building.

3. Legal Ownership:
Auditor should confirm that the building is legally owned by the concern whether purchased or constructed. a. Purchased: In case of buildings purchased from outsiders, auditor should inspect the title deed and extracts of municipal records in respect of the property. He should obtain a certificate from the lawyer of the concern that the title is valid. Auditor should confirm that the necessary stamp duty has been paid and the transfer agreement is duly registered. b. Constructed: If the building is constructed by the concern itself, auditor should verify the Contractor's Bills and the Architect's Bills. Auditor should also vouch the cost of material, labour and the expenses charged to the Building Account.

4. Subject to Charge or Lien:

Auditor should ascertain whether the buildings are subject to any charge, lien or encumbrances. He should check the loan documents, the Register of charges, Resolution of Board / Shareholders Meeting etc. in this regard.

B. Valuation: 1. Basis of Valuation:

Auditor should ascertain that the basis of valuation of the buildings, whether purchased or constructed, is proper and recognised. a. Book Value: Buildings should be shown at book value and not the market or realisable value. Book Value may be the historical cost or the new value after revaluation.

b. Cost:

i.

ii. iii.

Cost of Purchase or Construction: In case of buildings purchased from outsiders, the cost of buildings can be verified from the agreement of transfer, lawyer's bills, stamp duty receipt etc. In case of buildings constructed by the concern itself, the cost of construction can be determined from Architect's bills, contractor's bills, vouchers etc. Cost of buildings should not include cost of fixtures, electric fittings etc. If land and building are purchased jointly, the cost should be divided on some reasonable basis (e.g. Valuer's Report). Interest on loans taken to purchase or construct the buildings upto the date of completion of the project should be included in the cost of the buildings. Depreciation: Buildings should be depreciated at a reasonable rate. In case of a company the amount of depreciation should be in accordance with the provisions of the Companies Act and Schedule XIV thereto.

2. Revaluation:
In case buildings are revalued, auditor has to check the following points: a. Basis: Auditor has to check that the basis of revaluation is proper. The new values should not be higher than the market prices. Revaluation should be done by an expert valuer. b. Accounting: Auditor should see that the change in values is accounted in the books properly. Increase in value due to revaluation should be debited to the Buildings Account, and credited to Revaluation Reserve Account. Revaluation Reserve is not available for distribution i.e. payment of dividend. A decrease on the other hand, should be debited to the Profit and Loss Account. Depreciation should also be properly adjusted. c. Disclosure: Auditor has to ensure that the legal requirements of disclosure in the final accounts regarding revaluation are followed.

3. Foreign Exchange:
In case foreign exchange is involved, auditor should see that the amounts are converted in rupees in a proper manner.

4. Correct Computation:
Auditor should verify that the arithmetical computation while finding out the value is correct.

5. Schedule VI:
Auditor should ensure that the buildings are disclosed and presented in the Balance Sheet as per the requirements of Schedule VI.

6. Events After Balance Sheet Date:

Auditor should ascertain whether any event after the date of the Balance Sheet has affected the value of any fixed asset including buildings as at the year end.

XIII.

Furniture and Fixtures: Auditor should verify Furniture etc. keeping in mind AAS-5 and Guidance Note on Audit of Fixed Assets-

1. How to verify the records: a. Examine records, including the Fixed Asset Register, relating to opening balance, additions, self-construction, write-off, b. Obtain a certificate from management that the books have recorded all the Furniture etc. sold, written off, scrapped etc. 2. a. b. c.
How to verify the existence: Observe the physical verification being conducted by the management wherever possible. Examine whether the method of verification and its frequency was reasonable. Test-check the book records of Furniture etc. with the physical verification reports, and adjustment of discrepancies. retirements, physical verification, work-orders etc. relating to Furniture etc.

3. How to verify the ownership: a. Examine the purchase invoice, freight bills, insurance, installation charges etc. relating to Furniture etc. b. Examine the loan documents, the Register of charges, Resolution of Board/ Shareholders Meeting etc. to see if any c. Obtain direct confirmations, in case the assets are constructively in possession of other persons, such as bankers, through
a request signed by the client. furniture etc. is mortgaged/ pledged.

4. How to verify the valuation: a. Verify that the Furniture etc. have been valued and depreciated in accordance with professional pronouncements and b.
prevailing practices. If the Furniture etc. is fabricated by the client, verify the Contractor's Bills regarding the cost of fabrication. Verify that revaluations, allocations of lump-sum price or joint costs are based on expert advice.

c. Verify the compliance with the recommendations of Accounting Standard 10 (Accounting for Fixed Assets) relating to
accounting.

5. How to verify the disclosure: a. Verify the compliance with the recommendations of Accounting Standard 10 (Accounting for Fixed Assets) relating to b. Verify the compliance with the provisions of Schedule VI of the Companies Act. c. Verify the compliance with the provisions of CARO, 2003 viz. whether the company is maintaining proper records showing full particulars, including quantitative details and situation of
Furniture etc. whether these Furniture etc. have been physically verified by the management at reasonable intervals; whether any material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the books of account. If a substantial part of Furniture etc. have been disposed off during the year, whether it has affected the going concern basis. disclosure.

Audit of Liabilities: I. outstanding/ Pre-paid Expenses: 1. Accrual Accounting: "Accrual" is the fundamental basis of accounting. A limited company must maintain its accounts on accrual basis. Under this basis, a. expenses which have accrued are booked even if not actually paid, and b. amounts which are paid in advance are treated as pre-paid expenses. This gives rise to (a) Outstanding Expenses and (b) Pre-paid Expenses.

2. Scrutiny of Expenses A/c:

Auditor should scrutinise all expense accounts (especially accounts like Service Charges Paid, Interest, Rent, Salaries, Royalties etc.) to ascertain the amounts outstanding or prepaid.

3. General Rule:
As a general rule, expenses should be booked when they have accrued as per the terms of agreement between the parties.

4. Service Charges:
Service charges accrue when the service is performed and complete. Thus, charges for job work (i.e. processing by outsiders of material supplied by the concern) accrue when the job or processing is complete. If a job is complete at the year end, but not yet billed, auditor should ensure that the service charges are shown as accrued and payable in the books. On the other hand, if any amount is paid but the job is not complete as at year end, it should be shown as pre-paid expenses.

5. Interest Due:
Interest accrues on time basis at the rate agreed. Thus, if a loan agreement states that interest on a loan of Rs. 1,00,000 is payable @ 20% per year, interest for an year would be Rs.20,000. If only Rs. 15,000 are paid till the year end, interest of Rs.5,000 has accrued and must be booked as Outstanding Expenses. On the other hand, if interest paid is Rs. 25,000, Rs.5,000 are paid in advance and pertain to the next year. Auditor should scrutinise the Interest Account to ascertain the amount of Interest Outstanding or Interest pre-paid.

6. Rent:
Rent also accrues on time basis at. the rate agreed. Thus, if a rent agreement states that rent of Rs. 1,000 is payable per month, rent for an year would be Rs. 12,000. If only Rs. 10,000 are paid till the year end, rent of Rs. 2,000 has accrued and must be booked as Outstanding Expenditure. If on the other hand, Rs. 15,000 are paid during the year, Rs. 3,000 should be shown as Pre-paid Expenses.

7. Royalty:
Royalty means the charges for use of know-how, patents, trade marks and copyrights. Royalties accrue as per the terms of the concerned agreement.

8. Salaries and Wages:

Normally, salaries and wages of the last month of the accounting year would be outstanding at the year end. These amounts would be paid in the next month. While making the provision, provisions should be made for the Gross Salaries and Wages i.e. including the employer's contribution to Provident Fund, etc.

9. Commission on Sales:
Commission may be payable to sales staff, or outside agents. The amount of commission would depend upon the terms of agreement and the amount of sales. The auditor should verify the computation of commission and ascertain the commission outstanding or pre-paid as on the

year end. Auditor should verify that the appointment and terms of a sole selling agent are approved by the shareholders in a general meeting [s.294 of the Companies Act]. Schedule VI requires that Commission to Sole Selling Agents and must be disclosed separately.

10. Commission to Directors:

Commission to directors must be in accordance with the provisions of the Companies Act.

11. Opening Balance:

Auditor should check that the opening balance brought forward from the previous year in the Outstanding Expenses Account is squared off during the current year. The difference between the provision for outstanding expenses brought forward and the actual payment in the next year must be properly adjusted.

12. Prior Period Expenses:

Prior Period Expenses are expenses debited to the current year's profit and loss account, though relating to earlier years, due to the omission to treat such expenses as Outstanding Expenses during the concerned year. Such items should be disclosed separately in the profit and loss account.

II. Bills Payable:

The auditor should verify Bills Payable in the following manner.

1. Review of Internal Controls:

Auditor should study and review the system of internal controls relating to acceptance and payment of Bills Payable.

2. Scrutiny of Ledger Accounts:

Auditor should scrutinise the Ledger Accounts of Bills Payable.

3. Confirmation:
Auditor should obtain confirmation from the drawers or holders of bills in respect of the amount due on bills held by them on the balance sheet date. This should be reconciled with the balance in the Bills Payable Account in the ledger.

