AUDITING{DEPRECIATION}

UNIT-III

SEMESTER-V

MEANING & DEFENITIONOF DEPRECIATIONMEANING: It stands for a gradual

and continuous decline or reduction in the book value of fixed assets due to wear tear, obsolescence effluxion of time or any other reason.

DEFINITION: Depreciation can be

defined as that “Permanent decrease in the value of an asset through wear and tear in use, or passage of time”

CAUSES OF DEPRECIATION… From the definition discussed above the following

causes of depreciation can be identified. There are six causes are as follows:

Causes of depreciation

Wear & tear

Exhaustion

Effluxion of time

Obsolescence

Weather

Permanent fall in the value of an asset

WEAR & TEAR: The Value of assets decrease due

to its constant use. The more the machinery is in use more will be the wear and tear. The wear and tear of a machinery in use for three shifts will be much more than the machinery being used in a single shift.

EXHAUSTION: Certain assets loose their value

with lapse of time as they are being used or consumed or something is taken out of them e.g. Mines. The minerals in mines will be exhausted by constant extraction so also will be the case with plantations

EFFLUXION OF TIME: The lapse of time also effects

the value of an assets its directly linked with lapse of time e.g. patents, leasehold property etc. A patent becomes useless after the expiry of the period of patent.

OBSOLESCENCE: New innovations and

technologies also bring a fall in the value of assets. The outdated technology becomes cheaper. The loss in the value of assets on account of innovations and newer technology is called obsolescence.

WEATHER: Certain assets loss their value due to

rain or change in weather while determining depreciation, even these factors need to be taken into account.

PERMANENT FALL IN THE VALUE OF ASSET: Many times the value of an asset declines

permanently. Which ought to be considered while determining the quantum of depreciation. However a temporary decline cannot be treated as depreciation.

OBJECTIVES OF DEPRECIATION…

OBJECTIVES OF DEPRECIATION

MAINTAINING INTEGRITY OF CAPITAL & REPLACEMENT OF

ASSETS

CORRECTS CALCULATION OF

PROFITS

TO PRESENT A TRUE AND FAIR VIEW

LEGAL COMPLIANCE

MAINTAINING INTEGRITY OF CAPITAL & REPLACEMENT OF ASSETS:

The useful life of asset is limited. This enables to spread the cost of asset over the period of the life of the asset. The funds so provided come in very handy when the assets needs a replacement.

CORRECTS CALCULATION OF PROFITS:

In the absence of depreciation charge the calculation of profit will not be correct. In its absence company may end up dividend out of capital, which is legally prohibited and is financially undesirable. The profit & loss a/c and balance sheet will not represent the true reality of the state of affairs.

TO PRESENT TRUE & FAIR VIEW: The

final accounts are supposed to present a true and fair view of the net result of the business activity during an accounting period.

LEGAL COMPLIANCE: Provisions of

depreciation is essential to comply with the legal provisions of the companies act. The law requires provisions of depreciations before any distribution of profits.

BASIS OF DEPRECIATION…

Perfectly correct amount of depreciation chargable is difficult to determine. Following factors should be kept in mind while determining the regular or casual amount of depreciation.

1) Value of assets.2) Estimated working life of the asset

determined by experts.3) Repairs and renewals in the ordinary

course are persumed..

4) Additions and extensions made during the year along with the should be considered for determining the depreciation.

5) Scrap or residual value of an asset should be reduced the cost of an asset to be distributed during the life of an asset.

6) Obsolescence is another factor to be considered.

7) The provisions of companies act & Income Tax should also kept in mind.

8) The working hours for the asset.9) The Skill of the operators handling it.10) A major overhaul which enhance the

effective life of the assets.

METHODS OF DEPRECIATION…Over a period of time a number of

methods for computing the depreciation charge have been evolved. Some of the important methods are given below:

1. Straight line2. Diminishing balance or reducing

balance3. Annuity method4. Sinking fund method.5. Insurance policy method

6. The Depletion unit method7. Revaluation method8. Machine hour rate method9. Mileage method10. Production method11. Global Method12. Accelerated method13. Double Declining method14. Year’s digits method THE FORMULAE ARE LISTED

BELOW…..

