UNIT 1: INTRODUCTION TO AUDITING

Meaning and definition of auditing, objects of auditing, advantages and

limitations of auditing, classification of audit: statutory audit, Govt.
Audit, internal audit, continuous audit and annual audit.

1.1 Meaning and Definition of Auditing

The word Audit is derived from Latin word “Audire” which means
‘to hear’. Auditing is the verification of financial position as disclosed by
the financial statements. It is an examination of accounts to ascertain
whether the financial statements give a true and fair view financial
position and profit or loss of the business. Auditing is the intelligent and
critical test of accuracy, adequacy and dependability of accounting data
and accounting statements. Different authors have defined auditing
differently, some of the definition are:

“Auditing is an examination of accounting records undertaken with a

view to establishment whether they correctly and completely reflect the
transactions to which they purport to relate.”-[Link].

“Auditing is concerned with the verification of accounting data

determining the accuracy and reliability of accounting statements and
reports.” - R.K. Mautz.

“Auditing is the systematic examination of financial statements, records

and related operations to determine adherence to generally accepted
accounting principles, management policies and stated requirement.” -
[Link].

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1.2 Objectives of Auditing

The objectives of auditing are changing with the advancement of

business techniques. Earlier it was only to check the correctness of
receipts and payments. The objectives of the auditing have been
classified under two heads:
1. Main objective
2. Subsidiary objectives

Main Objective: The main objective of the auditing is to find reliability

of financial position and profit and loss statements. The objective is to
ensure that the accounts reveal a true and fair view of the business and
its transactions. The objective is to verify and establish that at a given
date balance sheet presents true and fair view of financial position of
the business and the profit and loss account gives the true and fair view

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of profit or loss for the accounting period. It is to be established that
accounting statements satisfy certain degree of reliability. Thus the
main objective of auditing is to form an independent judgement and
opinion about the reliability of accounts and truth and fairness of
financial state of affairs and working results.

Subsidiary objectives: The subsidiary objectives of the auditing are:

1. Detection and prevention of fraud: the one of the important

subsidiary objective of auditing is the detection and prevention of
fraud. Fraud refers to intentional misrepresentation of financial
information. Fraud may involve:
a) Manipulation, falsification or alteration of records or documents
b) Misappropriation of assets.
c) Suppression of effect of transactions from records or documents.
d) Recording of transactions without substance.
e) Misapplication of accounting policies

2. Detection and prevention of errors: is another important

objective of auditing. Auditing ensures that there is no miss-
statement in the financial statements. Errors can be detected
through checking and vouching thoroughly books of accounts, ledger
accounts, vouchers and other relevant information.

1.3 Importance of Auditing

Importance of auditing can be judged from the fact that even those
organizations which are not covered by companies Act get their
financial statements audited. It has become a necessity for every
commercial and even non- commercial organization. The importance of
auditing can be summed in following points:

a) Audited accounts help a sole trader in knowing the value of the

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 business for the purpose of sale.
b) Dispute over correctness of profits can be avoided.

c) Shareholders, who do not know about day-to-day administration of

the company, can judge the performance of management from
audited accounts.
d) It helps management in detecting and preventing errors and frauds.

e) Management gets advice on financial affairs from the auditors.

f) Long and short term creditors depend on audited financial

statements while taking decision to grant credit to business houses.
g) Taxation authorities depend on audited statements in assessing the
income tax, sales tax and wealth tax liability of the business.
h) Audited accounts are useful for the government while granting
subsidies etc.
i) It can be used by insurance companies to settle the claims arising on
account of loss by fire.
j) Audited accounts serve as a basis for calculating purchase
consideration in case of amalgamation and absorption.
k) It safe guards the interests of the workers because audited accounts
are useful for settling trade disputes for higher wages or bonus.

1.4 Types of audit

Based on ownership: On the basis of ownership audit can be: -

1. Audit of Proprietorship: In case of proprietary concerns, the owner

himself takes the decision to get the accounts audited. Sole trader
will decide about the scope of audit and appointment of auditor. The
auditing work will depend upon the agreement of audit and the
specific instructions given by the proprietor.
2. Audit of Partnership: To avoid any misunderstanding and doubt,
partnership audits their accounts. Partnership deed on mutual
agreement between the partners may provide for audit of financial
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 statements. Auditor is appointed by the mutual consent of all the
partners. Rights, duties and liabilities of auditor are defined in the
mutual agreement and can be modified by the partners.
3. Audit of Companies: Under companies Act, audit of accounts of
companies in India is compulsory. Chartered accountant who is
professionally qualified is required for the audit of accounts of
companies. Companies Act 1913 for the first time made it
compulsory for joint stock companies to get their accounts audited
from a qualified accountant. A number of amendments have been
made in companies Act, 1956 and 2013 regarding appointment,
duties, qualification, power and liabilities of a qualified auditor.
4. Audit of Trusts: The beneficiaries of the trusts may not have access
and knowledge of accounts of the trust. The trustees are appointed
to manage and look after the property and business of the trust.
Accounts of the trust are maintained as per the conditions and terms
of the trust deed. The income of the trust is distributed to the
beneficiaries. There are more chances of frauds and mis-
appropriation of incomes. In the trust deed as well as in the Public
Trust Act which provide for compulsory audit of the accounts of the
trust by a qualified auditor. The audited accounts of the trust ensure
true and fair view of accounts of the trust.
5. Audit of Accounts of Co-operative Societies: Co-Operative
societies are established under the Co-Operative Societies Act, 1912.
It contains various provisions for the regulations and the working of
these societies. Some of the states have adopted it without any
change, while others have brought certain changes to it. The auditor
of the Co-operative Society should have an expert knowledge of the
particular act under which Co-operative society under audit is
functioning. He should also study by-laws of the society and make
sure that the amendments made from time to time in the by-laws
have been duly registered in the Registrar’s Office. Companies Act is

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 not applicable to the co-operative Societies. The Registrar of co-
operative societies shall audit or cause to be audited by some person
authorized by him, the accounts of the society once in every financial
year.
6. Government Audit: Audit of government offices and departments is
covered under this heading. A separate department is maintained by
government of India known as Accounts and Audit Department. This
department is headed by the Comptroller and Auditor General of
India. This department works only for the government offices and
departments. This department cannot undertake audit of non-
government concerns. Its working is strictly according to government
rules and regulations.

Based on Time: On the basis of time the audit can be of following

types:

1. Interim Audit: When an audit is conducted between two annual

audits, such audit is known as Interim audit. It may involve complete
checking of accounts for a part of the year. Sometimes it is
conducted to enable the board of directors to declare an Interim
dividend. It may also be for the purpose of dealing with interim
figures of sales.
2. Continuous Audit: The Continuous Audit is conducted throughout
the year or at the regular short intervals of time.
a) “A continuous audit involves a detailed examination of all the
transactions by the auditor attending at regular intervals say weekly,
fortnightly or monthly, during the whole period of trading.” - T.R.
Batliboi
b) “A continuous audit is one where the auditor or his staff is constantly
engaged in checking the accounts during the whole period or where
the auditor or hiss staff attends at regular or irregular intervals
during the period.” -R.C Williams.
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Advantages of continuous Audit:

a. Complete checking of all the records: Since the audit is carried

out throughout the year, sufficient time is available for detailed
checking. Any enquiry and doubt arising in the course of audit can be
tackled in a better way.
b. Proper planning: Auditor can plan his audit work in a systematic
manner. He can evenly spread his work throughout the year. It will
improve efficiency of auditor.
c. Early detection of frauds and errors: The work of auditor
becomes easier for detecting frauds and errors, otherwise it will
involve more time.
d. Up-to-date accounts: The efficiency of account staff will increase
and their work will be up-to-date and accurate.
e. Valuable suggestions: Continuous audit will help the auditor to
understand the technicalities of business. This will help the auditor to
make suggestions for the improvement of business.
f. Preparation of interim accounts: Interim accounts can be
prepared without much delay. It will help the Board of Directors to
declare interim dividend.

Disadvantages of Continuous Audit:

a. Expensive: It is an expensive system as it may not suit the budget

of small organizations.
b. Dislocation of routine work: Frequent visits by auditor may
dislocate the smooth flow of office work.
c. Alteration of Figures: after the accounts have been audited, the
figures may be fraudulently altered by the staff.
d. Losing link in the audit work: As the work is not completed
continuously, the auditor may lose continuity and certain questions
and inquires may be left unanswered.
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3. Final Audit: Final Audit means when the audit work is conducted
after the close of financial year. A final audit is commonly understood
to be an audit which is not commenced until after end of the financial
period and is then carried on until completed.
4. Balance Sheet Audit: Balance Sheet Audit relates to the
verification of various items of balance sheet such as assets,
liabilities, reserves and surplus, provisions and profit and loss
balance. The procedure under this audit is to follow a backward
process. First the item is located in balance sheet, and then it is
located in original record for the purpose of verification.

Based on Objectives: On the basis of objectives the audit can be of

following types:

1. Internal Audit: It implies the audit of accounts by the staff of the

business. Internal audit is an appraisal activity within an organization
for the review of the accounting, financial and other operations as
basis for protective and constructive service to the management. It is
a type of control which functions by measuring and evaluating the
effectiveness of other types of control. It deals primarily with
accounting and financial matters but it may also properly deal with
matters of operating nature.
2. Cost Audit: Cost Audit is the verification of the correctness of cost
accounts and adherence to the cost accounting plans. Cost Audit is
the detailed checking of costing system, techniques and accounts to
verifying correctness and to ensure adherence to the objectives of
cost accounting.
3. Secretarial Audit: Secretarial Audit is concerned with verification
compliance by the company of various provisions of Companies Act
and other relevant laws. Secretarial audit report includes
a. Whether the books are maintained as per company’s act, 2013.

b. Whether necessary approvals as required from central Government,

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 Company law board or other authorities were obtained.
4. Independent Audit: Is conducted by the independent qualified
auditor. The purpose of independent audit is to see whether financial
statements give true and fair view of financial position and profits.
Mainly it is for safeguarding the interest of owners, shareholders and
other parties who do not have knowledge of day-to-day operations of
organization.
5. Tax Audit: Now-a-days tax audit has become very important to
ascertain the accuracy of tax related documents. Tax audit mostly
covers income returns, invoices, debit and credit notes and various
current and fixed assets. Tax audit is an innovation of 21st century. It
has added one more chapter to the practice of auditing. Tax audit
ensures the validity and credibility of tax related documents.