4. Secured:
Auditor should ascertain whether the bills payable are secured against the property of the concern. If so, he should verify the documents creating the charge as explained below in verification of "Loans taken against security". He should check the documents, the Register of Charges, Resolution of Board or Shareholders' Meeting etc. in this regard.

5. Events After Year End:

Auditor should check the following entries in the next year (a) if bills are confirmed as on any date after the year end, bills paid in the meanwhile should be checked, (b) If a new bill is accepted after the year end, in respect of a matured bill, auditor should inspect the new bill and ascertain the reasons.

III. Loan or Public Deposits Taken:

The auditor should verify Loans Taken in the following manner:

1. Review of Internal Controls:

Auditor should study and review the system of internal controls relating to acceptance of Loans. He should ascertain how loan amounts and terms are fixed and who are the persons authorised to sign the loan agreements.

2. Power to Borrow:
Auditor should see that the loans are within the borrowing powers specified in the memorandum and articles of the company. He should see that proper procedure was followed while accepting the Loan. He should see that the Loans comply with the provisions of section 292 and 293 of the Companies Act. He should ascertain whether loans within the prescribed limit were sanctioned by the board of directors and loans beyond such limits were sanctioned by the shareholders in a general meeting. Auditor should ascertain that the loans were taken for the purpose of the business of the company.

3. Confirmation:
Obtaining confirmation from the lenders is the best evidence to verify such accounts. The procedure is similar to that in the case of the debtors.

4. Legally Payable:
Auditor should confirm that all outstanding loans are legally payable. The loan agreements should indicate that proper procedures were followed while accepting the loan. The loan should not have become time barred.

5. Overall Checks:

Auditor should compare the details of loans for the current year with those of the previous year. He should investigate the abnormal differences. He should reconcile the loan accounts with the Register of Charges, Documents filed with the Registrar of Companies, payment of interest etc.

6. Disclosure in Accounts:
While verifying the accounts of loans, auditor should keep in mind the following requirements of Schedule. VI to the Companies Act regarding disclosure in the accounts: a. The installments of long terms loans, falling due within next 12 months, should be disclosed by way of a note. b. A loan should be classified as secured, only to the extent of the market value of the security. If the market value of the security is less than the outstanding amount of loan, difference should be shown as unsecured. c. Future installments under hire purchase agreements for the purchase of asset should be shown separately as secured loans.

7. Audit Report under CARO, 2003: a. Loans from Group Concerns: Under CARO 2003, auditor has to report: Whether Loans have been granted/taken from parties
listed in the register maintained under section 301 of the Companies Act, 1956? If so, give the number of parties and the amount involved in the transactions. Prepare a list of names and the amount involved. (i) Whether the rate of interest and other terms and conditions for loans granted/ taken are prima facie prejudicial to the interest of the company? (ii) Whether the payment of principal and interest are regular?

b. Deposits from the public: (i) Whether the company has accepted any deposits from the public? (ii) Whether the company has complied with the provisions of Sections 58 A & 58 AA of the Companies Act. 1956 / directions (iii)
of the RBI and the rules made there under? If not nature of contravention to be reported. Whether the company has complied with the requirement of the order passed by the Company Law Board etc.?

8. End use of funds:

Under CARO 2003, auditor has to report: a. Whether terms loans have been applied for the purpose for which the loans were obtained? Obtain the project report and check the application of funds for which the loan is obtained. b. Whether the funds raised for short-term purpose have been used for long-term investments (for example, acquiring fixed assets by utilizing substantial/entire portion of borrowed working capital.) and vice versa? If yes, the nature and the amount to be indicated.

IV. Loan Taken Against Security:

In addition to the general points discussed above (under "Loans Taken"), auditor should consider the following points when loans are taken against security.

1. Auditor's Duty:
Loans may be taken against different types of securities. The duty of the auditor is to (a) verify that the security is valid, i.e. legally enforceable, and (b) the value of the security is adequate to cover the loan amount.

2. Verification of Securities:
The documents to be verified by the auditor depend upon the type of security. This is shown in the following table. Whenever the borrower is a Company, the charge against any property must be registered with the Registrar of Companies. Auditor must insist on inspecting the certificate given by the Registrar of Companies that such charge is duly registered. This ensures that the security is valid and legally enforceable.

3. Valuation of Securities:
Auditor should consider the following points in this connection: a. Shares and Debentures: If shares and debentures are quoted on a recognised stock exchange, valuation is no problem. If the shares etc. are not quoted, he should compute the value himself, on the basis of the accounts of the concerned company. b. Partly Secured Loans: If the value of the security on the balance sheet date is less than the outstanding amount of loan, the loans are separately disclosed as partly secured in the balance sheet.

V. Secured Loans from Banks:

The auditor should verify Loans Taken from banks against security in the following manner:

1. Review of Internal Controls:

Auditor should study and review the system of internal controls relating to acceptance of such loans. He should ascertain how loan amounts and terms are fixed and who are the persons authorised to sign the loan agreements.

2. Power to Borrow:
Auditor should see that the loans are within the borrowing powers specified in the memorandum and articles of association of the company. He should see that proper procedure was followed while taking the Loan. He should see that the Loans comply with the provisions of section 292 and 293 of the Companies Act. He should ascertain whether loans within the prescribed limit were sanctioned by the board of directors and loans beyond such limits were sanctioned by the shareholders in a general meeting. Auditor should ascertain that the loans were taken for the purpose of the business of the company.

3. Confirmation:
Obtaining confirmation from the banks is the best evidence to verify such accounts.

4. Overall Checks:
Auditor should compare the details of loans for the current year with those of the previous year. He should investigate the abnormal differences. He should reconcile the loan accounts with the Register of Charges, Documents filed with the Registrar of Companies, payment of interest etc.

5. Disclosure in Accounts:
While verifying the accounts of loans, auditor should keep in mind the following requirements of Schedule VI regarding disclosure in the accounts: a. The installments of long terms loans, falling due within next 12 months, should be disclosed by way of a note. b. A loan should be classified as secured, only to the extent of the market value of the security. If the market value of the security is less than the outstanding amount of loan, difference should be shown as unsecured.

6. Verification of Security:
Auditor should verify the copy of loan agreement and ascertain the terms of loan, rate of interest, schedule of repayment etc. The documents to be inspected depend upon the type of security given. Thus, auditor should verify the copies of mortgage deed, list of stocks etc. If securities are deposited with the lending bank, e.g. shares etc. he should obtain a letter of confirmation from the bank regarding the custody of securities. In case of a company, any charge created against the property of the company to secure the loan must be registered with the Registrar of Companies. After registration, the Registrar issues a certificate of registration of charge. Auditor should verify the copy of such certificate. The details of such charges must be entered in the Register of Charges maintained by the company. Auditor should check the entries in this register also. If any such loan is entirely repaid during the year, the charge is said to be satisfied. Auditor must verify the documents the Registrar of Companies regarding the discharge of security, the certificate of satisfaction of charge issued by the Registrar of Companies and the entries in the Register of Charges.

7. Valuation of Security: a. Shares and Debentures: If Shares and Debentures are quoted on a recognised stock exchange, valuation is no problem. If the shares etc. b. Partly Secured Loans: If the value of the security on the balance sheet date is less than the outstanding amount of loan,
the loan is separately disclosed as partly secured in the balance sheet. are not quoted, he should call for the audited accounts of the concerned company and compute the value himself.

8. Reporting under CARO 2003 on Defaults:

Auditor has to report, under CARO 2003, whether the company has defaulted in repayment of dues to financial institution/ banks ? If so, report on the period and the amount of default.

VI. Loans Against Mortgage of Property:

Auditor should check the general points described above for verification of loans. He should, in addition, consider the following points.

1. Type of Mortgage:
Mortgage means a charge on immovable property to secure a debt. Mortgage may be of two types - Legal and Equitable. Legal Mortgage means a mortgage duly registered under the Transfer of Property Act. Equitable Mortgage means simply depositing the title deeds of the property with the lender as a security. Equitable Mortgage can be created only in notified towns.

2. Verification:
Auditor should verify the copy of mortgage deed and ascertain the terms of loan, rate of interest, schedule of repayment etc. In case of a company, such mortgage must be registered with the Registrar of Companies. After registration, the Registrar issues a certificate of registration of charge. Auditor should verify the copy of such certificate. The details of such charges must be entered in the Register of Charges maintained by the company. Auditor should check the entries in this register also. If a loan is repaid during the year, the charge is

said to be satisfied. Auditor must verify the documents filed with the Registrar of Companies regarding the discharge of security, the certificate of satisfaction of charge issued by the Registrar of Companies and the entries in the Register of Charges.

VII.

Debentures Secured Against Property: The auditor should verify debentures issued against security in the following manner:

1. Review of Regulations:
Auditor should study the regulations relating to issue of such debentures. He should ascertain how the issue amounts and terms are fixed and who are the persons authorised to carry out the prescribed procedures.

2. Power to Borrow:
Auditor should see that the debentures are within the borrowings powers specified in the memorandum and articles of the company. He should see that the debentures comply with the provisions of section 292 and 293 of the Companies Act. He should ascertain whether borrowings within the prescribed limits were sanctioned by the board of directors and borrowings beyond such limits were sanctioned by the shareholders in a general meeting. Auditor should ascertain that the proceeds of the debentures issue were utilised for the purpose of the business of the company.