STRAIGHT-LINE METHOD:

DECLINING BALANCE METHOD:

ANNUITY DEPRECIATION

Annuity depreciation methods are not based on time, but on a level of Annuity. This could be miles driven for a vehicle, or a cycle count for a machine. When the asset is acquired, its life is estimated in terms of this level of activity

SINKING FUND METHOD: A technique for

depreciating an asset in bookkeeping records while also generating money to purchase a replacement for the asset when it reaches the end of its useful life. Under the sinking fund method, the business sets aside an amount of money to invest annually so that the principal plus the interest earned in the fund will be enough to replace the asset.

INSURANCE POLICY METHOD

Insurance policy method is a slight modification of the depreciation fund method or sinking fund method. Under this method the amount represented by the depreciation fund, instead of being used to buy securities, is paid to an insurance company as premium. The insurance company issues a policy promising to pay a lump sum at the end of the working life of the asset for its replacement.

THE DEPLETION UNIT METHOD:

REVALUATION METHOD: A method of calculating

the depreciation of assets by which the asset is depreciated by the difference in its value at the end of the year over its value at the beginning of the year.

MACHINE HOUR RATE METHOD: This is

also known as Service Hours Method. This method lakes into account the running time of the asset for the purpose of calculating depreciation. The method is particularly suitable for charging depreciation on plant and machinery, air-crafts, etc. The amount of depreciation.

Cost Depletion = S/(R+S) × AB or AB/(R+S) × S

MILEAGE METHOD OF DEPRECIATION:

This method is used only for those assets whose useful life depends upon the fact that how many kilometres they have been driven e.g. buses, cars, trucks, and rolling stock etc. The depreciation on such assets depends on as to how many kilometres these assets have been driven.

PRODUCTION UNITS METHOD:

Under the units-of-production method, useful

life of the asset is expressed in terms of the total number of units expected to be produced.

GLOBAL METHOD: Under this method of depreciation, the value of all the assets irrespective of their nature is added together and depreciation is charged at an average rate on aggregated value. It is not a scientific method of providing depreciation.

ACCELERATED METHOD: Accelerated depreciation refers to any

one of several methods by which a company, for 'financial accounting or tax purposes, depreciates a fixed asset in such a way that the amount of depreciation taken each year is higher during the earlier years of an asset’s life. For financial accounting purposes, accelerated depreciation is expected to be much more productive during its early years.

DOUBLE-DECLINING METHOD: The double declining balance

method is an accelerated form of depreciation under which the vast majority of the depreciation associated with a fixed asset is recognized during the first few years of its useful life

AUDITOR’S DUTIES REGARDING DEPRECIATION…

1) Ensure that depreciation has been provided as per rates prescribed in companies act.

2) It takes notice of amount of capital employed and the nature of the business.

3) In case the depreciation charged is more than the rates prescribed, he should examine whether same are based on professionals and technical advice.

4) Where difference rates are use for different assets, the same should be consistently applied over the years.

5) In case of a change in the method of accounting for depreciation it is recalculated from the date on which asset came into use and deficiency has been charged to profit & loss a/c.

6) On the assets acquired during the year, he should ensure that depreciation is charged on pro-rata basis.

7) In case of revaluation of asset during the year it should be charged on revalued amounts.

8) That the depreciation complies with the provision of companies act and income tax act.

Therefore these are the duties of an auditor.

RESERVES AND PROVISIONS:RESERVES: Reserve is an appropriation of

profit which denotes that amount which is set aside for any known and unknown contingency, liabilities, diminution in the value of assets etc.,

According to Indian companies act “ The Expressions ‘ Reserve’ shall not subject as aforesaid, include any amount, written off or retained by way of providing depreciation, renewals or diminution in value of assets for any known liability”.