MCQ QUESTIONS - UNIT 1: INTRODUCTION TO AUDITING

1. What is the primary objective of auditing?

a. To prepare financial statements
b. To detect and prevent fraud
c. To manipulate accounting records
d. To manipulate financial statements
2. What is the main objective of auditing?
a. To manipulate financial statements
b. To ensure true and fair view of financial position
c. To avoid financial reporting
d. To avoid financial transactions
3. What is the Latin origin of the word "Audit"?
a. Audacia
b. Audire
c. Audax
d. Auditorium
4. Who heads the Government Audit department in India?
a. Prime Minister
b. President
c. Comptroller and Auditor General of India
d. Chief Justice
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5. What is the purpose of a continuous audit?
a. To audit accounts annually
b. To audit accounts intermittently
c. To audit accounts throughout the year
d. To audit accounts quarterly
6. Which type of audit involves the verification of compliance with the
Companies Act and other relevant laws?
a. Internal Audit
b. Cost Audit
c. Secretarial Audit
d. Independent Audit
7. Who appoints the auditor in a partnership?
a. Government
b. Sole trader
c. Mutual consent of partners
d. Comptroller and Auditor General of India
8. Which audit is conducted between two annual audits?
a. Final Audit
b. Interim Audit
c. Continuous Audit
d. Balance Sheet Audit
9. What is the objective of an internal audit?
a. To ensure compliance with tax laws
b. To verify cost accounts
c. To review accounting, financial, and other
operations
d. To verify adherence to Companies Act
[Link] is the purpose of a tax audit?
a. To detect and prevent fraud
b. To prepare financial statements
c. To ensure compliance with tax laws
d. To manipulate financial statements
[Link] audit type primarily deals with accounting and financial
matters but may also address operational issues?
a. Internal Audit
b. Cost Audit
c. Secretarial Audit
d. Independent Audit
[Link] conducts a statutory audit for companies?
a. Sole trader
b. Independent auditor
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 c. Partnership
d. Government auditor
[Link] is the main focus of a balance sheet audit?
a. Reviewing cost accounts
b. Verifying compliance with tax laws
c. Auditing financial statements after the close of the
financial year
d. Verifying various items of the balance sheet
[Link] is the significance of an interim audit?
a. To finalize financial statements
b. To audit financial statements annually
c. To enable the declaration of interim dividends
d. To conduct continuous auditing
[Link] appoints the auditor in a proprietary concern?
a. Mutual consent of partners
b. Sole trader
c. Government
d. Comptroller and Auditor General of India
[Link] does a continuous audit involve?
a. Detailed examination of transactions throughout
the year
b. One-time audit conducted annually
c. Auditing financial statements intermittently
d. Verifying compliance with Companies Act

[Link] is the primary objective of an independent audit?

a. To ensure compliance with tax laws
b. To prepare financial statements
c. To safeguard the interests of stakeholders
d. To manipulate financial statements
[Link] audit type ensures adherence to cost accounting plans?
a. Internal Audit
b. Cost Audit
c. Secretarial Audit
d. Independent Audit
[Link] conducts a government audit?
a. Sole trader
b. Independent auditor
c. Government auditor
d. Partnership
[Link] audit type involves a backward process of verification?
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 a. Final Audit
b. Continuous Audit
c. Balance Sheet Audit
d. Interim Audit
[Link] is the objective of detecting and preventing errors in
auditing?
a. To manipulate financial statements
b. To ensure true and fair view of financial position
c. To avoid financial reporting
d. To avoid financial transactions

[Link] depends on audited financial statements for assessing income

tax liabilities?
a. Sole trader
b. Shareholders
c. Taxation authorities
d. Government
[Link] is the importance of auditing in settling trade disputes?
a. To prepare financial statements
b. To ensure true and fair view of financial position
c. To safeguard the interests of workers
d. To manipulate financial statements
[Link] audit type involves the verification of compliance with the
Co-Operative Societies Act?
a. Cost Audit
b. Secretarial Audit
c. Government Audit
d. Audit of Co-operative Societies
[Link] is the primary purpose of detecting and preventing fraud in
auditing?
a. To ensure compliance with tax laws
b. To manipulate financial statements
c. To safeguard the interests of stakeholders
d. To manipulate accounting records

10 Marks Questions

1. Define auditing and explain four primary objectives of auditing.

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2. Write a brief note on the scope of auditing in a rapidly growing
world.

3. Why is auditing important for transparency and accountability?

4. What aspects should an auditor cover during the auditing process?

5. What are two challenges associated with continuous audit

systems?

6. How does auditing help in preventing financial fraud? Can you

provide examples?

7. What are the types of auditing? Explain five types of audits based
on ownership.

8. Define auditing and discuss several advantages and disadvantages

in a business environment.

9. Define continuous audit and assess its significance in error and

fraud detection and prevention.

[Link] is Tax audit? Explain its importance.

15 Marks Questions
1. What is auditing? What aspects and scopes does auditing cover?

2. Write a comprehensive note on the various objectives of auditing,

including their merits and demerits.

3. What is fraud? Explain its various types and how it contributes to

the detection and prevention of fraud.

4. Describe the different types of audits based on ownership and

analyse how they contribute to ensuring financial integrity within
organizations.

5. Explain the different types of audits based on time and discuss

their merits and demerits.

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 6. What is continuous audit? Describe its merits and demerits.

7. Describe the different types of audits based on objectives and

explain their contribution to modern business environments.

8. Is auditing a social waste? Comments.

UNIT 2: AUDIT PROCESS

Audit programme, audit process, audit note book, audit working papers,
audit files, internal control, internal check, duties of an auditor in
connection with internal check as regards cash transactions, purchases,
sales, wages and stores.

Audit programme

Meaning and Definition

Audit programme represents an outline of procedure to be

followed to support an opinion on financial statements. It is the auditor’s
plan of action. It provides a plan of work of examination and a set of
audit procedures.

According to Megis, an audit programme is a detailed plan of

the auditing work to be performed, specifying the procedure to be
followed in verification of each item in the financial statements and
giving the estimated time required.

According to holmes, Audit programme is a flexible planned

procedure of examination. Thus audit programme is a planning of audit

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by auditor so that he may be able to complete his work in a diligent
manner and complete the work without loss of time.

Advantages of audit programme:

Some of the important advantages of the audit programme are:

1. It enables the auditor to keep in touch with the work done and
general progress of the work.
2. The auditor can be certain that the audit staff will cover whole of the
ground.
3. It will help the audit assistants to know their duties.
4. It helps to increase the efficiency of audit assistants.
5. Fixing of the responsibility of audit assistants becomes easier.
6. It provides a check against the possibility of certain important items
requiring verification which are being omitted.
7. Continuity is not lost even if the person on the duty is changed.

Audit Note book

Audit note book is a diary or register maintained by audit staff to note
errors, doubtful quarries and difficulties. The purpose is to note down
the various points which need to be either clarified with the client or the
chief editor. The Audit note book is used for recording important points
to be included in the auditor’s report.
Contents of an Auditor’s Note Book:

1. A list of books of accounts maintained.

2. The names, duties and responsibilities of principal officers.
3. The particulars of missing receipts and vouchers.
4. Mistakes and errors detected.
5. The points which need clarifications and explanations.
6. The points deserving the attention of the auditor.
7. Various totals and balances.
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8. The Points to be a part of auditor’s report.

Advantages of Audit Note book:

Some of the advantages of the audit note book are.

1. It ensures the uniformity and helps in knowing the amount of work

performed.
2. Important matters relating to the audit work may be easily recalled.
3. Facilities and preparation of the audit report.
4. In case of the assistant in charge is changed, no difficulty is faced in
continuing the incomplete work.
5. The responsibility of the errors undetected can be fixed on clerk
concerned.
6. The audit note book shows the extent of the interest and pain taken
by the audit staff. It helps in their appraisal.
7. It ensures that the audit programme has been sincerely followed.
Deviations can be noticed.
8. It is reliable evidence in the court of law, if an auditor has to defend
himself.

Audit working papers

Meaning and Definition

The term audit working papers designate the files of analysis,

summaries, comments and correspondence built by an auditor during
the course of the field work of an audit engagement. These papers
contain essential facts about the accounts which are under audit.

According to Arnold W. Johnson, ‘’ Audit working papers

are the written private materials, which an auditor prepares for each
audit. They describe the accounting information which he receives from
his client, the methods of examination used, the conclusions (and
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reasons thereof) and the financial statements.”
According to Jack C. Robertson, “Working papers are
auditor’s own evidence of compliance with generally accepted auditing
standards and of the decisions respecting all procedures necessary in
the circumstances unique to the audit engagement.”

They consist of draft copies of trial balances, adjusting entries,

accounts analysis, schedules of debtors and creditors summaries of
reconciliation statements, certificates of official comments, copies of
correspondence between auditors and debtors, creditors and bank,
detailed schedule of items like depreciation, inventories previous audit
reports, important quarries with explanation audit programme and other
important materials.
Objectives of Audit working papers

The working paper serves following purposes:

1. They represent the volume of work performed by the auditor and his
staff, which helps in preparing the report.
2. They show the extent of adherence to accounting principles and
auditing standards.
3. They are useful as evidence against the charge of negligence.
4. They act as guide for subsequent examinations.
5. They enable the auditor to know the weakness of the internal check
system in operation as also the accounting system.
6. They assist the auditor in coordinating and organizing the work of
audit clerks.
7. They assist in planning and performance of audit work.

Internal Control Meaning and Definition

Internal control is a broad term with a wide coverage. It covers the

control of whole management system. Internal control involves a

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number of checks and controls exercised in a business to ensure its
efficient and economic working.

According to The American Institute of Certified Public

Accountants, “Internal control comprises of the plan of organization
and all the coordinate methods and measures adopted within a business
to safeguard its assets, check the accuracy and reliability of its
accounting data to promote operational efficiency and to encourage
adherence to prescribed managerial policies.”