3. Verification of Security:
When debentures are secured against property of the company, the charge must be registered with the Registrar of Companies. The certificate issued by the Registrar of Companies regarding certificate should also show the particulars of the property secured etc. Normally, the secured property is mortgaged in favour of trustees who can act on behalf of all the debentureholders.

4. Reconciliation:
Auditor should reconcile the debentures issued with the schedule of debentureholders and the Register of debentureholders.

5. Disclosure in Accounts:
While verifying the accounts of secured debentures, auditor should keep in mind the following requirements of schedule VI regarding disclosure in the accounts: a. The amount of debentures redeemable within next 12 months should be disclosed by way of a note. b. Debentures should be classified as secured, only to the extent of the market value of the security. If the market value of the security is less than the outstanding amount of debentures, difference should be shown as unsecured.

6. Reporting under CARO 2003 on Defaults:

Auditor has to report, under CARO 2003, whether the company as defaulted in repayment of dues to debenture holders? If so, report on the period and the amount of default.

VIII.

Deferred Credits:

1. Meaning:
Deferred credits are basically credits payable over more than one year and are likely to spread over more than one financial period. Deferred credits usually arise because of financing provided by the vendor or by a refinancing agency such as IDBI or EXIM Bank and involves signing bills of exchange counter guaranteed by buyer's bank.

2. Auditor's Duty:
The following aspects of deferred credits should be verified by the Auditor:

(i) Recording: a. Whether the entry is passed for the full amount of bills of exchange including the future discount charges (as in the case of b. Whether the assets value capitalized is as per company's accounting policy? (ii) Verification: a. Whether a confirmation of balance from the bankers is obtained for the following The bills of exchange issued by them outstanding, The charges to be accounted if any, Whether any security has been created in favour of the bank, Whether any personal guarantees have been issued by directors? b. Whether the bills of exchange on hand are verified? c. Where any deferred credits are outstanding in favor of a foreign supplier, whether the compliance with Accounting Standard
11 for foreign exchange fluctuations is examined? hire-purchase accounting).

3. Disclosure:
Deferred credits may create a problem for classification since they are neither loans nor current liabilities and fall in a category of its own. The Statement on Auditing Practices state the following in this respect: The question whether amounts payable to suppliers of machinery under deferred payment arrangements are to be shown as current liabilities or otherwise frequently arises. Since such liability arises as a result of purchases, they can classified as long term liabilities and shown separately after unsecured loans with an appropriate description. If there are any 'acceptance of bills etc., in respect of these liabilities the same should be indicated. The security if any, provided should also be indicated. The installments payable within 12 months from the date of the balance sheet may be separately indicated or shown as current liabilities.

IX. Contingent Liabilities: 1. Meaning:

Contingent Liability means possible liabilities which may or may not become actual liabilities. An actual liability indicates a legal obligation, while a contingent liability indicates an uncertain liability.

2. Examples:
Examples of Contingent Liabilities area. legal suits against the company for violation of trade marks or patents; for pollution of environment; for selling defectives goods etc. b. liability as a member of a company limited by guarantee. c. liability as a partner in a firm. d. guarantee for loans taken by others from bank or financial institutions.

3. Discovery:
Auditor should discover the contingent liabilities by the following procedures: (i) Whether the company has followed up last year's contingent liabilities and commitments and updated the same? (ii) Whether the following records are verified in detail to identify contingent liabilities? a. Minutes of the Board of directors and committees of directors b. Sales and purchase contracts for liquidated damages, penalties etc. c. Income tax, sales tax and excise records and the assessment orders etc. d. Listing of pending suits filed by third parties against the company e. Certificates from company's bankers for bills discounted, letters of credit, guarantees etc. f. Agreements with the unions and charter of demands which are currently under negotiation g. Investments schedules for outstanding calls on investments h. Schedule of legal and professional fees paid i. Correspondence with debtors for long overdue amounts because of their claims j. Commitments given by the company to the Government for subsidies received k. Export commitments l. Value of discount coupons issued to shareholders

4. Certificate:
Auditor should also obtain a certificate from the management, that contingent liabilities of all types have been disclosed in the notes to accounts. Such certificate, however, does not relieve the auditor of his duty to verify contingent liabilities. Such certificate merely indicates that auditor had asked for and obtained information from the management regarding such liabilities.

5. Report under CARO 2003, on Guarantees for Loans:

Auditor has to report, under CARO 2003, whether the company has given any guarantee for loans taken by others from bank of financial institutions, the terms and conditions whereof are prejudicial to the interest of the company.

X. Creditors:
The auditor should verify Creditors in the following manner.

1. Review of Internal Controls:

Auditor should study and review the system of internal controls relating to credit purchases and creditors. He should ascertain how credit purchases are made and who are the persons authorised to make purchases.

2. Creditors Ledger Scrutiny:

Auditor can now begin the next procedure of Scrutiny of Creditors Ledger which involves the following steps-

A. Checking Opening Balances: Opening Balances of the Creditors Ledger should be verified with reference to the audited
accounts, the creditors ledger and the schedule of creditors for the last year.

B. Checking Posting: 1. In vouching, auditor checks the entry in the original books such as Cash Book, Purchase . Register, Bills Payable Register, 2. 3. a. b. c. d.
Debit Note / Credit Note Register, Journal, etc. The next step is to check the posting from these books into the Creditors Ledger. Auditor should check that the correct amount is posted in the correct account on the correct side of the account. Posting may be checked on sample basis. Auditor may check either all the postings for say 3 months or check postings into selected accounts for the whole year. The following aspects should be checked all entries are posted in sequence of dates i.e. chronological order. no entry is inserted in between two entries afterwards. no entry is altered. against each entry, there is a reference of the folio of the original book or register.

C. Checking Casting:
Auditor should check the totals of the ledger accounts. If an account runs into many pages, he should check that the total of one page is correctly carried forward to the next page.

3. Checking Summary & Grouping:

Auditor should check the final balances of the Creditors Ledger into the Trial Balance and the Grouping. He should see thata. the total of individual balances in the Creditors Ledger tallies with the Creditors Control Account in the General Ledger, if any. b. no account in the nature of loan etc. is grouped under creditors. c. the debit balances in the Creditors Accounts are shown on the Assets side of the Balance Sheet. Such debit balances should not be deducted from the gross credit balances in the Creditors Accounts.

4. Checking Reporting Requirements: a. Book Entries: Auditor has to enquire (u/s 227 of the Companies Act) whether transactions of purchase etc. are not mere book entries.
Thus, if large purchases are made from a concern towards year end and these goods are returned immediately in the beginning of the next year, these may be fictitious purchases to show less profits. Further, if any transfer entry is passed between two party accounts, auditor should ascertain that both the parties have agreed to and confirmed such transfer of balances! This information can be obtained through an intelligent ledger scrutiny. Purchases from Group Concerns: Auditor can ascertain from the Ledger whether purchases are made from a group concern during the year. If so, he has to report under CARO 2003 whether the rates charged are reasonable compared to the market rates for similar items.

b.

5. Confirmation:
Obtaining confirmation from creditors is the best evidence to verify the creditors accounts. This is similar to obtaining confirmations from debtors, explained above.

6. Cut-off Transactions:
Auditor should ascertain that there are no unrecorded creditors. He has to ascertain that no creditors are omitted from the books of the concern. He has to carefully scrutinise the cut-off transactions in this respect. He should take the following steps a. Auditor should examine the "cut-off procedures". These are the procedures to ensure separation of transactions of the current year from those of the next year. Thus, though transactions of purchase are continuous, steps must be taken to divide the purchases of current year from the purchases of the next year. b. Auditor should ensure that purchase bills are booked for all goods received till the last day of the accounting year, and no purchase bills are booked unless the goods were actually received during the accounting year.

7. Overall Checks:
Auditor should compare the details of sundry creditors for the current year with those of the previous year. He should also work out the creditors turnover ratios for both the current and the previous year. He should investigate the abnormal differences.