PROVISION: Provision refers to the

amounts charged against revenue for depreciation, renewals and diminution in value of assets or amounts.

According to Indian companies act provision, “The Expression ‘Provision’ shall, subject to the sub-clause (2) of this act, which may mean any amount written off providing for any known liability of which the amount cannot be determined with substantial accuracy.

RESERVES vs. PROVISIONS

SL.NO

RESERVE PROVISION

1 Reserve is created by debiting p&l a/c and appropriation account.

A provision is debited to p&l a/c.

2 It is an appropriation of profit. It is a charge against profit.

3 Reserve is created for unknown liabilities.

A provision is made for a known liability.

Sl.no

RESERVE PROVISION

4 Creation of reserves depends upon the financial policy of the firm.

Creations of the provisions is a must as these are meant for meeting known liabilities.

5 Creation of reserves is discretionary and auditor is not to worry about it.

Creations of provisions is a must and auditor should qualify his report.

6 It represent undistributed profit and are available for distribution amongst shareholder.

Provisions are not available for amongst shareholders.

7 It is created only the company earns profit.

Provisions are requires even in the absence of profit.

CLASSIFICATION OF RESERVES…

Classification of

reserves

General reserve

Specific reserve

Capital reserve

Reserve fund

Sinking fund

Secret reserve

GENERAL RESERVE: Purpose of general

reserve is to strengthen the financial position of the company. It may be required to keep the share holders to satisfy by ensuring them a study return.

SPECIFIC RESERVE: A specific reserve is

more in the nature of “provisions’ as it is meant for certain or probable but unestimated liabilities. It is not available for distribution.

CAPITAL RESERVE: According to the

Companies Act, capital reserve shall not include any amount regarded as free for distribution through Profit & Loss Account.

Capital reserves are created on account of:

Appreciation in the value of assets. The surplus arising out of appreciation of fixed assts i.e., excess of appreciated value over book value is transfer to the capital reserve.

Profit on the sale of fixed asset. Profit made on account of redemption of debentures at a

discount. Premium received on issue of shares/debentures. Profit arising out of re-issue of forfeited shares. Pre-incorporation profits, if any. Profit made on purchase of a business. Exceptional profits earned in the regular course of

business. Any profit including revenue profit which are not

represented by liquid assets ‘ or which cannot be distributed amongst the shareholders according to the Articles of Association of the company.

These reserves can be utilized for…Issue of bonus shares.Writing off intangible asset like goodwill.Writing off discount etc. on issue of shares and

debentures.Premium on redemption of preference shares etc.,

DUTIES OF AN AUDITOR REGARD TO CAPITAL RESERVE:

The auditor should examine that the capital reserve is created out of capital gains only. If the capital reserves are to be utilized for distribution as dividend, he should see that the same is permitted by the articles of the company.

SECRET RESERVE: At times,

companies create a reserve which is not disclosed on the face of the balance sheet. Such a reserve is called “secret reserve”, “hidden reserve”, “internal reserve” or “Inner reserve”. Obviously, if a secret reserve exists, the balance sheet cannot reveal the correct picture of the financial affairs of the business.

CREATION OF SECRET RESERVES1) By writing off excessive depreciation

on fixed assets.2) By undervaluation of the closing stock.3) By writing down goodwill to nominal

value.4) By ignoring the permanent

appreciation in the value of assets.5) By including a fictitious liability.6) By showing contingent liabilities as real

liabilities.

7) By omitting some assets from balance sheet.

8) By suppression of sales.9) By inflating purchases.10)By overvaluing liabilities.11)By provision of excess provision of bad and

doubtful debts.12)By charging capital expenditure to

revenue.13)By grouping items of dissimilar nature on

the liabilities side of the balance sheet.Therefore the method are being adopted to

create secret reserves.

OBJECTS OF CREATING SECRET RESERVEObjectives for the creation of

secret reserves can be:1) To strengthen the financial

position of the company.2) To meet unforeseen

emergencies.3) To avoid competition.4) To regulate dividend.