The system of internal control can be defined as, “the plan of

organization and all the methods and procedures adopted by the
management of an entity to assist in achieving the management’s
objectives of ensuring, as far as practicable, the orderly and efficient
conduct of its business.”
In brief it can be stated that internal control includes not only
internal check and internal audit but the whole system of controls,
financial and otherwise, established by the management in order to
carry on the business of the company in an orderly manner, to
safeguard its assets and to secure as far as possible the accuracy and
reliability of records.
Objectives/Need of the Internal Control:

1. Providing reliable data: Business decisions require accurate

information to run the business efficiently. Examples of significant
areas where management requires reliable information are fixation
of selling prices production directives depending upon requirements
etc. with the efficient internal control in place the accurate, required
and reliable information can be provided for taking the important
decisions and efficient performance of the activities.
2. To promote operational Efficiency: the controls within an organization
are meant to prevent unnecessary duplication of efforts, protect
against waste in all aspects of business and discourage other types
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 of inefficient use of resources so as to promote the operational
efficiency.
3. To encourage adherence to the prescribed policies: the system of
internal control is meant to provide reasonable assurance that
procedures and rules of various institutes are followed by company
personnel.
4. Safeguarding assets and records: the physical assets of the company
can be stolen, misused or accidently destroyed if not properly
protected by adequate controls. The internal control helps to
safeguard the physical assets and to secure the accuracy and
reliabilities of the records of the company.
Internal Check
Meaning and Definition:

Internal check is the valuable part of the internal control. It is an

arrangement of the duties of members of staff in such a manner that
the work performed one person is automatically and independently
checked by the other.

According to F.R. M.e paula, “internal check means

practically a continuous internal audit Carried on by the staff itself, by
means of which the work of each individual is independently checked by
other members of the staff.”

According to D.R. Davar, “Internal check is a system or

method introduced with defined instructions given to staff as to their
sphere of work with a view to control and the verification of their work
and also the maintenance of accurate records as the ultimate aim.

According to Joseph Lancaster, “The internal check is a

method of organizing the entire operations, office, warehouse, factory
and the duties to the respective staff so that frauds and irregularities
are impossible without collusion.”

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All the definitions of internal check give a common idea about system
organized within the concern itself, wherein the work of one employee is
automatically checked up by the other and the possibility of error or
fraud is reduced to the minimum.

Objectives of internal check:

1. To exercise moral pressure over the staff.

2. To ensure that the accounting system produces reliable and
adequate information.
3. To provide protection to the resources of the business against fraud,
carelessness and in efficiency.
4. To distribute work in such a manner that no business is left
unrecorded.
5. To allocate duties and responsibilities of each clerk in such a way
that he may held responsible for particular fraud or error.
6. To increase the efficiency of clerks because the allocation of duties is
based on the principle of division of labour.
7. To detect errors and frauds easily if it is committed, because in an
efficient internal check system, there is a provision for independent
checking.

Advantages of Internal Check:

1. Proper division of work: internal check entails a proper and rational

distribution of work among the members of staff of the enterprise
keeping in view their individual qualifications, experience and area of
specialization.
2. Detection of errors and frauds: since no individual worker is allowed
to handle a job completely from the beginning to the end, and the
work of each clerk is automatically checked by the other, this helps

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 in the early detection and discovery of errors and frauds.
3. Increased efficiency coupled with economy: A good system of
internal check increases the efficiency of work among the staff and
leads to overall economy.
4. Convenience to auditor: where an organization is operating the
system of internal check, the statutory auditor may conveniently
avoid detailed checking of the transactions. He may apply a few tests
here and there and can relieve himself from detailed checking.
5. Accuracy of the accounts can be relied upon: If there is a good
system of internal check the owner of the concern may rely upon the
genuineness and accuracy of the accounts.
6. Increase in Profits: overall efficiency and economy in operations
result in more profits- thus ensuring larger dividends for the owners
or shareholders.

Internal Check with Regard to Sales:

The system of internal check regarding sales should take care of

following:
1. On receipt of the order, it should have numbered and preserved in
Orders Received Book with full particulars.
2. The Dispatch Department should be given a copy of the order with
necessary particulars.
3. The Dispatch Department should take steps to pack the goods as per
order.
4. The statement of goods as prepared by the Dispatch Department
should be checked with the customer’s order and then invoice will be
prepared in triplicate by means of carbon papers.
5. A responsible official should check the invoice particularly the rates
charged and calculations made.
6. With the help of the copy of invoices entries should be made in Sales
Day Book.
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7. On dispatch of the goods records should be made in the Goods
Outward Book.
8. Two copies of the invoice may be sent to customer who will return
one of them after signing it. It will serve the purpose of delivery note.
Third copy will be retained for further reference.
9. Entries should be made in Goods inward Book for all the goods
returned by the customers. Credit notes should be prepared and
should be duly checked and initialed by the responsible official.
10. With the help of credit notes, records should be made in the Sales
Return Book.

Internal Check with Regard to Purchases:

1. Requisition: the procedure for issuing purchase requisitions should
be specified. The head of the department, who is need of goods,
should fill a requisition slip duly signed and then should send to the
purchase department. The details about the quality, quantity and the
time by which the goods must be supplied be clearly mentioned in
the requisition slip.
2. Enquiry: Purchases department makes an enquiry about terms and
conditions of the purchases from different suppliers for these
purposes tenders are generally invited. But, who shall open and
accept the tenders, should be clearly specified. As rule lowest tender
should be accepted and decision be taken.
3. Purchase Order: the purchase department places orders which
should be recorded in the purchase order book. Four copies of
purchase order should be prepared. One copy will be sent to vendor,
the second to the store department, third to the accounting
department and fourth will be retained by the purchase department
itself. A responsible officer should review the purchase order, before
signing by the authorized person or director.
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4. Receipt of goods: on receipt of goods, the purchase department
should properly inspect them, and after an entry in the goods inward
(receipt) book, the same should be sent to the stores. Concerned
department should be informed about the receipt of goods.
5. Making the payments: the purchase department should
thoroughly check the invoices and send the same to accounting
department for payment. The accounting department should
compare the invoice with the purchase order and incoming
inspection report and should verify the calculations. The accounts
department should enter the invoice in purchase book. Only
responsible official should draw cheque for the payment of invoice. At
the time of signing, a signing authority must verify that correct
payment is made.

Internal check with regard to fixed assets:

1. A proper authority should be designated for the sanction of capital

expenditure. The authority may be given to managing director, a
factory manager or a committee may be set up for this purpose.
2. A proper authority should be designated even for sale of fixed assets,
transfer or even for discarding of an asset.
3. Proper accounting records in respect of fixed assets should be
maintained and it should be ensured that the proper accounting
distinction is observed between capital and review expenditure.
4. There should be a periodic inspection of assets.
5. A fixed asset register must be maintained giving details of all the
fixed assets. In this register description of the assets, their cost and
location should be mentioned. Management should also ensure that
all the fixed assets are verified physically from time to time.
6. Perfect arrangements should be made to ensure that fixed assets are
properly maintained and applied in the service of the company.
7. Where the fixed assets are transferred between branches or

23
 members of the sale group, proper arrangements in respect of their
pricing, depreciation and accounting should be made.
8. Depreciation rates are to be authorized and evidenced and which
persons are to be responsible for carrying out and checking the
necessary calculations.
9. Lastly it should be seen that these fixed assets should be adequately
insured.

Internal check with regard to cash transactions

CASH RECEIPTS:
1. There should be a separate clerk known as cashier to deal with the
receipts of cash. Immediately upon receipts of cash a rough record of
the amount should be made. The cashier should not be authorized to
keep cash with him. He should not be allowed to make expenditure
out of it and to make entries in the ledger and other books of prime
entry.
2. All receipts should be banked daily. From time to time the bank
reconciliation statements should be prepared to reconcile bank and
cash balances.
3. Bank pay- in-slips should not be prepared by the same person who is
in charge of making actual deposits in the bank.
4. All receipts should be acknowledged by means of printed receipts.
Counter-foils of all the receipts issued should be properly maintained.
Unused receipt must be kept with some responsible officer.
5. Spoiled receipts should be cancelled and not torn off. If some
alterations are made in the receipts already written, it should be
properly initialed.
6. Copies of receipts previously issued must be marked duplicate.
7. Some responsible persons of the firm should verify the balance of
cash by carrying out a surprise physical check from time to time.

CASH PAYMENTS:
24
1. The person in charge of making payments should have no connection
with the receipts of cash.
2. All payments should, as far as possible be by chance cheques
excluding petty cash payments. The cheques drawn for payment
should be order cheques and as far as practicable they should be
crossed.
3. Arrangements should be made to ensure that the vouchers
supporting payments cannot be presented for the payments twice,
such vouchers should be stamped as paid before the cheques are
signed.
4. An official should check up the statements received from creditors
and verify with the invoices and ledger accounts only after proper
verifications cheques should be drawn in favour of the creditors.
5. For sanctioning the payments of special nature, only directors and
senior officers should be empowered.
6. Bank reconciliation statements should be prepared to reconcile bank
and cash balances from time to time by some authorities other than
the cashier.
7. Bank cheques must be held under lock and key with a responsible
officer.
8. Receipts duly signed and stamped should be obtained for each
payment.
9. Receipts so obtained should be properly arranged and maintained
through proper filing system.
[Link] ensure the availability of cash discounts, monthly or periodic
payments should be made on the fixed dates.

Internal checks- Wages

25
Preparation of Wage Sheet:
The wage sheet should not be prepared by one clerk alone. A set of
clerks should compare the records maintained at the gate and the wage
office and enquire about differences, if any. The following points should
be taken into account.
1. Base: The wage sheets should be prepared with the help of
attendance register, overtime slip and pass-out slip.
2. Separate Sheets: Separate wage sheets should be used for time-
workers and piece-workers.
3. Checking: The wage sheet should be inspected and counter signed
as correct by the works manager and foreman.

26
4. Signature: The wage sheet should be counter signed by those
employees who has prepared it.
5. Approval: Each and every wage sheet should be approved by
factory manager or managing director.

Payment of Wages:
1. The person who is in-charge for payment of wages should not have
connection with the preparation of wages sheet.
2. Each worker should be asked to receive his wages personally in the
presence of his foreman to identify him.
3. No payment is made to someone on behalf of a worker who is
absent.
4. Wage payment should be made by cash department, not by other
persons.
5. The amount of wages for each employee should be placed in an
envelope bearing the name and number of person.
6. Special arrangements should be made for payment to the absentees.
7. Exact amount of money should be drawn from the bank for payment
of wages.
8. Advances to workers should be discouraged and if it becomes
unavoidable, they should be given through the petty cashier.
9. If casual workers are also employed in the factory a separate record
should be maintained about them.
10. Undisbursed wages should be deposited immediately into the
bank.