8. Amount of Write Backs:

Auditor should check the Creditors Balances, especially, those outstanding for a long time to determine the amount to be written back, i.e. credited to the profit and loss account as no longer payable. Exercises

A. Multiple Choice Questions:

1. The following points should be noted or checked by the auditor in verification of an asset (a) Checking the Voucher (b) Checking the transactions (c) Checking the Entry in the Books (d) Checking existence, ownership, non-omission and disclosure 2. While checking the cut-off procedures, the Auditor should ensure that (a) Sales bills are raised for all goods despatched till the last day of the accounting year, (b) No sales bills are raised unless the goods were actually despatched and sold during the accounting year. (c) Both the above (d) None of the above 3. Auditor should verify stocks which are not lying with the concern e.g. goods on consignment, (a) Through physical verification at consignee's godown (b) Through observing the physical verification carried out by the consignee (c) By obtaining and examining the confirmation from the consignee (d) By obtaining and examining the confirmation from the consignor 4. Closing stock with consignee is to be shown as the asset of
(a) The consignor (c) Both the above (b) The consignee (d) None of the above

5. Stock of Goods on Consignment should be valued at (a) Invoice price (b) Cost or market price whichever is lower (c) Price at which goods were sent to the consignee (d) None of the above 6. Prior Period Expenses are (a) Expenses of the current year paid in previous year (b) Expenses of the previous year paid in current year (c) Expenses of the previous year paid in previous year (d) Expenses of the current year paid in next year 7. Prior Period Expenses are (a) Expenses credited to the current year's profit and loss account, though relating to earlier years (b) Expenses debited to the current year's profit and loss account, though relating to next year (c) Expenses debited to the current year's profit and loss account, though relating to earlier years (d) Expenses debited to the previous year's profit and loss account, though relating to the current year 8. (a) (b) (c) (d)
If the market value of the security is less than the outstanding amount of loan taken, Difference should be shown as loans and advances Difference should be shown as current liability Difference should be shown as unsecured loan None of the above

9. A mortgage duly registered under the Transfer of Property Act is known as (a) Equitable mortgage (b) Legal mortgage (c) Hypothecation (d) Pledge 10. ______ involves depositing the title deeds of the property with the lender as security. (a) Equitable mortgage (b) Legal mortgage (c) Hypothecation (d) Pledge 11. Deferred credits from machinery suppliers (a) Are credits payable over more than one year (b) Arise because of financing provided by the vendor or by a refinancing agency (c) Involve signing bills of exchange counter guaranteed by buyer's bank (d) All of the above

12. An auditor is verifying valuation of building which has been self-constructed by the client. Which of the following documents is least (a) Bills of contractor (b) Minutes of meeting of board of directors (c) Certificates of engineer and architect (d) Loan agreement
verify this investment by relevant to the auditor for verification purposes?

13. Equity shares of XY Ltd. held by ABC Ltd. are in the custody of Stock Holding Corporation of India Limited (SHCIL). The auditor many (a) viewing last year's working papers. (b) Obtaining a certificate from a responsible official of the ABC Ltd. (c) Obtaining a certificate from SHCIL (d) Obtaining a certificate from XY Ltd. 14. While reconciling a client's annual physical inventory with book stock, an auditor observed that for certain items the stock in hand was
more than that shown in the books. This could be the result of the client's failure to record(a) Purchase returns (b) Sales return (c) Goods with consignor (d) Purchase discounts

15. Goods Received Notes support entries in

(a) Sales book and sales return book (c) Cash book and purchase book (a) Debtors (c) Building (b) Purchase book and sales return book (d) sales book and purchase return book (b) Land (d) Machinery

16. Which of the following assets cannot be subjected to physical verification

B. Fill in the Blanks: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23.
Verification involves obtaining and examining evidence in respect of an item of _____ or _____. _____ means obtaining written evidence from outside parties regarding existence of an asset or liability. _____ procedures ensure separation of transactions of the current year from those of the next year. If any debtor has become insolvent after the balance sheet date, provision (should be / should not be) made for such debts as bad debts. Auditor (needs to / is not required to) ensure that the book stocks are adjusted for any excess or shortage found on physical verification. If the stocks are undervalued the profits and assets will be (overstated / understated). Auditor should ensure that, in valuing stocks of goods sold on hire purchase, the proportionate estimated profit applicable to outstanding installments, (is / is not) added. Auditor should see that Loose tools have been disclosed separately as an item of (fixed/current) asset. In case of right shares acquired the year, their cost should be (added to / deducted from) the cost of the original shares. In case of (Rights / Bonus) Shares received during the year, no adjustment should be made to the cost of original shares. In case of a company the amount of depreciation should be in accordance with the provisions of the Companies Act and Schedule _____ thereto. Revaluation Reserve (is / is not) available for distribution i.e. payment of dividend. Mortgage means a _____ on immovable property to secure a debt. A mortgage duly registered under the Transfer of Property Act is known as _____ mortgage. _____ Mortgage means simply depositing the title deeds of the property with the lender as a security. Bills Receivable discounted before maturity, but likely to be dishonoured on presentation are considered as (current / contingent) liabilities. During the scrutiny of ledger, auditor should see that all entries are posted in sequence of dates i.e. _____ order. During the scrutiny of ledger, auditor should see that, against each entry, there is a reference of the _____ of the original book or register. _____ of Debtor's Balance mean all the sales bills pending as at the year end which add up to the closing balance in the account. If the balance in a debtor's account is a credit balance, it indicates that _____ are more than sales made. The credit balances in the Debtors Accounts are shown on the (Assets / Liabilities) side of the Balances Sheet. Credit balances in the Debtors Accounts (should be / should not be deducted) from the gross debit balances in the Debtors Accounts. In the (positive / negative) form of confirmation, the debtor is asked to write back whether he agrees or not with the balance shown.

24. In the (negative / positive) form of confirmation, the debtor is asked to write back only if he disagrees with the balance 25. The debtors confirmations should be returned to the (auditor / client) and not to the (auditor / client). C. Match the Following: 1. 2. 3. 4. 5. 6. 7. 8. 9.
Column A Rights Shares Column B shown.

Bonus Shares Stocks Debtors Value of building constructed by auditee Value of machinery fabricated by auditee Future installments under hire purchase agreements for the purchase of asset Loan secured by Legal Mortgage of Immovable Property Loan secured by Equitable Mortgage or immovable property

a. Confirmation b. Add cost to the cost of original shares c. Certificate from Chartered Engineer d. Check title deeds deposited with leader or solicitor e. Check Mortgage Deed f. Add only to no. of shares received to the number of original shares g. Certificate from Civil Contractor h. Treat as contingent liability i. Physical verification j. Certification from Architect k. Certification from Factory Manager l. Show separately as secured loans

D. State whether True or False: 1. Verification involves obtaining and examining evidence in respect of an item of revenue or expenditure. 2. Confirmation means obtaining written evidence from management regarding existence of an asset or liability. 3. Verification involves obtaining and examining evidence in respect of an item of asset or liability at the beginning of the year. 4. Verification means comparing the entries in books of accounts with documentary evidence in support thereof. 5. When the auditor observes whether the inventory is being taken by the staff of the concern in the right manner, he is said to employ the audit technique of 'inspection'. 6. The opening balance of the stock book for the next year should be the closing stock of the current year as per the physical inventory. 7. If the stocks are overvalued the profits and assets will be overstated. 8. Investments are valued at the market price as at the year end. 9. Depreciation is to be provided on the investments annually. 10. In case of Bonus Shares received during the year, no adjustment should be made to the cost of original shares. Only the number of shares should be increased resulting in a lower average cost per share. 11. Investment in subsidiary companies is valued at cost, even if the subsidiary company has incurred any losses. 12. Patents should be written off over their legal period of validity or their working life, whichever is shorter. 13. In case patents were developed in-house, they are shown in the books at Nil value. 14. Interest on loans taken to purchase machineries upto the date of completion of the project should be included in the cost of the machineries. 15. Increase in value of plant and machineries due to revaluation should be debited to the Plant & Machineries Account, and credited to Profit & Loss Account. 16. No depreciation can be claimed in respect of freehold land. 17. A decrease in the value of freehold land on revaluation should be debited to the Profit and Loss Account, and credited to Land Account. 18. A loan should be classified as secured, only to the extent of the market value of the security. 19. The entry for amounts payable to suppliers of machinery under deferred payment arrangements passed for the full amount of bills of exchange including the future discount charges. 20. If an asset is purchased by a company, it is necessarily owned by the company. 21. An asset which is owned by a company need not necessarily be in its possession.

22. An invoice is a reliable evidence that the asset is owned by the company. 23. Goods in transit are to be included in Closing Stock-in-Trade. 24. Inspection means observation of an asset. 25. Confirmation means obtaining documents from the client supporting the voucher. 26. It is the responsibility of the auditor to carry out physical verification of fixed assets at appropriate intervals in order to ensure that they are in existence. 27. In case of Bonus Shares received during the year, adjustment should be made to the cost of original shares. 28. Investment in subsidiary companies is valued at cost or net realisable value whichever is lower. 29. When inventory is under the custody and control of a third party, the auditor must attend the physical verification of the inventories. 30. Vouching includes verification. 31. Obtaining direct confirmation from debtors does not mean that the debt will be recovered. 32. Direct confirmation procedures for debtors balances need not be carried out with the consent of the concern (auditee). 33. The detailed procedure for obtaining debtors confirmation (from whom, when, how, in what form etc.) is to be decided by the entity 34. In the negative form of confirmation, the debtor is asked to write back whether he disagrees with the balance shown. 35. In the positive form of confirmation, the debtor is asked to write back only if he agrees with the balance shown. 36. The positive form of confirmation is used when many parties are likely to agree with the book balances shown. 37. The negative form of confirmation is used when few accounts having large balances are involved. 38. The debtor confirmations should be returned to the client.
Check your Answers: A. Multiple Choice Questions: 1. D 4. A 7. C 2. C 5. B 8. C 3. C 6. B 9. B (auditee).