DAMAGES OF SECRET RESERVEThe balance sheet fails to show a true

and fair view of the financial position of the company.

The directors may indulge in speculative activity by regulating secret reserves and thereby manipulating dividend rates and consequently the share prices.

The creation of secret reserves lowers the rate of dividend, share prices and adversely effects the gains of shareholders.

If the secret reserve is created by undervaluing an asset, company may loose the secret reserve if the asset is lost accidently, say in fire as the insurance claim will be received on lower amount.

If secret reserve is created by omitting an asset, the auditor will not be able to verify such an asset.

According to Companies Act, creation of such reserves is prohibited, therefore in the case of joint stock companies, it will be a violation of law.

AUDITOR’S DUTY REGARDING SECRET RESERVESThe creation of secret reserves is prohibited by

Companies Act, only banking insurance electricity companies etc. are allowed to create such a reserve.

Therefore, the auditor should state the fact in his report, if he finds that such a reserve has been created.

In the case of companies where creation of a secret reserve is permitted, he should carefully enquire into the necessity of creating such a reserve.

He need not qualify his report, if he is satisfied with the desirability of creation of such a reserve and the amount.

UNIT-1Classification of audits: After

understanding the meaning, definition, scope and purpose of auditing one needs to understand the classes or types of audit. Various classes of audit are listed below…

I(A) ON THE BASIS OF SCOPE: An audit examination can be

general or specific . A general audit will cover all the areas of business. The audit can be independent or internal. On the basis of emphasis it can be further classified as:

1. Partial audit2. Occasional audit3. Interim audit4. Cost audit5. Management audit6. Performance audit7. Standard audit8. Audit in depth9. Post and vouch audit10. Operational audit11. Cash audit

ON THE BASIS OF NATURE OF ACTIVITY: The activities which are the subject

matter of audit may be commercial or non-commercial. While the audit of profit motive organizations can be called commercial audit, the audit of non-profit organizations will fall under non-commercial audit.

ON THE BASIS OF FORM OF ORGANIZATIONS: On the basis of form of

organizations the audit may be classified as private and government. The method of appointment and reporting will differ considerably in these two types of audit.

ON THE BASIS OF WHO CONDUCTS AUDIT: On the basis the audit is classified

into independent (external) or internal audit. An independent audit is conducted by an independent, professionally qualified person who is not an employee of the organization hiring his service.

ON THE BASIS OF LEGAL NECESSITIES: On this basis the

audit can be classified into statutory and non-statutory audit. Where law, through some act requires compulsory audit of an organization or activity the audit to call statutory audit. Where is audit is conducted without any legal necessity or requirement, the audit is called non-statutory audit.

ON THE BASIS OF METHOD OF EXAMINATION:

When the auditor and his staff is constantly engaged in the work during the whole year or period at regular or irregular intervals, this audit is known as continuous audit.

GOVERNMENT AUDITA separate department is maintained by

Government of India, known as Accounts and Audit Department. This department is headed by Comptroller and Auditor General of India. This department works only for government offices and departments.

DIFFERENCE BETWEEN GOVERNMENT VS. COMMERCIAL AUDITSl.N.

GOVERNMENT AUDIT COMMERCIAL AUDIT

1. This department works independently.

It is audited by two different persons.

2. It is continuous audit. It is periodical audit.

3. It is audited before the incurring of payment.

It is always made after the incurring of payment.

4. Treasury officer makes an examination on audit.

Cashier has nothing to do with audit.

5. It is a spending department per forms.

No part of audit by spending department

INTERNAL AUDIT:It implies the audit of accounts by the staff of

the business. The staff may or may not have professional qualification for audit of accounts. The objectives and functions of internal audit depend on the nature of operations and business. Sometimes the internal audit may be done by independent persons appointed for the purpose.

INSTITUTE OF INTERNAL AUDITOR DEFINES……“ Internal auditing is the independent

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 an operating nature.