Internal Check as Regards Stores

1. Location of Stores: Stores should be located at a convenient place

and should have proper facilities so that goods may not be
misplaced, misused or wasted.
2. Receipt of Stores: The Stores Department on receiving the goods
in stores should prepare a Goods Received Note in triplicate. One
27
 copy of the note should be sent to the Purchase Department, second
copy to the Accounts Department and the third copy will be retained
by the Stores Department. The particulars of the goods received
should be entered in the note.
3. Preservation of Stores: Stores should be properly preserved; the
following are the points to be noted in this regard.
4. A separate place should be earmarked for each type of stores.
5. All items in stores should be serially numbered and the place where
they are to be kept also should be numbered.
6. Entries relating to stores, such as, receipts, issues and balance of
stores should be recorded in the bin cards. Such bin cards should be
kept hanging on the places where stores are reserved.
7. A responsible officer at frequent intervals should check the stores
and should also compare the bin cards with the stores ledger.
8. At regular intervals stocktaking should be conducted. Differences if
any noticed between the actual stock and the balance of stock as
shown by the books should be properly adjusted after obtaining
sanction from the higher officials.
9. Issue of Stores: The following system should be adopted for issuing
stores:

10. Stores should be issued only against proper requisition slip

received from the department. The requisition slip should be signed
by the responsible person of the department.
11. Issue of stores should be made only by an authorized person. The
Stores officer should be seated near the gate so that all the issues
should be made under his supervision.
12. When materials or stores are returned from the job or
department, it should be properly accounted in the Materials Return
Note.
13. When materials or stores are transferred from one department or
job to another entry should be made through the Materials Transfer

28
 Note.
14. Proper instructions should be given to the gate-keeper not to
allow any materials out of the factory without obtaining permission
from the storekeeper.

15. Recording: When materials are issued under the material

requisition slip from the department, the requisition slip should be
sent to the stores accounts section for recording. At frequent
intervals the bin cards should be checked and compared with the
entries in the stores records.

16. Books and Documents to be Vouched: (1) Bin Card, (2)

Stores Ledger, (3) Goods Received Note, (4) Material Requisition Slip,
(5) Material Transfer Note, (6) Material Return Note.

17. Records to be verified by the Auditor

a. Auditor should check entries relating to stores with the
following records:
b. Bin Card: Maintained by the Storekeeper in Stores
Department.
c. Stores Ledger Account: Maintained by Accountant in
Accounts Department.

29
 UNIT 2: AUDIT PROCESS
1. What is an audit programme primarily designed to do?
a. Prepare financial statements
b. Verify each item in the financial statements
c. Manipulate financial records
d. Perform internal audits
2. What is the purpose of an audit note book?
a. To prepare financial statements
b. To record errors and doubtful queries
c. To manipulate financial records
d. To facilitate internal control
3. Which of the following is NOT an objective of audit working papers?
a. Representing the volume of work performed
b. Providing evidence of compliance with auditing standards
c. Assisting in planning and performance of audit work
d. Facilitating the preparation of financial statements
4. What is the main purpose of internal control in a business?
a. To promote operational inefficiency
b. To discourage adherence to prescribed policies
c. To safeguard assets and promote operational efficiency
d. To encourage fraud and carelessness
5. What does internal check primarily involve?
a. External verification of financial records
b. Continuous internal audit
c. Independent verification of financial statements
d. Arrangement of duties to ensure automatic checking
6. What is the purpose of internal check with regard to sales?
a. To ensure accurate reporting of sales figures
b. To discourage adherence to sales policies
c. To promote operational inefficiency in sales department
d. To increase the number of sales transactions
7. What is the primary role of internal check in relation to purchases?
a. To increase the cost of purchases
b. To ensure timely payments to suppliers
c. To detect errors and frauds in purchase transactions
d. To discourage adherence to purchasing policies
8. In the context of fixed assets, what does internal check primarily aim to ensure?
a. Efficient utilization of fixed assets
b. Accurate recording and maintenance of fixed asset records
c. Discarding of fixed assets
d. Devaluation of fixed assets
9. What is the main focus of internal check with regard to cash transactions?

30
 a. To promote cash frauds
b. To ensure proper segregation of duties
c. To encourage misappropriation of funds
d. To safeguard cash and discourage fraud
[Link] is the main content of an auditor's note book?
a. Detailed financial statements
b. Errors, queries, and important points
c. Secretarial audit reports
d. Cost analysis records
[Link] is the significance of audit working papers?
a. To prepare financial statements
b. To facilitate internal control
c. To manipulate financial records
d. To provide evidence of compliance with auditing standards
[Link] does internal control encompass?
a. Only internal audit
b. Only internal check
c. The whole system of controls within a business
d. Only financial controls
[Link] is the primary objective of internal check?
a. To encourage fraud and inefficiency
b. To discourage adherence to prescribed policies
c. To ensure automatic checking of duties
d. To detect errors and frauds easily
[Link] to the American Institute of Certified Public Accountants, what
does internal control comprise?
a) Financial controls only
b) Internal audit procedures
c) Safeguarding assets and records
d) Plan of organization and coordinated methods within a business
[Link] should the preparation of wage sheets be conducted according to the
guidelines?
a) Independently by a single clerk
b) With comparison by multiple clerks
c) Without reference to attendance records
d) In collaboration with the factory manager
[Link] is the purpose of using separate wage sheets for time-workers and
piece-workers?
a. To increase paperwork
b. To streamline the payment process
c. To confuse the clerks
d. To save on stationery costs
17. Who should inspect and counter sign the wage sheet as correct?

31
 a. Cashier and accountant
b. Works manager and cashier
c. Works manager and foreman
d. Storekeeper and accountant

[Link] action should be taken regarding undisbursed wages according to the

guidelines?
a. Kept in the factory safe
b. Distributed among the workers
c. Deposited immediately into the bank
d. Used for factory expenses
[Link] should approve each wage sheet?
a. Cashier
b. Factory manager or managing director
c. Accountant
d. Foreman
[Link] precaution should be taken regarding the person in charge of wage
payment?
a. Should be closely related to the preparation of wage sheets
b. Should not have any connection with the wage sheet
preparation
c. Should be the works manager
d. Should be a clerk
[Link] what manner should wage payment be made according to the
guidelines?
a. By any available person
b. By check only
c. By cash department
d. By the factory manager
22. What is the recommended approach for dealing with advances to workers?
a. Encouraging them
b. Giving directly from the bank
c. Discouraging, and if unavoidable, through the petty cashier
d. Providing them without any restrictions
23. What should be done with materials returned from a job or department?
a. Ignored
b. Recorded in the Material Return Note
c. Sold to other departments
d. Hidden in the stores
24. Who maintains the bin card in the Stores Department?
a. Factory manager
32
 b. Storekeeper
c. Accountant
d. Works manager

[Link] of the following statements regarding cash receipts is true according

to the guidelines provided?
a. The cashier is authorized to keep cash with him for convenience.
b. Bank reconciliation statements should be prepared only when
discrepancies are suspected.
c. Bank pay-in-slips should be prepared by the same person who makes
actual deposits.
d. Spoiled receipts should be discarded without any further action.

10 Marks Questions

1. What is an audit program? Explain its features.

2. Sate the various contents of an audit program?
3. Define an audit notebook and state a few of its merits.
4. Define audit working papers and briefly explain their types with examples.
5. What is internal check? Explain the objectives of an internal check system.
6. Define internal control and explain its need with examples.
7. Explain a suitable system of internal check regarding cash purchases in a
business organization.
8. What is internal audit? How does it differ from external audit?
9. Why is audit documentation important, and what does it include?
[Link] is audit risk? Explain three types of audit risk with illustrations.

15 Marks Questions
1. Define an audit program and discuss its various merits and demerits.
2. What is an audit notebook? State the various contents that should be
incorporated in an audit notebook.
3. What is an audit working paper? State the various contents that should be
incorporated in an audit working paper.
4. Explain the various objectives of audit working papers.
33
5. What is an internal check system? Enumerate the various merits and
demerits of it.
6. What is internal check? Explain a suitable system of internal check
regarding cash receipts and payments.
7. Write a comprehensive note on internal control systems and their
contribution to the financial statements of firms.
8. Explain a suitable system of internal check regarding sales and sales
returns.
9. Enumerate a suitable system of internal check regarding the preparation of
wages and their payments.
[Link] a suitable system of internal check regarding stores or inventory.

34
 Unit – 3 Audit Evidence
Introduction, audit procedures to obtain audit evidence, types of audit
evidences, reliability of audit evidence, methods to obtain audit
evidence.

Introduction
An auditor applies various audit procedure to obtain audit evidence
which enables him to form an opinion whether the financial
statements of an entity are free from material misstatement and
state a true and fair view or not.
Audit Evidence is the information that the auditor uses in arriving at
a conclusion on the basis of which he forms his opinion.

What is audit evidence?

Audit evidence is all information and documentation collected and used
by an auditor on which the auditor’s opinion is based in arriving at the
conclusions of his or her review of the financial accounts, internal
controls, and other matters needed to certify the company's financial
statements.

Audit evidence includes both information included in the accounting

records underlying the financial statements and other information. The
amount and type of audit evidence differ from one audit to another
based on the business industry, the company's financial system, the
scope of the audit, and the type of audit.
Examples of auditing evidence include bank accounts, management
accounts, payrolls, bank statements, invoices, and receipts.

35
36
 What are the Types of Audit Evidence?
There are eight types of audit evidence. Each type has a specific
purpose depending on the audit’s goal, the client’s objectives, and the
assertion being tested.
1. Physical examination. This involves inspecting tangible assets,
such as inventory, machinery, or documents, to verify their
existence, condition, or ownership. Physical examination provides
direct evidence and is often documented in audit work papers.
2. Confirmations. This refers to relying on third parties such as banks
to confirm various aspects of the financial statements (for example,
the closing bank balance or accounts payable records).
3. Documentary evidence. Auditors will gather documentation, such
as internal process documents, emails, or logs, to help with different
portions of the overall audit. For example, the auditors may use the
documentation for vouching or tracing a process flow as a part of the
audit procedures.
4. Analytical procedures. This includes any analysis performed by
the auditors using their calculations to substantiate the financial
information and any accounting records provided by the client to find
discrepancies.
5. Oral evidence. Auditors may hold question-and-answer sessions
with their client’s senior leadership team to inquire about the
business operations when planning and designing the audit
procedures.
6. Accounting system. This allows the auditor to access financial

37
 reporting documents and any information related to financial
statements. The accounting system may also act as the source of
audit evidence.
7. Re-performance. The auditor assesses the control risk by re-
performing key internal control processes to check for deficiencies.
8. Observatory evidence. Auditors may observe activities or
processes during site visits or walkthroughs. This allows them to
assess the effectiveness of internal controls, compliance with
regulatory requirements, or adherence to specific procedures.

Relevance and Reliability

Relevance: The relevance of audit evidence refers to its relationship to
the assertion or to the objective of the control being tested. The
relevance of audit evidence depends on:
a) The design of the audit procedure used to test the assertion or
control, in particular whether it is designed to (1) test the assertion
or control directly and (2) test for understatement or overstatement;
and
b) The timing of the audit procedure used to test the assertion or

38
 control.