10. A 11. D 12. B

13. C 14. B 15. B

16. A

B. Fill in the Blanks:

(1) Asset; Liability (2) Confirmation (3) Cut-off (4) Should be (5) Needs to (6) Understated (7) is not (8) Current (9) Added to (10) Bonus (11) XIV (12) is not (13) Charge (14) Legal (15) Equitable (16) Contingent (17) Chronological (18) Folio (19) Composition (20) Receipts (21) Liabilities (22) should not be (23) Positive (24) Negative (25) Auditor, Client C. Match the Following: (1) - (b); (2) - (f); (3) - (i); (4), (a); (5) (j), (6) - (c), (7) - (1), (8) - (e), (9) - (d)

D. True or False:
True: 6, 7, 10,11, 12, 14,16, 17, 18, 19,21,22,23, 31 False: 1, 2,3, 4, 5, 8,9,13,15,20, 24, 25, 26,27,28,29,30, 32, 33, 34, 35, 36, 37, 38

CHAPTER 6 INTRODUCTION TO COMPANY AUDIT Qualifications and Disqualifications:

1. Qualification of Company Auditors [Section 226]:

Section 226 of the Companies Act, 1956, prescribes the qualifications of auditors of a company. (1) A Chartered Accountant: A person should be a Practising Chartered Accountant within the meaning of the Chartered Accountants Act, 1949.

(2) A Firm of Chartered Accountants: A firm whereof all the partners are Chartered Accountants practising in India
may be appointed as an auditor by its firm name. In such a case any partner so practising may act in the name of the firm.

(3) A 'Certified Auditor': The holder of a certificate under the Restricted Auditors Certificates (Part B States Rules),
1956, can be appointed as an auditor of companies. Thus, a chartered accountant in practice, a firm of practising chartered accountants or a certified restricted state auditor can be appointed as the auditor of a company.

2. Disqualifications [Section 226]:

According to Section 226 (3) of the Companies Act, 1956, none of the following persons shall be qualified for appointment as an auditor of a company: (1) a body corporate, (2) an officer or employee of the company, (3) a person who is a partner, or who is in the employment, of an officer or employee of the company, (4) a person who is indebted to the company for an amount exceeding one thousand rupees, o r who has given any guarantee or provided any security in connection with the indebtedness of any third persons to the company for an amount exceeding one thousand rupees, (5) a person holding any security (i.e. an instrument with voting rights) of that company after a period of one year from the date of commencement of the Companies (Amendment) Act, 2000, (6) a person who is a director or a member of the private company,

(7) a person disqualified to be appointed as an auditor of any other body corporate which is that company's (8)
subsidiary or a holding company or a subsidiary of that company's holding company, or would be so disqualified if the body corporate were a company, Under S. 224 (IB), a firm which already holds the specified number of company audits cannot accept any more company audits. [This does not apply to a private limited company, after the commencement of the Companies Amendment Act, 2002].

An auditor, who after his appointment, becomes subject to any of the above disqualifications, shall be deemed to have vacated his office as an auditor. These disqualifications have been provided to ensure that the auditors are independent and impartial. Appointment: 1. First Auditors: The first auditors of a company are appointed by the directors in the first meeting of the Board of Directors to be held within 30 days of the incorporation of the company. If the directors fail to do so, the shareholders can appoint the first auditors in a general meeting. Such auditors hold their office till the conclusion of the first annual general meeting.

2. Appointments and Reappointments by Shareholders:

Except in the case of the first auditor, every company shall, at each annual general meeting, appoint an auditor who will hold office from the conclusion of the meeting until the conclusion of the next annual general meeting. At any annual general meeting, a retiring auditor, by what soever authority appointed, shall be reappointed unless: (a) he is not qualified for reappointment ; (b) he has given the company a notice in writing of his unwillingness to be reappointed; (c) a resolution has been passed at the meeting appointing somebody else instead of hi m or providing expressly that he shall not be reappointed ; or (d) where notice has been given of an intended resolution to appoint some person in place of a retiring auditor, and by reason of death, incapacity or disqualification of that person, the resolution cannot be proceeded with.

3. Appointment by Central Government: (a) Where no auditors are appointed at an annual general meeting, or appointed by an ordinary resolution even (b)
though a special resolution as necessary within seven days of such a meeting the company shall intimate this information to the Central Government which may appoint a person to fill the vacancy. Under Section 619, the Comptroller and Auditor-General of India may appoint or reappoint the auditor of a Government company.

4. Casual Vacancy: (a) Where a vacancy is caused by the resignation of an auditor, the vacancy shall be filled by the company in a (b) The Board of Directors may fill any other casual vacancy (e.g. arising due to death, disqualification etc.) in the (a) While any such vacancy continues, the remaining auditor or auditors, if any, may continue to act as the auditor (b) Any auditor appointed in a casual vacancy shall hold office until the conclusion of the next annual general
meeting. or auditors. office of an auditor. general meeting.

5. Appointment by Special Resolution:

In the case of a company in which not less than 25% of the subscribed share capital is held, whether singly or jointly by: (a) a public financial institution, or a Government company or the Central Government or any State Government; (b) any financial or other institution established by any provincial or State Act in which a State Government holds not less than 51% of the subscribed share capital; (c) a Nationalised bank or on insurance company carrying on general insurance business, the appointment or re-appointment at each annual general meeting of an auditor or auditors shall be made by a special resolution (which must be approved by 75% of members present). If the company fails to pass such a special resolution, the Central Government may appoint the auditor of that company. Removal of Auditors [Section 225]: In order to provide a check against the removal of independent and honest auditors, the Companies Act prescribes strict rules in this regard.

1. Removal Before Expiry of the Term: (a) First Auditors: The first auditor, appointed by the board of directors, can be removed by the shareholders at a general
meeting before the expiry of his term, without obtaining the previous approval of the central government. However, a special notice of at least 14 days is required for the appointment of any other person in his place. (b) Other Auditors: Any other auditor can be removed before the expiry of his term by the company only at a general meeting, after obtaining prior approval of the central government. Thus the central government needs to be convinced that the auditor has to be removed. In all cases of premature removal of auditors the provisions of section 225 (explained below) shall apply.

2. Appointing a New Auditor in Place of Retiring Auditor:

Section 225 prescribes the following procedure regarding the appointment of a new auditor in place of a retiring one, whether on or before the expiry of his term. (1) Special Notice: Firstly, a special notice is required for such a resolution. Such notice must be given to the company at least 14 days before the date of the meeting. (2) Copy of Notice to Retiring Auditor: The company shall send the copy of notice to the retiring auditor and also to each member. (3) Written Representation by Retiring Auditor: (a) Written Representation of Reasonable Length: The retiring auditor can make written representation, of a reasonable length, to the company and request its notification to the members of the company. (b) Company to Send Copy to Members: The company shall, unless it is too late to do so, (i) in any notice of the resolution given to members of the company state the fact of the representation having been made, and (ii) send a copy of the representation to every member of the company. (c) Read Out At Meeting: In case the copies are not sent to all members, the auditor may require that the representation shall be read out at the meeting. (d) Auditor To Be Heard At Meeting: In any case, the auditor has the right to be heard at the general meeting. (e) Court's Orders on Defamatory Representation: The copies of the representation need not be circulated or read out in the meeting if, on the application of the company or any other aggrieved person, the court is satisfied that the auditor is misusing his rights to secure needless publicity for defamatory matters. Remuneration of Auditors [Section 224 (8)]: The remuneration of an auditor of a company may be fixed by the authority which appoints him. 1. Board of Directors: Thus, the board of directors can fix the remuneration in case of the (i) first auditors or (ii) the auditors appointed in any casual vacancy caused otherwise than by resignation.

2. Shareholders:
Similarly, if the auditor is appointed by the shareholders at its general meeting, the remuneration shall be fixed by the shareholders at the general meeting.

3. Central Government:
If the auditor is appointed by the Central Government, the remuneration shall be fixed by the Central Government.

4. CAG:
In case of an auditor appointed u/s 619 by the Comptroller and Auditor General (CAG) of India, the remuneration shall be fixed by the company in general meeting.

5. Remuneration Includes Expenses:

'Remuneration', it should be noted includes reimbursement of expenses incurred in the course of audit.

6. Retiring Auditor:
In case of reappointment of a retiring auditor, the amount fixed for the previous period is considered as the remuneration for the current year, in the absence of anything to the contrary.

7. Other Remuneration:
An auditor may receive separate remuneration for services rendered other than the audit work e.g. for attending income-tax work, or for advice in company law matters, management services etc. Such remuneration is a matter of arrangement with the board of directors and does not generally require the approval of the company at a general meeting.

8. Disclosure in Accounts:

A separate disclosure of all amounts paid to the auditor in whatever capacity and whether as fees or expenses, is required to be made in the profit and loss account under Schedule VI, classified as below: 1. As auditor ; 2. As adviser or in any other capacity in respect of: (a) taxation matters, (b) company law matters, and (c) management services, and 3. Other amounts paid in any other manner. Rights of Company Auditor: 1. Access to Books and Vouchers:

(1) Legal Provision: Section 227(1) of the Companies Act provides that every auditor of a company shall have a right of (2) (3)
access at all times to the books and accounts and vouchers of the company, whether kept at the head office of the company or elsewhere Meaning of Vouchers & Books: The term 'vouchers' includes all documents, correspondence, agreements, etc. which support the transactions appearing in the financial statements. The term 'books' includes the financial, statutory, and statistical books, the cost records and the stock records. Access at All Times: An auditor can inspect the books etc. at any time during the period he acts as the auditor of the company. He does not have to wait till the year end to conduct the audit. He can make surprise checks of cash balance or stock-in-hand any time. The phrase 'all time', however implies only the normal business hours.