THE OBJECTS AND SCOPE OF INTERNAL AUDIT:

(i) To evaluate the working of accounting and operational controls;

(ii) To determine the level of adherence of pre-determined policies, plans and procedures of accounting;

(iii)To determine the extent to which assets are accounted for safeguarded from losses;

(iv)To determine the authenticity of accounting and other data of the organization.

(v) To appraise the performance of assigned duties.

ADVANTAGES OF INTERNAL AUDIT:1. Service to management.2. Provides assurance of an effective system of

internal control that is not excessive.3. Ensures reliable basis for production of

accounts and statements of trading.4. Verifies the operation of established

procedures and policies and sees that they are adequate, not wasteful.

5. Highlights departures from established procedures.

6. Draws attention to deficiencies in the system, control, practices etc.,

7. Finds inefficiencies.8. Suggests remedies and improvements.

DIFFERENCE BETWEEN INTERNAL AUDIT AND INDEPENDENT AUDIT

S.N. INTERNAL AUDIT INDEPENDENT AUDIT

1. Internal is conducted by permanent staff.

Independent audit is conducted by independent qualified auditor.

2. Duties and responsibilities of internal auditors is always determined by the management.

Companies Act, 1956 and other laws provide for the scope of responsibilities and function of independent auditors.

3. Internal auditor is under the direct control of management.

Independent auditor enjoys better status and independence.

4. The basic purpose is early detection of errors and frauds and their prevention.

The purpose is to see whether final statements give true and fair view of financial position & profits.

5. It is continuous in nature. It is conducted periodically.

6. It may or may not have professional qualification.

Auditor must have a professional qualification.

STATUTORY OR COMPULSORY AUDITAn audit by qualified persons which is a

compulsory requirement under law, is known as statutory audit.

The qualified Chartered Accountants who are not connected with preparation of accounts or management of the concern, can be appointed as auditors.

ESSENTIALCHARACTERISTICS OF STATUTORY AUDIT:

1. It is a compulsory audit.2. Statutory audit must be a complete audit, it can’t be a

partial audit.3. The Act always provides for the norms regarding

appointment of auditor.4. The Auditor must be a qualified accountant.5. The auditor must not be a disqualified as per the provision

of the law.6. Auditor is an independent person. Management has no

control over his work.7. It cannot be made optional by members of the organization.

They cannot restrict its scope either.8. Generally, the rights, the duties and liabilities of the

statutory are laid in the statue. These can nit be altered.9. The statutory auditor serves the members and not the

management.

I.CONTINUOUS AUDIT“ 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 his staff attends at regular or irregular intervals during the period”.

- R.C.Williams

ADVANTAGES OF CONTINUOUS AUDIT:1. Complete checking of all records.2. Proper planning3. Preparation of interim accounts4. Early detection of fraud and error5. Up-to-date accounts6. Valuable suggestions7. Early presentation of accounts8. Moral check

II. ANNUAL OR PERIODICAL AUDIT: DEFINITION: “A final or completed audit is commonly

understood to be an audit which is not commenced until after end of financial period and is then carries on until completed”

CHARACTERISTICS OF PERIODICAL OR ANNUAL AUDIT:

i. Generally audit work starts after the close of financial year. But sometimes, some part of audit work audit start before close of financial year.

ii. The audit work is done and completed in a continuous session.

iii. The auditor visits the client only once in a year and keeps on going till the work is completed.

iv. It gives satisfactory results in case of small concerns.

ADVANTAGES:1. Office work is not unnecessarily distributed because

auditor visits only once a year.2. Minimization of chances of alteration of audited work.3. Auditor’s staff has a grip over the audit as the work is

completed continuously.4. It is a less expensive system and suitable for small

business houses.5. Periodical audit can be finished quickly within

reasonable time.DISADVANTAGES:6. The audited accounts may not be available immediately.7. Auditor may not be able to check and verify all

transactions.8. In big concerns periodical auditing is not very useful.9. The auditor’s report may get delayed.10. There is more dependence on the co-operation of

management which is not a desirable thing.