Reliability: The reliability of evidence depends on the nature and

source of the evidence and the circumstances under which it is
obtained. For example, in general:
 Evidence obtained from a knowledgeable source that is independent
of the company is more reliable than evidence obtained only from
internal company sources.
 The reliability of information generated internally by the company is
increased when the company's controls over that information are
effective.
 Evidence obtained directly by the auditor is more reliable than
evidence obtained indirectly.
 Evidence provided by original documents is more reliable than
evidence provided by photocopies or facsimiles, or documents that
have been filmed, digitized, or otherwise converted into electronic
form, the reliability of which depends on the controls over the
conversion and maintenance of those documents.
The auditor is not expected to be an expert in document authentication.
However, if conditions indicate that a document may not be authentic or
that the terms in a document have been modified but that the
modifications have not been disclosed to the auditor, the auditor should
modify the planned audit procedures or perform additional audit
procedures to respond to those conditions and should evaluate the
effect, if any, on the other aspects of the audit.
Method of obtaining evidence.
Audit evidence is collected via audit procedures. Those procedures are
categorized as risk assessment procedures and audit procedures. The
latter includes tests of controls and substantive procedures.
There are seven types of audit procedures, and the purpose of the
process typically dictates which one is used:

39
1. Inspection. Auditors collect evidence by inspecting physical assets,
records, or documents.
2. Observation. Auditors observe the client’s business processes and
operations to identify deficiencies.
3. Inquiry. Auditors talk with the client’s senior management to gain a
deeper understanding of business processes for the auditing process.
Inquiry alone, however, isn’t considered sufficient audit evidence to
reduce the risk.
4. External confirmation. This involves obtaining written or oral
responses from third parties, such as customers, suppliers, or
financial institutions.
5. Recalculation. The auditors perform calculations to verify that the
final account balances match those reported by the client.
6. Re performance. The auditor independently performs procedures
or controls that were initially performed by the entity to verify their
effectiveness.
7. Analytical procedures. The auditor analyzes financial and non-
financial data, such as comparing current and prior-year financial
ratios or trends, to identify unusual fluctuations or patterns that may
indicate potential errors.

According to the Public Company Accounting Oversight Board (PCAOB),

which regulates audit firms in the United States, any audit evidence

40
obtained must be sufficient and appropriate.
Sufficiency measures the quantity of audit evidence; appropriateness
refers to the quality of audit evidence. The sufficiency of the audit
evidence is affected by both the risk of material misstatement and the
risk associated with the control and the quality of the audit evidence
obtained.

41
42
 Unit – 3 Audit Evidence
1. What is the primary purpose of audit evidence?
a) To ensure compliance with audit standards
b) To certify the company's financial statements
c) To form an opinion on the financial statements
d) To detect fraud within the organization
2. Which type of audit evidence involves inspecting tangible assets?
a) Confirmations
b) Analytical procedures
c) Physical examination
d) Oral evidence
3. What is the purpose of confirmations in the audit process?
a) To confirm the auditor's identity
b) To verify the accuracy of financial statements with third
parties
c) To obtain evidence through interviews
d) To analyze financial trends
4. Which type of audit evidence includes emails, logs, and internal process
documents?
a) Physical examination
b) Documentary evidence
c) Analytical procedures
43
 d) Re-performance
5. How do auditors utilize oral evidence in the audit process?
a) By observing activities during site visits
b) By re-performing key internal control processes
c) By holding question-and-answer sessions with the client's
leadership team
d) By analyzing financial trends
6. What does the accounting system serve as in the context of audit evidence?
a) Source of financial reporting documents
b) Source of observational evidence
c) Source of oral evidence
d) Source of re-performance evidence
7. When auditors re-perform key internal control processes, what are they
assessing?
a) The accuracy of financial statements
b) The reliability of confirmations
c) The effectiveness of internal controls
d) The completeness of documentary evidence

8. What does observatory evidence involve?

a) Reviewing financial records
b) Re-performing key processes
c) Observing activities or processes during site visits
d) Analyzing accounting systems
9. Which type of audit evidence provides direct evidence of existence,
condition, or ownership?
a) Confirmations
b) Re-performance
c) Physical examination
d) Analytical procedures
[Link] is the primary purpose of analytical procedures in auditing?
a) To verify the accuracy of financial statements
b) To gather documentary evidence
c) To analyze financial trends and identify discrepancies
d) To observe activities or processes during site visits
[Link] of the following best describes the relevance of audit evidence?
a) Its relationship to the assertion or control being tested
b) Its complexity and depth
c) Its monetary value
d) Its physical location
[Link] does the reliability of evidence depend on?
44
 a. The number of sources it comes from
b. The timing of when it's obtained
c. The nature and source of the evidence
d. The length of the audit process
[Link] type of evidence is generally considered more reliable?
a. Evidence obtained from internal company sources
b. Evidence obtained indirectly by the auditor
c. Evidence provided by original documents
d. Evidence provided by knowledgeable internal sources
[Link] is evidence provided by original documents more reliable?
a. When the documents have been converted into electronic form
b. When the auditor is not an expert in document authentication
c. When the controls over the conversion and maintenance of
documents are effective
d. When the terms in the documents have been modified
[Link] of the following is an example of inquiry as an audit procedure?
a. Analyzing financial ratios
b. Independently performing controls
c. Talking with senior management
d. Observing business operations
[Link] type of audit procedure involves independently performing controls
initially performed by the entity?
a. Recalculation
b. Inspection
c. Observation
d. Re-performance
[Link] does the PCAOB define sufficiency of audit evidence?
a. The quantity of audit evidence obtained
b. The quality of audit evidence obtained
c. The complexity of audit evidence obtained
d. The monetary value of audit evidence obtained
[Link] does appropriateness of audit evidence refer to?
a. The quantity of audit evidence obtained
b. The quality of audit evidence obtained
c. The timing of when audit evidence is obtained
d. The source of audit evidence obtained
[Link] type of audit evidence involves comparing current and prior-year
financial ratios or trends?
a. Recalculation
b. Inspection
c. Observation
45
 d. Analytical procedures
[Link] is the primary purpose of external confirmation as an audit
procedure?
e) To independently perform controls
f) To observe business operations
g) To obtain written or oral responses from third parties
h) To analyze financial ratios
[Link] type of evidence involves physically inspecting tangible assets or
documents?
a) Observation
b) External confirmation
c) Inspection
d) Re-performance
[Link] is the purpose of recalculation as an audit procedure?
a. To independently perform controls
b. To analyze financial ratios
c. To verify account balances match those reported by the
client
d. To obtain written or oral responses from third parties

[Link] is evidence provided by knowledgeable internal sources considered

more reliable?
a. When it's obtained indirectly by the auditor
b. When it's provided by external sources
c. When it's provided by original documents
d. When it's obtained from independent sources
[Link] does observation as an audit procedure involve?
a. Independently performing controls
b. Physically inspecting tangible assets
c. Analyzing financial ratios
d. Observing business processes and operations
[Link] type of audit evidence is generally considered the least reliable?
a. Evidence obtained from independent sources
b. Evidence provided by original documents
c. Evidence obtained indirectly by the auditor
d. Evidence provided by knowledgeable internal sources.

10 Marks Questions

1. What is audit evidence? State three types of it.

46
2. Explain the concept of audit evidence and its significance in the audit
process.
3. Discuss the various types of audit evidence and provide examples for each
type.
4. What is meant by the sufficiency of audit evidence? Explain the various
factors that influence it.
5. State various procedures to obtain audit evidence.
6. How does physical examination contribute to the auditor's assessment of
financial statements? Provide examples.
7. Define relevance and reliability in the context of audit evidence.
8. Explain how the design and timing of audit procedures affect the relevance
of audit evidence.
9. Discuss factors influencing the reliability of audit evidence, providing
examples for each.
[Link] the reliability of evidence obtained from knowledgeable,
independent sources versus internal company sources.

15 Marks Questions
1. Define audit evidence and provide examples of three types.
2. Explain the concept of audit evidence and elaborate on its significance
within the audit process.
3. Discuss various types of audit evidence, providing examples to illustrate
each type.
4. Define the sufficiency of audit evidence and analyze the diverse factors that
influence it.
5. Enumerate and explain various procedures used to obtain audit evidence.
6. How does physical examination contribute to the auditor's assessment of
financial statements? Provide relevant examples to support your
explanation.
7. Define relevance and reliability concerning audit evidence, emphasizing
their importance in the audit process.
47
8. Analyze how the design and timing of audit procedures impact the
relevance of audit evidence, providing insights into their interplay.
9. Discuss factors that influence the reliability of audit evidence, providing
specific examples for each factor.
10. Compare the reliability of evidence from external sources to internal
sources, highlighting strengths and weaknesses.

48
 Unit 4: Vouching

Meaning, definition and objects, vouching of cash transactions. Cash

receipts and cash payments, credit purchases and credit sales.

Meaning and Definition

Vouching is concerned with examining documentary evidence

to ascertain the authenticity of entries in the books of accounts. In other
words, it is an inspection by the auditor of evidence supporting the
transactions made in the books. Vouching is a technique used by an
auditor to judge the truth of entries appearing in the books of accounts.
Some important definitions of vouching are:

“Vouching means testing the truth of items

appearing in the books of original entry.” – J.R. Batliboi

“Vouching is an act of comparing entries in the

books of accounts with documentary evidence in support
thereof.” - Dicksee

From the above definitions we can conclude that vouching is a

technique in which an auditor verifies authenticity and authority of
transactions recorded in the books and on the basis of which he submits
a report, indicating that accounts are correct, free from errors or fraud
and complete.

Objectives of Vouching:
1. All the transactions which are connected with the business have been
recorded in the books of accounts properly.
2. To verify that all transactions recorded in the books of accounts are
supported by documentary evidence.
3. The vouchers which support the entries are legally valid from the
view point that they are authentic, addressed to the business and
49
 properly dated.
4. To verify that no fraud or error has been committed while recording
the transaction in books of accounts.
5. The vouchers have been processed carefully through various stages
of internal check system.
6. While recording the transaction whether distinction has been made
between capital and revenue items.
7. Whether accuracy has been observed while totaling, carrying forward
and recording an amount in the account.