2. Right to Obtain Information and Explanations:

Section 227 (1) of the Companies Act entitles the auditor of a company "to require from the officers of the company such information and explanations as the auditor may think necessary for the performance of his duties as auditor." In case any information or explanations are not given to him, he should report this fact to the members.

3. Right to Visit Branches and Access to Branch Accounts:

Where the branch accounts are audited by another person the company auditor can - (a ) visit the branch office, if he deems it necessary to do so (b) have a right of access at all times to the books and vouchers of the company maintained at the branch office.

4. Right to Receive Notices of and Attend General Meeting:

Section 231 of the Act provides that "all notices of and oth er communications relating to any general meeting of a company shall be forwarded to the auditor of the company; and the auditor shall be entitled to attend any general meeting and to be heard at any general meeting which he attends on any part of the business which concerns him as auditor."

5. Other Rights:
Auditor has the right (1) to receive intimation of appointment (S. 224), (2) to make written representation when threatened with removal (S. 225). (3) to seek opinion of an expert, if required (Registrar of Companies V. P. M. Hegde), (4) to be indemnified against any liability incurred by him in defending himself against any civil or criminal liability when treated as an 'officer' under S. 633 of the Act, (5) to receive remuneration, (6) to have lien on audit working papers etc.

6. Right of Lien:
Meaning of Lien: A lien is "the right of one person to satisfy a claim against another by holding the other's property as security." If an auditor is not paid his audit fees, the question arises as to whether in order to recover his fees A. an auditor has a right of lien in respect of the books of accounts and vouchers of a company, and B. an auditor has a right of lien in respect of his working papers. No Lien on Books of Company: (1) Provisions of Companies Act: The Companies Act, 1956 provides that the books of account shall be kept at the Registered office of the company (or any other place decided by the directors). The books also have to be open to inspection by directors, shareholders, officers of Government etc. Hence an auditor cannot have any lien on the books of accounts of the company audited by him, since the books cannot be removed elsewhere at all.

(2) ICAEW:
The Institute of Chartered Accountants of England and Wales (ICAEW) has stated that an auditor cannot have a lien on accounting records which a company must keep in order to comply with the provisions of the Companies Act.

(3) Legal Cases:

The above position is supported by the following legal decisions : (a) In Capital Fire Insurance Association (b) The Anglo - Maltese Hydraulic Dock Co. Ltd. (c) Herbert Alfred Burliegh Vs. Ingram Clark Ltd.
Lien on Working Papers etc.:

(1) Lien on Working Papers:

Documents prepared by the auditor solely for his own purpose belong to the auditor, it was decided in the case of Chantrey Martin & Co. Vs. Martin, that the working papers which are prepared by the auditor for the purpose of preparing the balance sheet belonged to the auditor and not to the client company. Thus, the working papers and schedules relating to the audit, draft copy of the final typed accounts, notes and calculations made by the auditor and the tax calculation, it was held, belonged to the auditor. According to the statement issued by ICAEW - "An auditor's working papers are his own property and he is entitled to retain them. The expression working papers is used here to mean any document that the auditor or his staff may prepare in order to help him carry out the work which he is engaged to do. AAS-3 by ICAI also states that working papers are the property of the auditor

(2) Lien on Correspondence with Client:

The statement by ICAEW further states that - "letters received by the accountant from his client are the accountant's property and may be retained by him. So may the accountant's copies of his letters to his client [in re Wheatcraf]." Importance: (1) Rights Necessary for Discharge of Duties: To enable the auditor to discharge his duties of reporting on the accounts effectively, the Companies Act gives him certain rights e.g. the right of access to the books and vouchers of the company, right to seek information and explanations from the officers of the company, etc.

(2) Rights cannot be Restricted:

The rights of the company auditor cannot be limited or restricted in any way. Any resolution limiting the powers of the auditor or any such provision in the Articles of Association will be void. Duties of Company Auditor:

1. Make Audit Report to Members:

Section 227 (2) of the Companies Act provides that "the auditor shall make a report to the members of the company on the accounts examined by him, and on every Balance Sheet and Profit and Loss Account and on every other document declared by this Act to be part of r annexed to the balance sheet or profit and loss account, which are laid before the company general meeting during his tenure of office" Eras, the basic duty of the auditor is to make a report to the members of the company. Duty report includes the following duties (i) To Report Whether Accounts Show True and Fair View: Section 227 lays down the various matters that are required to be included in the auditor's report. Primarily, the auditor is required to state whether the financial statements of the company present a true and fair view of its state of affairs and working results.

(ii) To Report Whether Accounts give Required Information: Section 227 (2) requires the company auditor to
state 'whether the said accounts give the information required by this Act in the manner so required....' This provision makes it the duty of the auditor to ensure that the financial statements give the information in accordance with the requirements of the Companies Act.

(iii)

To Report Whether Necessary Information Obtained: Section 227 (3) requires that the auditor's report shall also state whether he has obtained all the information and explanations which were necessary for the purposes of his audit.

(iv) To Report Whether Proper Books of Account Kept: Section 227 (3) further requires that the auditor should also
state in his report whether, in his opinion, proper books of account as required by law have been kept by the company.

(v) Whether Final Accounts Agree with Books of Account: The auditor's report should also state whether the
company's balance sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns.

(vi) To Report Compliance With Accounting Standards: The auditor has to report whether, in his opinion, the profit
and loss account and balance sheet comply with the prescribed accounting standards.

(vii)

To Give Reasons for Qualifications In Report : Section 227 (4) provides that if any of the matters in the auditor's report is answered in the negative or with a qualification, the auditors report shall also state the reason for such an answer.

(viii)

To Show Adverse Comments in thick type or Italics: S. 227(3)(e), introduced by the Companies Amendment Act, 2000 requires that the observations or comments of the auditors which have any adverse effect on the functioning of the company, shall be printed in the auditors report in thick type (bold) or in italics.

(ix) To Report on Director's Disqualification: S. 227(3) (f), introduced by the Companies Amendment Act, 2000
requires the auditors to report whether any director is disqualified from being appointed as a director under s.274 (10) [i.e. a director of a public company which has not filed its annual accounts for 3 years; or failed to repay its deposits/interest thereon or redeem its debentures or pay dividend in time].

2. Make Enquiries u/s 227 (1A):

Section 227 (1A) of the Companies Act requires the auditor to inquire into the following-

(i) Loans and Advances Made: whether loans and advances made by the company on the basis of security have been
properly secured and whether the terms on which they have been made are not prejudicial to the interest of the company or its members.

(ii) Transactions Represented by Book Entries: whether the transactions of the company which are represented merely
by book entries are not prejudicial to the interest of the company.

(iii)

Investments Sold at Less than Cost Price: whether the shares, debentures and other securities held as investments by the company have been sold at a price less than that at which they were purchased by the company. This clause does not cover a banking company or an investment company (i.e. a company which deals in shares, stocks, debentures etc.).

(iv) Loans and Advances Shown as Deposits: whether loans and advances made by the company have been shown as
deposits.

(v) Personal Expenses: whether personal expenses have been charged to revenue account. (vi) Allotment of Shares for Cash: where it is stated in the books and papers of the company that any shares have been
allotted for cash, the auditor should inquire whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading.

3. Submit CARO Report:

The auditor is required to submit a report to the shareholders on such matters as may be specified by the Central Government under Section 227 (4A) of the Companies Act. The matters to be specified in such report have been prescribed by the Company Law Board vide the Companies (Auditors Report) Order, 2003 (commonly known as CARO). It is the duty of the auditor to report on the following specified matters.

4. Sign Audit Report:

It is the duty of the auditor to sign his report or sign or authenticate any document required by law to be signed or authenticated by the auditor. (S.229).

5. Certify Report in Prospectus:

A prospectus issued by a company under Section 56 of the Companies Act has to contain a Statement showing the following particulars: (1) profits and losses for the last 5 years, (2) the rate of dividends paid in each of the last 5 years, (3) assets and liabilities of the company, (4) nature of provisions and adjustments to be made, (5) profits or losses of the subsidiaries, if any. It is the duty of the auditor to verify and certify such report.

6. Certify Statement in Statutory Report:

The directors are required to prepare and submit to the shareholders a report known as Statutory Report before the date of the first meeting of the members of a public limited company known as the Statutory Meeting as per the provisions of Section 165 of the Companies Act. It is the duty of the auditor to certify as correct the following particulars in the Statutory Report: (1) the total number of shares allotted, (2) the total amount of cash received in respect of the shares allotted, and (3) a receipt and payments account showing - (i) the receipts and the source thereof (ii) payments made, and the (hi) balance cash in hand.

7. Comply with Ceiling on No. of Audits:

The Companies Act places a ceiling on the number of comp any audits that an auditor can hold. This ceiling was introduced to distribute the audits among larger number of auditors, to avoid monopoly of audit work by a few major firms of chartered accountants. Auditors Report: Introduction: Audit, by definition, is the examination of the accounts of a concern by an independent expert, with a view to expressing an opinion thereon. This opinion of the auditor is contained in the Audit Report. Audit Report is the last step in the entire process of audit. We have seen in the earlier chapters, how an auditor plans his audit, prepares an audit programme, obtains audit evidence through audit procedures like Vouching, Verification, Ledger Scrutiny, Analytical Review, Management Representation etc. and ascertains the compliance with various provisions of the Companies Act and so on. All this audit work finally leads to the drafting and issuance of the Audit Report. The auditor, like a Judge deciding a suit, reviews the evidence available with him so far and forms his opinion on the accounts. The auditors "judgement" on the accounts is contained in his Audit Report. Contents: The reports under any law e.g. under the Companies Act should contain the matters prescribed under the law. In other cases e.g. sole proprietor or partnerships, the Audit Report should contain certain essential features. The ICAI's latest standard (AAS 28) issued in April 2003 on "The Auditor's Report on Financial Statement" lays down the following essential contents of an Audit Report: (i) Title: The Audit Report should be issued on the printed letterhead of the auditor. It should bear a title "Audit Report".