DIFFERENCE BETWEEN…...SL.N

CONTINUOUS AUDIT PERIODICAL AUDIT

1 Auditor’s staff visit and check the accounts frequently

The auditor staff visit only once a year

2 They become more efficient and regular

They will be closed after the financial year.

3 It comes to an end with the close accounting period

It commences after the accounts are closed

4 It is very expensive It is economical.

III. PARTIAL AUDIT: when an auditor is asked to audit

certain category of transactions or transactions made during a part of the period it is known as partial audit.

IV. BALANCE SHEET AUDIT: Balance sheet audit relates to the verification of various items of balance sheet such as assets, liabilities, reserves and surplus, e.t.c., then it is located in the original records of transactions and purpose of verification.

V. COST AUDIT: Cost audit is the complete check of and verification of cost accounts to see whether the concern has adhered to cost accounting principles.

VI. MANAGEMENT {EFFICIENCY} AUDIT: “An investigation of a

business from the highest level downward in order to ascertain whether sound management prevails through out, thus facilitating the most effective relationship with outside world and efficient organization and smooth running of internal organizations”

VII.PERFORMANCE AUDIT: It examines the

profit and losses of various activities and also the relationship between production and sales with a view to maximize the profits of the organization.

VIII.OCCASIONAL AUDIT: It is conducted as a

special event, normally in those organization where routine audits are not taking place.

IX. AUDIT IN DEPTH: The audit in depth is

another type of sample checking. In this type of audit is selected transactions are subject to be detailed stepwise verification

X. POST AND VOUCH AUDIT: It involves in

verification of all individual transactions.XI. OPERATIONAL AUDIT:

This audit aims at improving the operations of the business. It is an aid of the management .

XII.INTERIM AUDIT: When audit is

conducted between two annual audits, such audit is known as interim audit. It may involve complete checking of account for a part of a year

PREPARATION BEEORE THE COMMENCEMENT OF AUDIT

Ascertain the scope of duties: First of all an auditor should ascertain the precise nature and scope of his duties. In other cases, he should discuss the things with the person who is going to hire his services. Knowledge about business:

A good audit cannot be conducted by confining oneself to the accountant’s office. It will be desireable for an auditor to visit the factory site to appreciate the nature of transaction which are recorded in the books of accounts such a visit will enable him to understand the nature of men material and machinary involved in the process of production.

• Knowledge of the Accounting System:The auditor should also obtain list of the books maintained

by the client along with information relating to internal control system.

• List of Principal Officers:The auditor should also obtain list of the principal officers of

the organisation.• Knowledge of Technical Details:

He should also acquire some knowledge about the technical details, if any of the business.• Enquiry into Special circumstances, if any:

An auditor should also enquire into special circumstances, surrounding his appointment. In case, he is being appointed in place of another auditor, it becomes his professional duty to communicate with the auditor, in whose place he is being appointed.• Instructions to the client:

1. Accounts should be finalised and kept ready for audit.2. The necessary schedules be prepared and made available.

AUDIT PLANNING For effective and efficient conduct of an audit;

audit planning is necessary. In fact planning should be continuous throughout the course of audit assignment. A good audit plan shall be based on:

(i) Knowledge of the accounting system in the organisation and its policies and internal control procedures.

(ii) Reliability of the internal control system.(iii)Programming of the nature, timing and

extent of the audit procedures to be performed.(iv) Good co-ordination of the work.

AUDIT PROGRAMME

According to Magi's, an audit programmer 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.

Advantages Of Audit Programme

Some of the important advantages of conducting an audit programme according to pre-determined audit programme are.1. Audit assistants know their clear cut duties.2. Efficiency of the audit assistants increases.3. The routine gets systematic.4. Continuity is not lost even if the person on

duty is changed.