Important of vouching
1. Vouching is equally important as passing of original entry in the
books of accounts. If, original entry is wrong, it will affect every
process of accounting entry and its impact will be till the end result.
Similarly, vouching is base of all auditing process.
2. Efficiency of vouching will decide the success of audit.
3. Any errors and frauds are easily detectable if vouching is conducting
in searching and intelligent manner.
4. Intelligent and faithful vouching will establish reliability on financial
statements, i.e., Profit and Loss account and Balance Sheet of any
organization.
5. If adequate internal control system exists, the Auditor may choose to
do test checking instead of complete vouching.

Types of voucher
There are two types of vouchers −
Primary Voucher − Original copy of written supporting document
is called primary voucher. Like purchase Bill, cash memo, pay-in-slip,
etc.
Collateral Voucher − Copies of supporting documents which are
not available in original are collateral voucher like duplicate or

50
 carbon copy of sale invoice.
Example of Vouchers

Vouching of cash Transactions:

How to vouch various cash receipts (Receipt side)

1. Cash sales: In vouching cash sales, cash register should be fully

checked with carbon copies of cash memos. Then, the auditor should
verify the daily deposits of cash received in the bank dates of the
cash and the date on which the receipts are recorded in cash book
must be same. Where the cash memos are cancelled, all copies
including the original copy duly cancelled should be kept in the book.
Where a company has a discount policy, if more discount is allowed
in a transaction it must be approved by a responsible officer.
2. Cash received from the debtors: The auditor should verify
amount received from debtors from the counterfoils or carbon copies
of the receipt issued to the customers. All these receipts should be
serially numbered. Amount should be entered in the cash book on
the day when received. Discount allowed to customers should be
authorized by a responsible officer. Sometimes correspondence
made with customer can also be verified.
3. Loans: While vouching the loans received, the terms and the
conditions contained in the agreement should be verified. If the loan
51
 is secured what security has been offered, whether the fact has been
disclosed in the balance sheet.
4. Bills receivable: Bills receivable book maybe verified because the
various details regarding the bills matured and discounted are
available in it. Auditor should check the amount received with the
bank statement. Some bills might have become due but no amount
has been received. Whether the entry for the dishonor of such bill
has been made.

A verification of the bills discounted should be made. Whether, entry

for discount has been made. Such bills should appear as contingent
liability in the balance sheet; if the date of maturity is after the date
of balance sheet.

5. Sale of Investment: If the sales have been affected through a

bank, the auditor should examine the bank advice to know the
various details. Sometimes the investment is sold through the
broker. Broker’s sold note or commission should be examined to
verify the sale proceeds and commission charged by the broker.
If the investments are sold at cum-dividend price, auditor should see
that proper apportionment has been made between capital receipts
and revenue receipts.
Sometimes the investments are made against specified funds. Profit
or loss on sale of such investments must be transferred to such
funds account.
6. Sale of Fixed Assets: Sale of fixed assets may be vouched with
minute book of board of directors, correspondence, agents’ sale
account and sale contract. It should be seen that proper account has
been credited. Any profit arising on the sale of asset shall be credited
to revenue account which is not available for distribution of
dividends. If any expense on the sale of assets is paid, the sale
proceeds of the asset should be reduced by such amount and the

52
 balance should be credited to asset account. It must be seen that
sale of fixed assets has been sanctioned by the authorized person or
committee.

Vouching of cash payments (payment side):

1. Cash Purchases: good purchased are actually received by store

keeper. Cash memos can be compared with goods inward book to
verify the goods received. Only the net amount (after trade discount)
should be entered in the books.
2. Payment to creditors: Should be examined with the receipts
issued by the creditors. The receipts should indicate the purpose for
which the payment has been made. If the payment is made in full
and final settlement of account, the balance should be accounted for
as discount received. Where the payment is made in excess of the
bill, either the excess payment is in advance or the payment is made
by mistake, which should be recovered back from the creditor.
3. Bills payable: Bills payable honored on the date of maturity and is
returned by the payee after receiving the payment. These bills
should be cancelled after being paid. Bills payable paid can be
vouched with bills book. If the payment is made by the bank, bank
statement or pass book can be examined to verify the payment of
bill
4. Wages: wages paid and calculated for various months should be
compared. If the wages of particular month differ from the preceding
month, the auditor should look into the reasons for difference.
Random checking of wages calculations should be made. The auditor
should see the proper record is maintained for unpaid wages,
deductions for any advance taken by the worker should also be
verified, and deductions made from the wages should also be
entered in the proper account. Special attention should be given to
the payments made to casual workers.
53
5. Payment of Salaries: in vouching the payment of salaries following
points are important
a) Auditor should check salary register with the entries made in the
cash book
b) He should examine carefully alterations in the amount of deductions
on account of fines, funds, loans, insurance etc.
6. Purchase of Investment: the auditor should compare the
investment purchased with Broker’s Bought Note. If the possible,
physical verification of investments should be made. Investments
must be in the name of the company. Where the investments are
purchased at cum-interested price, interest included in the purchase
price should be debited in the interest account and the balance in
investment account. Later on when the interest is received on the
investment, it should be credited in the interest account.
7. Rent paid: the auditor should verify the payment of rent from the
agreement. The ret voucher should be supported by rent receipt
from the landlord. It should be seen that payment of rent is
sanctioned by responsible officer.
8. Loans: Auditor should be that the loan voucher should be supported
by the receipt given by the party. Further details regarding terms
and condition of the loan can be verified from the loan agreement. It
should be seen that installment of loan along with interest are
received in time. Mortgage Deeds and other documents should also
be examined.
Interest on Loan: Auditor should verify that rate of interest on loan
does not differ from the terms and conditions of loan agreement.
Debenture interest can be verified from debenture interest book. All the
payments of interest must be supported by vouchers and receipts.
54
 Vouching of Trading Transactions

Vouching of purchase book:

The main aim vouching of purchases book is to see that all purchase
invoices are entered in purchases book and the goods entered in the
purchases book are entered are actually received by the business.

While vouching credit purchases the auditor should examine and see
the following points.
i. There should be proper record for all purchase orders. A duplicate
copy of the order is kept in office for record.
ii. A copy of purchase order shall be send to the Accounts
Department.
iii. All goods received should be recorded on goods received note; a
copy of it should be sent to Accounts Department.
1. The auditor should see that only credit purchases of the goods are
recorded in purchase book.
2. The purchases book can be verified from purchase invoices, copies of
orders placed, goods received note, goods inward book, copies of
challans from suppliers.
3. The quantity mentioned in the invoice must be same as is shown in
the purchase order.
4. The price charged by the supplier must be as per quotation/pricelist
of the supplier.
5. The supplier bill must be in the name of business and for the period
under audit.
6. While vouching the purchase vouchers, each voucher should be
stamped or initialed after examination, so that it could not be
55
 produced again.
7. Any purchase, made not for the purpose of business of the client,
must not be debited to purchase account.
8. Duplicate invoices must not be entered in the purchase book if
original invoices have already been recorded.
9. The auditor should be more careful while vouching the purchase
made in the first and last month of the accounting period, because
sometimes the purchase of last year may be included in the
purchases of first month of current year or purchases of the last
month of current year may be recorded in the next.

Vouching of Purchase Returns

While vouching the purchase returns the following points should be

taken into consideration by the auditor.
1. He should see that a Debit note has been sent to the supplier or
Credit note has been received from the supplier.
2. The quantity returned as per the return note must correspond with
storekeeper’s record, return outward register and gatekeeper’s
outward register.
3. The amount showed in the credit note should be verified.
4. He should be careful about the recordings of purchases return in the
current year. Sometimes the profits of current year may be
manipulated by recording current year’s purchases return in the
subsequent year.
5. The purchases return of the first month and last month of the
Accounting year should be vouched carefully, to detect any
manipulation of amounts.

Vouching of Credit Sales

1. The sales register should be examined with copies of sales invoices.

56
 The sale of capital items should not be recorded in the sales book,
otherwise the profits will be inflated.
2. Test check should be applied on the calculations made in sale
invoices.
3. The totaling and the castings of sales book should be verified.
4. Sales Tax, duties collected thorough sales invoices must be recorded
under separate accounts.
5. It should be verified that all sales invoices are prepared on the basis
of challans and then sales invoices are entered in sales book and
from there, posted to their respected accounts.
6. Sales made in the current year must be recorded under that year and
shall not be treated as sales of subsequent year.
7. All cancelled sales invoices must be kept together for verification by
auditor, who should see that cancelled invoices are properly treated
in the books.
8. The statement of accounts should be verified by getting
confirmations from the customers.

Vouching of Sales Return

The Auditor should pay special attention to the following while vouching
the sales return

1. Date on which the goods are actually retuned.

2. Credit note or Debit note of sales return.
3. Gatekeeper’s receipt book.
4. Return inward register.
5. Stores records.
6. Corresponding entry for the return of goods in customer’s account.
7. Goods returned should form the part of closing stock at cost price or
market price whichever is less.

57
10 Marks questions
1. Define vouching and explain its significance in auditing practices.
2. Summarize the objectives of vouching and discuss their importance in
ensuring the accuracy of financial records.
3. Provide examples of primary and collateral vouchers used in vouching.
4. Compare and contrast the vouching procedures for cash receipts and cash
payments, highlighting their differences and similarities.
5. Develop a checklist outlining the steps an auditor should follow while
vouching cash transactions.
6. Assess the importance of vouching in detecting errors and frauds in
financial statements, providing examples to support your argument.
7. Define continuous audit and discuss its advantages and disadvantages
compared to traditional audit methods.
8. Explain the importance of vouching in verifying credit purchases and credit
sales, emphasizing its role in ensuring transparency.
9. Describe how an auditor would vouch the purchase returns and sales
returns, listing the key documents and records involved in the process.
[Link] the impact of effective vouching on the reliability of financial
statements, considering the consequences of inadequate vouching
practices.