(ii) Addressee: The Audit Report should be addressed to the shareholders in case of a company. In other cases, it should
be addressed to the proprietor, partners etc., i.e. to the person who has appointed the auditor.

(iii)

Identify Financial Statements: The Audit Report should clearly identify the financial statements e.g. the balance sheet and the profit and loss account of XYZ Company Limited for the year ended 31.3.200...

(iv) Responsibility: The Report should state that the financial statements are basically the responsibility of the
management. It should state that the responsibility of the auditor is to express an opinion on the financial statements based on his audit.

(v) Scope: The report should describe the scope of the audit. It should state that the audit was planned and performed to
obtain reasonable assurance whether the financial statements are free of material misstatement (error or fraud). It should state that the audit covered examining, (a) supporting evidence on test basis (b) the accounting principles used (c) estimates made by the management, and (e) the presentation.

(vi) Opinion on Accounts: The Audit Report should clearly give the auditor's opinion whether the financial statement
gives a true and fair view of the affairs of the concern as at the end of the year and of the profit or loss for the year. The Report should state whether the financial statements comply with applicable laws and rules (e.g. the Companies Act) and the accounting standards, principles and practices recognised in India. It should include a statement by the auditor that his audit provides a reasonable basis for his opinion.

(vii) (viii)
signed.

Place of Signature: The Audit Report should give the place of signature.

Date of Report: The Audit Report should indicate the date when the audit was completed and the report was

(ix) Signature and Membership No.: The Audit Report should be properly signed by the auditor or the partner of the
Auditor's firm. It should mention the auditor's membership number assigned by the ICAI. Types of Audit Reports/ Opinions: An auditor's opinion may be of different types. Depending on his review of audit evidence, an auditor may give an opinion on the audit report which may be (1) Unqualified, i.e. he is satisfied with the accounts or (2) Qualified , i.e. he is not satisfied regarding some matters or (3) Negative or Adverse i.e. he is entirely dissatisfied with the accounts. In some cases Auditor may not be able to express any opinion in absence of evidence or he may give a partial opinion on only some matters since only that much evidence is available. These types of opinions and Audit Reports are discussed below.

1. Unqualified or Clean Audit Report:

Where the auditor gives a positive opinion on all the matters contained in the Audit Report, it is said to be unqualified or clean Audit Report. AAS 29 states that (1) Auditor should express an unqualified opinion when he concludes that the financial statements give a true and fair view in accordance with the financial reporting framewo rk used for the preparation and presentation of the financial statements. (2) An unqualified opinion indicates that a. the financial statements are prepared using the generally accepted accounting principles, which have been consistently applied; b. the financial statements comply with relevant statutory requirements and regulations; and c. there is adequate disclosure of all material matters and proper presentation of the financial information. Thus, an Audit Report of a Limited Company is said to be unqualified or clean when the auditor reports thata. he has obtained all the information and explanation necessary for the purpose of his audit. b. he has received the Branch Audit Report from the Branch Auditor. c. the profit and loss account as well as the balance sheet tally with the books of accounts. d. proper books of accounts, as required by law, have been kept by the company. e. the accounts give the information required by the Companies Act, in the manner so required. f. the accounts give a true and fair view, in the case of the balance sheet, of the state of the company's affairs as on the date of the balance sheet, and in the case of the profit and loss account, of the profit or loss for the year.

2. (1) (2) a. b.

Modified Report: According to AAS 29, any audit report, other than an unqualified report, is known as modified report. An auditor's report is considered to be modified when it includes matters that do not affect the auditor's opinion; matters that affect the auditor's opinion (i) qualified opinion (ii) disclaimer of opinion (iii) adverse opinion

3. modified Report on Non-Material Matters: (1) According to AAS 29, at times, auditor's report may be modified by including a paragraph drawing attention to a (2) Such paragraph modifies the standard format of the audit report. Hence, it is known as "Modified" Audit (3) Such paragraph should be placed before the opinion paragraph in the report. It should specifically mention that the (4) Such paragraph should be added, for example, regarding problem regarding going concern assumption or any other (5) Example of such modified opinion is as follows: "Without qualifying our opinion, we draw attention to Note 10 of
Schedule... to the financial statements that the company is defending a legal case claiming damages for infringement of patents. The ultimate liability on this account is presently unknown, and no provision is made in the financial statements." However, if the uncertainty is very significant, it is advisable for the auditor to give a disclaimer of opinion. significant uncertainty. auditor's opinion is not qualified in this respect. Report. But it does not affect the unqualified opinion. particular matter. Such matter may be explained in further details in the notes to accounts.

(6)

4. Qualified Report:
Where the auditor gives an opinion subject to some reservations it is said to be a qualifie d Audit Report. Thus, an Audit Report is said to be qualified when the auditor is not satisfied regarding any or some of the matters and reports that - subject to such matters... I report that... the accounts give a true and fair view ..." . It should be noted that the auditor is dissatisfied or unhappy only regarding some matters and not all matters. Further the matters are not so important as to make the accounts unreliable. The matters do not affect the true or fair view of the accounts. Qualified report is discussed in detail below.

5. Negative Report:
Where the auditor gives a negative opinion on the accounts, he is said to give a negative Audit Report. Thus, an Audit Report is said to be negative when the auditor is not satisfied regarding any or some of the vital matters and reports that - " In view of so and so matters ... the accounts do not give a true and fair view The matters are so important as to make the accounts unreliable. The matters adversely affect the true or fair view of the accounts. For example an audit report may state " The company has failed to make a provision for bad debts which amount to about 60% of the total debts. Hence, in our opinion, the accounts do not give a true and fair view In case of a negative opinion, auditor must give all the reasons therefore.

6. No Opinion Report:
When the auditor is unable to give any opinion, in absence of necessary information or explanations, he is said to make a 'No Opinion Report' or a disclaimer of opinion. Thus, an Audit Report may state that "The books of account and vouchers were destroyed in a fire in the premises of the concern and were not available for examination. In the absence of the books and vouchers, we are unable to express any opinion on the accounts..." There may be many reasons for disclaimer of opinion. Thus, a. auditor may be unable to obtain all the information and explanation necessary for the purpose of his audit. Thus, an audit report may state that - "we were not able to observe all physical inventories and confirm accounts receivable due to limitations imposed on the scope of our work by the entity. Because of the significance of these matters, we do not express an opinion on the financial statements." b. auditor may not have received the Branch Audit Reports from the Branch Auditors in respect of many branches. c. the profit and loss account as well as the balance sheet may not be tallying with the books of accounts i.e. the difference in trial balance may be large and untraceable, and so on. Partial Opinion Report: When the auditor is able to give an opinion on some matters, but not all the matters, he gives a partial, limited or piecemeal opinion. Thus, an auditor may be unable to give an opinion on whether the accounts of the entire concern are true and fair, but he may be able to give an opinion that the branch accounts are true and fair on the basis of the branch audit reports. Auditor should give reasons for giving such partial opinion in his Audit Report.

A. multiple Choice Questions: 1. The first auditors of a company are appointed (a) By the shareholders in their first meeting to be held within 30 days of the incorporation of the company (b) By the directors within 30 days of their first meeting held after the incorporation of the company (c) By the directors in the first meeting of the Board of Directors to be held within 30 days of the incorporation of the (d) Through the appointments clause in the memorandum of association
company

Objective Questions

2. Every company shall, at each annual general meeting, appoint an auditor who will hold office (a) From the conclusion of the meeting until the beginning of the next annual general meeting (b) From the conclusion of the meeting until the conclusion of the next accounting year (c) From the beginning of the accounting year until the end of the accounting year (d) From the conclusion of the meeting until the conclusion of the next annual general meeting 3. The auditor of a Government company is appointed by (a) The shareholders (b) The Board of Directors (c) The Comptroller and Auditor-General of India (d) The Central Government 4. Any auditor appointed in a casual vacancy shall hold office (a) Until the end of the accounting period during which he is appointed (a) Until the end of the immediately succeeding accounting period during which he is appointed (b) Until the conclusion of the next annual general meeting. (c) Till the date of termination as mentioned in the letter of appointment 5. In the case of a company in which not less than 25% of the subscribed share capital is held by any of the (a) The appointment of an auditor shall be made by an unanimous resolution (b) The appointment of an auditor shall be made by a special resolution (c) The appointment of an auditor shall be made by such financial institutions (d) The appointment of an auditor shall be approved by the central government 6. Who is primarily responsible for the appointment of statutory auditor of a limited company?
(a) Managing Director of the company (b) Members of the company (c) The Central Government (d) All of the above specified financial institutions,