Disadvantage Of Audit Programme

1. The task becomes mechanical, as a result initiative and efficiency are adversely effected.

2. The task may be finished hurriedly to complete it within the scheduled time.

3. It does not serve any purpose in the audit of a small organisation.

4. Inefficient audit assistants may also take shelter behind the programme.

Audit Programme For Cash Check posting of cash book. Check the vouchers for cash transactions. Check bank reconciliation statements. Check posting into personal accounts. Check arithmetical accuracy of Cash book.

Audit Programme For Purchases/Purchases Return

Examine and review system for purchases.Check authority and authorisation for

ordering goods.Check invoices checked by invoice clerk and

compare with order book and Good Inward Book.

Check the approval of goods by the department ordering it.

Check the entries in Stock Register.

Audit Programme For Sales/Sales Return

Check the entries for sales tax, if any.Check a representative number of sales

invoices with goods outward record.Check the valuation of goods.Check a representative number of eateries

with gate keeper’s record.Check the system of accounting for Goods

Sold on sale or return basis.

Types Of Audit Programmes Fixed Audit Programme:

It is a set of standardised instructions, which are to be followed while conduction the audit. A fixed audit programme includes all possible audit procedures, although all of them may not be applicable in a situation. Flexible Audit Programme:

A flexible audit programme does not prescribe the exact audit procedure to be followed. It prefers to give an outline of the scope, nature and limitations of the audit assignment. It does not predetermine the nature of work to be performed by each person of the audit staff.

Audit-Note BookIs a diary or register maintained by audit

staff to note errors, doubtful queries and difficulties. The purpose is to note down various points which need to be either clarified with the client or the chief auditor. The audit note book is also used for recording important points to be included in the Auditor’s Report. It is a complete record of doubts and their clarification.

Contents of an Audit Note BookAn audit note-book usually contains the following

information about the audit work performed b the audit staff: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 calling for clarifications and explanations.6. The points deserving the attention of the auditor.7. Various totals and balances.8. Extracts from the minutes and contracts.9. The points to be part of the Auditor’s Report.10.Date of commencement and completion of the audit.

Audit Working PapersMeaning:

The term audit working papers designate the files of analyses, summaries, comments and correspondence built up by an auditor during the course of the field work of an audit engagement. These papers contain essential facts about accounts which are under audit.Definition:

Arnold. W. Johnson defines that “Audit working papers are the written, private materials, which an auditor prepares for each audit. They describe the accounting information which he receives form his client, the methods of examination used, his conclusions (and reasons thereof ) and the financial statements”.

Procedure Of AuditThe method of work adopted by any auditor will vary

with the individual training, experience, likes and circumstances. Still the following points should be taken care of:1. Use of special Ticks:

The auditor should se special ticks for each class of transactions checked. The following ate the classes requring special ticks.

(i) Posting, (ii) Casting, (iii) Carry Forward, (iv) Bank Statement, (v) Vouching.In use special ticks some precautions are needed. These precautions are:(a) The same tick should not be used for the same

transaction in all the firms.(b) The system of ticks adopted should not be explained to

the clients staff.(c) Different colours should be used to distinguish periods.

2. Each section of the work should be completed upto a certain points otherwise the chances of mistakes increase.

3. All important totals, balance and other noteworthy points should be noted in the audit note book.

4. Vouching should generally be done by two audit clerks together.

5. The auditor should not accept any figures or casting in pencil. The figures written with pencil can be tampered with very easily. Therefore he should insist on figures being written in ink.

6. In the case of continuous audits, the work should be performed up to a certain date.

7. In the case of small concerns, auditor is generally asked to balance the books. In such cases, he acts as an accountant and not auditor.

8. Routine checking:Routine checking involves checking of such

common records and books which is carried on by the auditor as a matter of routine. The functions included in routine checking are-

(a) Checking of casts, sub casts, carry forwards and other calculations in the books original entry.

(b) Checking of postings in the ledgers.(c) Checking of balances in the ledgers.(d) Checking of transfer of balance from ledger to

the trial balance.Routine checking helps the auditor in finding out

certain errors and frauds.9. Test Checking:

The main objective of audit is to formulate an overall opinion on the accounts and financial statements