58
 Unit 4: Vouching
1. What is the primary purpose of vouching in auditing?
a. To generate financial reports
b. To verify the authenticity of transactions
c. To prepare tax documents
d. To conduct market analysis
2. Which of the following is NOT an objective of vouching?
a. Ensuring all transactions are properly recorded
b. Verifying the accuracy of financial statements
c. Detecting errors and frauds
d. Ensuring all transactions are profitable
3. How does an auditor verify cash sales transactions?
a. By comparing cash register tapes with cash memos
b. By checking bank deposits against cash sales
c. By reviewing daily sales reports
d. By examining customer invoices
4. Which document should an auditor examine to verify cash received
from debtors?
a. Sales invoices
b. Bank statements
c. Counterfoils or carbon copies of receipts
d. Purchase orders
5. What should an auditor verify while vouching loans received?
a. Security offered against the loan
b. The profitability of the loan
c. The credit rating of the borrower
d. The auditor's personal opinion
6. How can an auditor verify the sale of investments?
a. By checking bank advice
b. By reviewing shareholder agreements
c. By examining sales invoices

59
 d. By analyzing market trends
7. When vouching the sale of fixed assets, what document should an
auditor examine?
a. Sales contracts
b. Employee contracts
c. Marketing materials
d. Internal memos
8. What should an auditor compare with cash memos to verify cash
purchases?
a. Goods inventory
b. Sales reports
c. Goods inward book
d. Employee schedules
9. How can an auditor verify payments to creditors?
a. By reviewing cash register tapes
b. By examining receipts issued by creditors
c. By analyzing market trends
d. By checking employee schedules
[Link] document should an auditor examine to verify bills payable?
a. Bank statements
b. Purchase orders
c. Bills payable book
d. Sales invoices
[Link] does an auditor verify wages payments?
a. By reviewing customer invoices
b. By comparing with employee schedules
c. By analyzing market trends
d. By examining bank statements
[Link] should an auditor verify while vouching payment of salaries?
a. Employee performance reviews
b. Salary negotiations
c. Salary register with cash book entries
d. Customer complaints
[Link] can an auditor verify rent payments?
a. By reviewing rent agreements
b. By examining employee schedules
c. By analyzing market trends
d. By reviewing cash register tapes
[Link] document should an auditor examine to verify loans?
a. Loan agreement
b. Sales contracts

60
 c. Purchase orders
d. Bank statements
[Link] does an auditor verify interest payments on loans?
a. By reviewing customer invoices
b. By examining bank statements
c. By analyzing market trends
d. By reviewing cash register tapes
[Link] is the primary aim of vouching the purchases book?
a. To inflate profits
b. To ensure all purchase invoices are recorded
c. To manipulate financial statements
d. To minimize taxes
[Link] document should an auditor examine to verify credit
purchases?
a. Goods received note
b. Sales register
c. Debit note
d. Cash memos
[Link] should an auditor verify purchases made in the first and last
month of the accounting period?
a. Apply test checks on calculations
b. Compare with sales records
c. Examine purchase invoices carefully
d. Verify with storekeeper's records
[Link] should an auditor verify while vouching purchase returns?
a. Sales invoices
b. Purchase orders
c. Credit note from the supplier
d. Cash receipts
[Link] of the following should not be recorded in the sales book?
a. Sales of capital items
b. Cash sales
c. Sales on credit
d. Sales returns
[Link] should an auditor verify regarding sales tax and duties
collected through sales invoices?
a. Recording under separate accounts
b. Recording under general ledger
c. No verification needed
d. Ignoring the taxes
[Link] should an auditor verify sales invoices?
61
 a. Comparing with purchase orders
b. Applying test checks on calculations
c. Ignoring sales invoices
d. Reviewing employee schedules
[Link] document should an auditor examine to verify sales return?
a. Goods received note
b. Debit note
c. Credit note
d. Purchase orders
[Link] should an auditor verify regarding cancelled sales invoices?
a. Keep them for personal use
b. Ignore them
c. Ensure proper treatment in the books
d. Discard them immediately
[Link] should an auditor verify goods returned in sales return?
a. Ignore them
b. Check gatekeeper's receipt book
c. Compare with employee schedules
d. Review market trends

10 Marks Questions

62
 Unit – 5 Verification and Investigation

Investigation

Meaning and Definition

Investigation involves inquiry into facts behind the books and accounts
into the technical, financial and economic position of the business.
Investigation is a critical examination of the books and accounts with a
specific objective.

“The term investigation implies an examination of the accounts of a

business for some special purpose.” - Spicer and Pegler

“An investigation is an examination of accounting records undertaken

for a special purpose; in fact, it is an audit of which the scope the scope
is limited or extended in accordance with requirements of the particular
purpose. Its object is usually to discover and display the facts in such a
manner as will enable the parties for whom it is undertaken to draw
conclusions and make their decisions accordingly.”

Features of investigation

1. It is critical examination and is based on Suspicion on the state of

affairs to be investigated.
2. It may even extend to the examining of individuals like Directors,
Auditors and other officers of the company
3. It does not confine itself only with the financial aspects but technical,

63
 political, economic and managerial aspect are also accounted for.
4. The investigation is normally conducted with certain specific
objectives.
5. With the predefined objectives, the scope and the nature of
investigation may be limited or extended.
6. The investigator submits his report of investigation only to his client,
who appoints him.
7. In the investigation report, the factual information is given in an
analytical and descriptive manner.
8. No specific rules and provisions are framed for the investigation.
Investigation is voluntary and contractual in nature, except in
companies.
9. It suggests the outlines for the future course of action on a particular
problem.

Difference between Investigation and Audit

1. An Audit is carried out to ensure that the balance Sheet and the
profit and Loss A/C show a true and fair picture. But, on the other
hand, an investigation is carried out on for some predefined purpose
e.g. to know the financial position of the company or its earning
capacity.
2. An Audit is limited only for an examination of the accounts of the
concern but the investigation covers not only examination of
accounts, it involves probing deep into the matter and looking for
required information far behind the books whenever necessary.
3. The Investigation is not legally compulsory but audit is statutorily
compulsory in case of joint stock companies.
4. Auditing can only be conducted by a chartered accountant but it is
not necessary that an investigator must be a Chartered accountant.
5. An audit is always carried out on behalf of the owner of the business,
but the investigation may be conducted on behalf of the proprietor of
64
 the business, in case he suspects any fraud, or on behalf of the
outside parties.
6. An audit always relates to a period of 1 year or 6 months but the
investigation may cover several years.
7. Investigation is done when the books of accounts are already subject
to a regular audit i.e. the investigation starts where the audit ends.
8. Unlike auditor, an investigator is not bound by accounting
conventions, policies and disclosure requirements.

Verification

Meaning and Definition

Verification means the procedures normally carried out at the

year end, to confirm the ownership, valuation and existence of items at
the balance sheet date. In simple words verification means, ‘proving the
truth or conformation.’

“The verification of assets implies an enquiry into the value,

ownership and title, existence and possession, and the presence of any
charge on the assets.” - Spicer and Pegler

Valuation

Meaning and Definition

Valuation means to set the exact value of an asset on the basis of

its utility. Valuation forms an important part of the everyday audit. It is
because the accuracy of balance sheet depends much upon how
correctly the estimation of the value of various assets and liabilities has
been made. Both over- valuation and under- valuation of assets and
liabilities would exhibit wrong picture of the financial affairs of a
concern. The auditor has to see that the assets and liabilities appearing
in balance sheet have been exhibiting their proper value i.e. neither

65
they have been over-valued nor under- valued.

Methods of Valuation:

1. Cost price: The price which is paid for the acquisition of an asset is
known as cost price, of course the expenses incurred in the purchase
of an asset and its installation in its cost price.
2. Market value: A value which an asset can fetch in the market when
sold is known or termed as Market value.
3. Replacement Value: It is a price at which a particular asset can be
replaced. The assets such as commission, freight etc. is included in
such a value.
4. Book Value: A value at which an asset appears in the books of
accounts is known as its book value. It is usually the cost less
depreciation written off so far.
5. Going Concern value or Conventional value or token value or
Historical value: It is equivalent to the cost less reasonable amount
of depreciation written off. No notice is taken of any fluctuation in the
price of the assets. Reason for this is that these assets are acquired
for use in the business and not for sale.
6. Residual Value: A value which will be realized in the market and
received from the sale of an asset it is known as its realizable Value.
7. Scrap Value: A value which is obtained from the asset if it is sold as
scrap.

Verification and Valuation of Different assets

For the purpose of convenience, we may divide the assets in the

following categories

1. Intangible Assets. Viz., goodwill, patents, trademarks, copyrights etc.

2. Fixed Assets viz., land and building, plant and machinery, furniture
and fixtures etc.

66
3. Floating assets viz., cash in hand and at bank, BR, stock in trade,
sundry letters etc.

Intangible assets:

1. Goodwill:

Verification: Where goodwill has been purchased along with a running

business, the same should be verified from the agreement with the
vendor showing the price paid for it. But when the amount is not
specially fixed, the goodwill is the amount for the purchase of the
business over the net assets taken over.

It should be verified that the goodwill has been recorded in the books of
accounts only when some consideration in money or its equal has been
paid for.

In case of partnership the auditor should verify the changes made in the
goodwill account from time to time on the basis of provisions made I the
partnership deed.

Valuation: Goodwill should be valued at a cost less amounts written

off.

2. Patents:

Verification: The Auditor should examine the patents with the help of
certificate which have granted such patent rights. The auditor should
also ensure that the patents are registered in the name of client

67
Valuation: patents must be valued at cost less depreciation. The
patents should be written off in a period of sixteen years after which the
right automatically lapses unless the term is extended.

3. Copyrights:
Verification: In verifying the copyrights, auditor should inspect the
agreement between the auditor and the publisher.
Valuation: Generally, the value of the copyright is not stable because
copyrights lose their value by passage of time. In the balance sheet
copyright must be shown a cost less amounts written off from time to
time.

4. Trademarks:
Verification: Trademarks can be verified by examining the assignment
deed duly endorsed by the office of the registrar of trademarks. In case
they have been purchased from others, the auditor should vouch the
expenditures incurred in connection with their acquisition e.g.
registration fees, payments made to designers etc.
Valuation: The valuation method is the most suitable method valuation
of trademarks. it should be seen that trademarks are properly valued
and shown in balance sheet.

Fixed Asset:

1. Freehold land and building:

Verification: The auditor should examine the title deeds to ensure that
they are in the name of the client. Any addition or sale during the year
should be carefully examined.

Valuation: Freehold land being a no depreciable asset is generally

shown at cost which includes the purchase price, broker’s commission,
registration fees, legal charges etc. Any payments made to Municipality
68
Corporation or improvement trust as developmental charges should be
included in the cost. If market realizable value is taken as basis for
valuation of freehold land the same should be disclosed clearly in the
balance sheet

Valuation of buildings: Buildings should always be valued at cost less

depreciation at a reasonable rate. Actually, the market or realized value
of the buildings

69
keeps on fluctuating. Therefore, it should be taken into account while
valuing the buildings.
2. Leasehold property:

Verification: The auditor should inspect the lease agreement to find

out the value and duration. The auditor should see that lease agreement
is registered with the registrar and certificate testing to the validity of
the same.

Valuation: Leasehold land and buildings are to be valued at cost less

depreciation which should be sufficient writes it off completely during
the period of lease

3. Plant and machinery:

Verification: Auditor should commence the process of verification by

obtaining a schedule of plant and machinery certified by responsible
officer of the concern.