7. Which of the following sections of the Companies Act deal with qualifications of the auditor?
(a) Section 226 (1) and section 226(2) (b) Section 224 (1) and section 224 (2) (c) Section 226 (3) and section 226(4) (d) Section 224(3) & Sec.224

8. Which of the following statement is not true? (a) A partnership firm can be appointed as a statutory auditor of limited company (b) Appointment can be made in the name of the firm (c) Majority of the partners should be practising India (d) All partners should be chartered accountants 9. As per the requirements of section 226(3) and 226(4) a person is disqualified from being appointed as a statutory (a) Debentures of the company (b) Equity shares of the company (c) Preference Shares of the company (d) Security carrying voting rights of the company 10. The board of directors shall appoint first auditor of a company (a) Within 30 days of the first shares issue of the company (b) Within 30 days of the payment of registration fees of the company (c) Within 30 days of the commencement of the business of the company (d) Within 30 days of incorporation of the company 11. If a casual vacancy in the office of auditor arises by his resignation it should only be filled by the company in a
(a) Board meeting (c) General meeting (b) Extraordinary general meeting (d) Annual general meeting auditor if he holds

12. The authority to remove the first auditor before the expiry of term is with (a) The shareholders in a general meeting (b) The shareholders in the first annual General meeting

(c) The board of directors (d) The Central Government 13. Which of the following statements is not correct regarding removal of first auditor before expiry of the term ? (a) He is removed at a general meeting (b) The shareholders are authorized to do so (c) The approval of the Central Government is required for such removal (d) The directors are not authorized to do so 14. The retiring auditor does not have a right to (a) Make written representations (b) Get his representations circulated (c) Be heard at the meeting (d) Make defamatory statement in his written representation 15. Who out of the following cannot be appointed as a statutory auditor of the company?
(a) Retiring auditor (c) Tax Consultant (b) Internal auditor (d) First Auditor

16. The remuneration of an auditor of a company may be fixed by the board of directors in case of (a) The first auditors (b) The auditors appointed in any casual vacancy caused by resignation (c) The retiring auditors who are re-appointed (d) The auditor appointed in place of the retiring auditors 17. The remuneration of an auditor of a company may not be fixed by the shareholders in case of (a) The first auditors (b) The auditors appointed in any casual vacancy caused by resignation (c) The retiring auditors who are re-appointed (d) The auditor appointed in place of the retiring auditors 18. The rights of the company auditor (a) Can be limited if a special resolution approved by 75% of the members is passed (b) Can be limited if there is a specific provision in the Articles of Association (c) Cannot be limited or restricted in any way (d) Depend on the terms mentioned in the letter of appointment B. Fill in the Blanks 1. The first auditors of a company are appointed by the directors in the first meeting of the Board of Directors to be held 2. The provisions of law relating to appointment and removal of auditor ensure the independence of (auditors / 3. A (certified / government) auditor is the only non-chartered accountant who can be appointed as the auditor of a 4. The auditor of a Government company is appointed by the _____. 5. Any auditor appointed in a casual vacancy shall hold office until the _____ of the next annual general meeting. 6. In the case of a company in which not less than 25% of the subscribed sh are capital is held by any of the 7. A partnership firm (can be / cannot be) appointed as a statutory auditor of limited company. 8. If a casual vacancy in the office of auditor arises by his resignation it should onl y be filled by the company in a 9. The approval of the Central Government (is / is not) required for the removal of first auditor. 10. A person who has given any guarantee in connection with the loan of any third persons to the company for an 11. A director or a member of the private company (is / is not) qualified to be appointed as an auditor of that company.
C. Match the Following: Column A 1. First Auditor 2. Re-appointment of Auditor 3. Re-appointment of Auditor when 25% Column B a. C & AG b. Must be approved by Central Government c. Board of Directors amount exceeding one thousand rupees (is/is not) qualified to be appointed as an auditor of that company. _____ meeting. specified financial institutions, the appointment of an auditor shall be made by a _____ resolution. company. shareholders). within _____ days of the incorporation of the company.

4. 5. 6. 7.

shareholding with specified financial institutions Failure of shareholders to re-appoint auditor Auditor of Government Company Removal of first auditor appointed by Board Removal of subsequent auditor by shareholders

d. Special Resolution e. Need not be approved by Central Government f. Shareholders at Annual General Meeting g. Central Government

D. State Whether True or False: 1. Section 226 of the Companies Act, 1956 states that any chartered accountant, whether in practice or not, can 2. Section 226 of the Companies Act, 1956 states that a firm whereof the majority of partners are Chartered 3. A body corporate whereof all the members are Chartered Accountants practising in India may be appointed as 4. An officer or employee of the company who is a Chartered Accountant practising in India may be appointed as 5. A Chartered Accountant practising in India who is a partner of an officer or employee of the company may be 6. A debtor of the company for an amount exceeding one thousand rupees cannot be appointed as the auditor of 7. A creditor of the company for an amount exceeding one thousand rupees cannot be appointed as the auditor 8. A shareholder of the company cannot be appointed as the auditor of a company. 9. A shareholder of the company holding shares of less than one thousand rupees can be appointed as the 10. The first auditors of a company are appointed by the directors in the first meeting of the Board of Directors to 11. The first auditors of a company are appointed by the shareholders in the first meeting of the members to be 12. The auditor of a Government company is appointed by the shareholders. 13. The auditor of a Government company is appointed by the Comptroller and Auditor-General of India. 14. Any casual vacancy in the post of an auditor shall be filled by the company in a general meeting. 15. There a vacancy is caused due to the death of an auditor, the vacancy may be filled by the Board of Directors. 16. When one of the two joint auditors resigns, the remaining auditor cannot continue to act as the auditor. 17. In the case of a company in which not more than 25% of the paid-up share capital is held by any of the specified 18. In the case of a company in which not less than 75% of th e subscribed share capital is held by any of the specified 19. The first auditor, appointed by the board of directors, can be removed by the Board of Directors before the expiry of 20. The first auditor, appointed by the board of directors, can be removed by the shareholders at a general meeting 21. The first auditor, appointed by the shareholders, can be removed by the Board of Directors before the expiry of his 22. Any auditor, other than the first auditor, can be removed before the expiry of his term by the company only at a 23. An auditor can be removed only by the authority (Board, Shareholders or Central Government) which appointed 24. Every company auditor is a chartered accountant but ever y chartered accountant cannot be an auditor of a 25. An auditor must retire once he attains the age of 60. 26. If the auditor is inefficient, directors can change him even before his term is over. 27. A partner of a firm whereof all the partners are Chartered Accountants practising in India may be appointed as an 28. Any resolution limiting the powers of the auditor will be void. 29. Every auditor of a company shall have a right of access only to those books and accounts and vouchers of the
company, kept at the registered office of the company. auditor in his individual name. company. him. general meeting, after passing a special resolution. term, after obtaining the previous approval of the central government. before the expiry of his term, only after obtaining the previous approval of the central government. his term, without obtaining the previous approval of the shareholders. financial institutions, the appointment of an auditor shall be made by a special resolution. financial institutions, the appointment of an auditor shall be made by a special resolution. held within 30 days of the date of incorporation of the company. be held within 30 days of obtaining the certificate of commencement of the company. auditor of a company. of a company. a company. appointed as an auditor of the company. an auditor of the company. an auditor of a company. Accountants practising in India may be appointed as an auditor by its firm name. be appointed as the auditor of a company.

30. Every auditor of a company shall have a right of access to only those books and accounts and vouchers of the 31. Every auditor of a company shall have a right of access to the books and accounts and vouchers of the company 32. Once a separate branch auditor is appointed the company audit or cannot visit the branch office. 33. Once a separate branch auditor is appointed the company auditor cannot have a right of access to the books 34. The auditor shall be entitled to vote at any general meeting on any part of the business which concerns him as 35. The first auditor appointed by the board of directors can be removed by the board at its subsequent meeting. 36. Government companies are also to be considered for the ceiling on number of audits. 37. Whoever appoints the auditor, the remuneration is always fixed by the shareholders. 38. An auditor can be removed only after a special resolution to this effect is approved by the shareholders in a general 39. The observations or comments of the auditors which have any adverse effect on the functioning of the company 40. An auditor can be appointed as first auditor of a newly formed company simply because his name has been stated in
the Articles of Association. Check your Answers 10. D 11. C 12. A 13. C 14. D 15. B 16. A 17. A 18. C shall be printed in the auditors report in capital letters. meeting. auditor. and vouchers of the company maintained at the branch office. only after the end of the financial year. company prepared after the date of his appointment.

A. Multiple Choice Questions:

1. C 2. D 3. C 4. C 5. B 6. B 7. A 8. C 9. D

B. Fill in the Blanks: (1) 30 (2) Auditors (3) Certified (4) Comptroller and Auditor-General of India (5) Conclusion (6) Special (7) can be (8) General (9) is not (10) is not (11) is not C. Match the Following: (1) - (c); (2) - (f); (3) - (d); (4) - (g); (5) - (a). (6) - (e), (7) - (b)

D. True or False:
True: 6, 8, 13, 15,24, 28 False: 1, 2,3,4, 5, 7,9, 10, 11,12,14, 16, 17, 18, 19, 20, 21, 22, 23, 25, 26, 27, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40