Valuation: For valuing the plant and machinery, the auditor should
prepare a list of each machine from the plant register and should get
the list certified by the woks manager. The auditor should see the plant
and machinery account is shown in the balance sheet at cost less
depreciation after making proper adjustments regarding new purchases
of machinery and sale of older machinery during the year.

Floating Assets:

Cash in Hand: Verification: The auditor should verify the cash in hand
by actually counting it on the date of balance sheet.

1. Cash at Bank:
Verification: The auditor should verify cash at bank by comparing the
balance shown in cash book and pass book. In verifying the bank

70
balance, the auditor should also prepare bank reconciliation statement
to ascertain the correct position.
2. Stock in trade:
Verification: It is practically impossible for auditor to physically verify
each item of the stock in hand because of various reasons i.e. limited
time and the lack of technical knowledge. Therefore, the auditor has to
rely upon test checks to ascertain the accuracy of stock in trade
Valuation: The stock in trade being a floating asset should be valued at
cost price or market price whichever is less.
The cost price can be calculated from any of the following
methods

a) Unit cost method

b) Average cost method
c) First in first out method (FIFO)
d) Last in first out method (LIFO)
e) Highest in first out (HIFO)
f) Base stock method
g) Adjusted selling price method
h) Standard cost method.

3. Investments:

Verification The auditor should verify the

details of the schedule of

71
 Valuation: If investments are to be held as a fixed asset for the
purpose of earning interest/dividend; these are to be valued at cost
which includes brokerage and stamp duty paid in regard there to.

But if the investments are held as current assets, these assets should be
valued at cost or market price whichever is less. The auditor may come
across the situations where the market Value is much below the cost of
acquisition of investments. Ordinarily he should ignore a temporarily fall
in the market value, but where the fall in value seems to be of a
permanent nature, he should see that adequate depreciation is provided
by passing the required entries.

Verification of Liabilities:

Capital:

In case of firm, the auditor should verify the liability on account of the
capital with the help of partnership deed; pass book and the cash book.
In case of a company auditor should examine the memorandum of
association to verify the information as to the maximum capital the
company is authorized to raise. He should also ascertain the amount of
called up in respect of each class of shares and also ascertain how many
shares of each class are allotted as fully paid. Auditor should also
specify the sources from which the bonus shares are issued i.e.
capitalization of profits are reserves for share premium accounts. He
should also ensure that capital profit, if any on issue of forfeited shares,
has been transported to capital reserve.
Debenture:

The auditor should note the following points while verifying the
depreciation:

72
 a) Debenture trust deed’ should be inspected and with its help, the
debenture account in the ledger should be examined.
b) If necessary, the auditor can obtain a certificate from the debenture
holders.
c) Since the debentures are supposed to be redeemed, the auditor
should see the arrangements for their redemption.
d) The debenture may be issued at par or at premium.

e) The auditor should see the details as given in the Register of

Mortgages and charges.

Trade creditors:
a) The First task the auditor is to ask for schedule of creditors.
b) The purchase ledger should be checked with the books of original
entry, invoices and credit notes etc.
c) Discount on creditors should be checked with reference to creditor’s
account.
d) If any debt Is found unpaid for a longer period of time any enquiry
should be made since it is possible that instead of paying to the
creditor the amount might have been misappropriated
Loans:

The auditor should examine the loan agreement in order to ascertain

the terms of loan, amount of loan and period and the nature of the loan.
In case the loans are overdrafts have been taken from a bank an
agreement with the bank and a certificate to that effect should be
obtained and examined.

Outstanding liabilities for expenses:

The auditor should obtain a certificate from responsible officer of the

company stating that all outstanding liabilities for expenses incurred
have been brought into account.
73
 The auditor can verify those items of expenses which usually constitute
outstanding liabilities.
E.g. salaries payable, legal expenses, rent, wages, audit fees etc.

Reserves and Funds:

The auditor should examine and verify that whether the decision
to create reserve or fund is dictated by needs and circumstances of
business and relevant legal provisions and check the relevant entries in
books of accounts and check the entries passed for the purpose in the
profit and loss appropriation account.
Income Received in Advance

The auditor should examine the schedules of income received in

advance and ensure that these are fully disclosed in the balance sheet

The auditor duty is to examine whether interest, rent,

installments etc., received in advance should be classified as liability
and shown as such in the balance sheet.

Distinction between vouching, verification and valuation

Vouching Verification Valuation
Meaning Vouching is a process of Verification is a Valuation is a process
comparing the entries in process which which certifies the
the books of accounts proves the correct value of the
with the bonafide existence, assets and liabilities
vouchers ownership and at the date of balance
title to the sheet.
assets
Subject Vouching is made of the Verification on the Valuation is also made of
matter entries recorded in the other hand is assets and liabilities
books of original entry made of assets appearing in the

74
 and their posting in and liabilities balance sheet at the
the ledger appearing in the end of the year
balance sheet
at the end of the
year
By Whom Vouching is done by the Verification on the Valuation on the other
senior auditor and audit other hand is hand is done by the
clerks. done by the auditor h i m s e l f
audit or o r h i s associates
himself his
associates
When Vouching is done after Verification on the Valuation on the other is
the entry of other is done at done at the end of
transactions in the the end of the the financial year
account books financial year when the final
when the final accounts are to be
accounts are to prepared
be prepared
Evidence In vouching , bonafide Verification is In valuation an auditor
vouchers are sufficient made on the has to depend upon
evidence for vouching basis of the certificates of
evidence such the owners/diectors.
as the title
deed, receipts
and payments
etc.

75
 Unit – 5 Verification and Investigation
1. What is the primary objective of verification in accounting?
a. To determine the financial position of the company
b. To confirm the ownership, valuation, and existence of
items at the balance sheet date
c. To conduct a critical examination of the books and accounts
d. To investigate the technical, financial, and economic position of
the business
2. According to Spicer and Pegler, what does the term "investigation" imply?
a. A routine examination of accounting records
b. A critical examination of the books and accounts with a
specific objective
c. An audit with limited scope
d. A financial analysis of a company's performance
3. Which of the following is a feature of investigation?
a. Limited to financial aspects only
b. Scope and nature predetermined by accounting standards
c. Submission of the report to regulatory authorities
d. Critical examination based on suspicion
4. In what way does valuation contribute to the accuracy of a balance sheet?
a. By ensuring under-valuation of assets
b. By over-valuing liabilities
c. By setting the exact value of assets based on their utility
d. By neglecting the estimation of asset values
5. Which statement accurately differentiates between audit and investigation?
a. Audit focuses on probing deep into financial matters, while
investigation is limited to accounts examination.
b. Investigation is legally compulsory, while audit is not.
c. An auditor must be a Chartered Accountant, but an investigator
need not be.
d. Audit is conducted to know the financial position of the
company, while investigation ensures a true and fair
picture.
6. Who appoints the investigator in a business investigation?
a. Regulatory authorities
b. Chartered Accountants
c. The company's management
d. External stakeholders or clients
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7. What is the primary difference between valuation and verification?
a. Valuation involves confirming ownership, while verification
sets the exact value of assets.
b. Verification is legally compulsory, while valuation is not.
c. Valuation focuses on financial aspects, while verification
encompasses technical and economic aspects.
d. Verification is conducted on behalf of the company, while valuation
is conducted on behalf of external stakeholders.
8. What distinguishes investigation from audit?
a. Investigation involves limited scope, while audit covers a broader
range of aspects.
b. Audit always relates to a specific period, while
investigation may cover several years.
c. An audit is conducted by an investigator, while an investigation is
conducted by a Chartered Accountant.
d. Investigation is legally compulsory, while audit is not.
9. Who submits the investigation report?
a. Regulatory authorities
b. The company's management
c. Chartered Accountants
d. The investigator's client
[Link] aspect is NOT covered by investigation?
a. Technical
b. Managerial
c. Financial
d. Compliance with accounting conventions
[Link] is the primary purpose of vouching in auditing?
a. To prove the existence, ownership, and title to assets
b. To certify the correct value of assets and liabilities
c. To compare entries in the books with bonafide vouchers
d. To ensure the accuracy of balance sheet figures
[Link] method of valuation is based on the amount paid for the acquisition
of an asset?
a. Market value
b. Replacement value
c. Cost price
d. Book value
[Link] valuing goodwill, what should be considered?
a. Current market trends

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 b. Initial purchase price only
c. Cost less amounts written off
d. Fluctuations in asset values
[Link] is the market value of a patent determined?
a. By consulting financial journals and newspapers
b. By inspecting the lease agreement
c. By examining the assignment deed
d. By reviewing the debenture trust deed
[Link] distinguishes residual value from scrap value?
a. Residual value is obtained from selling the asset in the
market, while scrap value is obtained from selling it as
scrap.
b. Residual value is the same as market value, while scrap value is
the value recorded in books.
c. Residual value is based on the replacement cost, while scrap value
is based on historical cost.
d. Residual value is considered in balance sheet valuation, while
scrap value is not.
[Link] is the primary method for verifying cash in hand?
a. Inspecting the cash book
b. Comparing with the bank balance
c. Counting the cash physically
d. Preparing bank reconciliation statements
17. Which of the following is a floating asset?
a. Land and buildings
b. Patents
c. Cash in hand
d. Goodwill

18. How is stock in trade usually valued?

a. At market value only

b. At cost price only
c. At market or cost price, whichever is less
d. At market price plus transportation costs

19 What is the main concern of an auditor when verifying investments?

a. Ensuring they are recorded in the books

b. Determining the market value accurately
c. Checking the legality of the investment

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 d. Confirming the amount of interest or dividends received

20 How are trade creditors typically verified?

a. By comparing with bank statements

b. By inspecting lease agreements
c. By reviewing the purchase ledger
d. By counting the physical stock

21. What distinguishes between vouching, verification, and valuation?

a. The subject matter they deal with

b. The timing of their execution
c. The evidence required for each
d. The individuals responsible for conducting them

22 How are freehold land and buildings typically valued?

a. At market value
b. At cost less depreciation
c. At book value
d. At scrap value

23 What should an auditor primarily verify when examining debentures?

a. Redemption arrangements
b. Terms and conditions of the loan
c. Interest or dividends received
d. Debenture trust deed

24 When does vouching typically occur?

a. Before the entry of transactions in account books

b. At the end of the financial year
c. After the preparation of final accounts
d. During the audit of balance sheet figures

25 Which of the following is NOT considered a fixed asset?

a. Leasehold property
b. Plant and machinery
c. Copyrights
d. Trademarks

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