F.Y.BAF PRESENTS PROJECT ON…..

CONCEPTS IN AUDITING

• Foundation Of Auditing• Vouching• Verification• Valuation• True & Fair Audit• Errors & Frauds• Secret Reserves• Window Dressing• Teeming & Lading

Concepts In Auditing

Auditing – Auditing begins, where accountancy

ends. An auditor examines the financial statements prepared by the accountant and verifies the items therein with the help of relevant documentary evidence and explanation and information given to him.

In other words he examines analytically and critically the accounts and financial statements prepared by the accountant.

INTRODUCTION

SCO

PE O

F AN

AU

DIT

AT ITS VERY MINIMUM

AUDITOR SHOULD ASSESS THE RELIABILITY AND

SUFFICIENCY OF INFORMATION CONTAINED IN UNDERLYING

ACCOUTNING RECORDS AND SOURCE DATA BY

STUDY AND EVALUATION OF ACCOUNTING SYSTEM AND

INTERNAL CONTROLS

TESTING THE INTERNAL CONTROLS

TESTS, INQUIRIES,VERIFICATION PROCEDURES OF TRANSACTIONS

AND BALANCES

DECIDE WHETHER THE RELEVENT INFORMATION

IS PROPERLY DISCLOSED IN THE FINANCIAL STATEMENTS

COMPARING THE FINANCIAL STATEMENTS WITH THE

UNDERLYING ACCOUNTING RECORDS AND OTHER SOURCE

DATA

CONSIDERING MANAGEMENTS JUDGEMENTS IN PREPARATION OF

FINANCIAL STATEMENTS

AS PRESCRIBED BY THE TERMS OF

ENGAGEMENT

MATTERS PRESCRIBED BY LAW.3

MATTERS PRESCRIBED BY THE PROFESSIONAL PRONOUNCEMENTS OF

ICAI

Vouching consists of comparing the entries in the books with particulars in the voucher as regards date, amount, name of the party.

But vouching is not a mere comparison of the entry with the supporting document.

It is a critical examination of the supporting documents to understand the substance / essence of the transaction & to ensure that accounting of the transaction is done as per substance/ essence of the transaction.

VOUCHING

What are the Objectives of vouching ?1. Transactions are authorized.

2. Transactions represented by the entries are not ultra vires the entity.

3. Transactions represented by the entries have : - actually occurred - during the period under the audit. - pertain to the entry under audit.

4. Transactions have been recorded in the correct amounts.

5. Transactions have been allocated properly between capital &revenue.

VOUCHING

1. Addressed to the client – all vouchers should be in the name of the client .if they are addressed in the name of an employee / official etc. it could be a personal expense and not a business expense.

2. Date- the date on the voucher should be seen . The date of the voucher should fall during the period under audit. Otherwise, it is possible that payments pertaining to earlier or later period is included in the accounts of the current period.

3. Cancelled- vouchers examined should be cancelled by initials /firm’s stamps to avoid the same voucher being produced again in support of another payment.

4. Amount- the amount entered should be checked with the amount on the vouchers.

5. Authorization- voucher should be authorized by competent authority.

POINTS TO BEAR IN MIND WHILE VOUCHING

Verification of assets & liabilities.Introduction: Verification means confirmation of the truth , accuracy &

existence of an item or entry.

Verification of assets & liabilities implies obtaining and examining evidence in respect of assets and liabilities.

Verification goes beyond books of accounts and documentary evidence. It is more than checking arithmetical accuracy of the record of assets & liabilities;

it involves physical inspection of certain assets as shown in the balance sheet really exist.

VERIFICATION

Scope of verification/ verification includes:1. Whether the assets are owned by the company.

2. Whether they are shown in the books of accounts.

3. Whether they are free from any change other than those disclosed in the books .

4. Whether they are acquired in connection with the object of the business.

5. Whether they are actually lying with the company or the balance sheet date.

6. Whether they are properly valued or the balance sheet date.

VERIFICATION

Valuation of assets means determining the fair value of assets on the basis of generally accepted accounting principles (GAAP).

It is an important part of auditors duty. The auditor must satisfy himself whether all the assets shown in the balance sheet are at proper values.

If the assets are over or under valued, the financial statement will not disclose true & fair view of the state of affairs & the profitability of the company .

Thus, the main object of proper valuation of assets is to represent a true and fair view of the state of affair of concern through the balance sheet.

VALUATION

Methods of valuation of assets :1. Cost price :In this method, the assets are valued at actual cost including installation

charges if any.

2. Market value :Market value is the price which exits in the market on the balance sheet

date .

3. Cost of market value whichever is lower :This method of valuation is generally used for valuation of current

assets.

4. Replacement value:Here, the replacement value means the amount of money which could

be required to replace an existing asset by purchasing a new asset of the same type . On arriving, at such a value, expenses such as commisions , freight etc are taken into account.

VALUATION

5. Realizable value:It means the amount of money which will be realized in the

market from the sale of assets. Under this, assets are valued according to be anticipated sale value of assets.

6. Scrap value:Scrap value means realizable value of assets which are

receivable after long use. Under this, assets of no use to the business are valued at the amount for which they can be sold in the market as if they were scrap.

7. Going concern/ book value / written down value :Going concern value is the estimated present value of the

asset. It is equivalent to cost less depreciation written off up to date. Generally , fixed assets are value at going concern value.

VALUATION

VOUCHING v/s VERIFICATIONVOUCHING VERIFICATION

Meaning & Scope:Is a substantive audit procedure which deals with examination of profit and loss transactions/items.

Meaning & Scope:Is a substantive audit procedure which deals with examination of balance sheet transactions/items whether they are assets or liabilities are properly stated in the balance sheet.

Normally, extensive vouching exercise is done during the depth test/cradle-to grave test.

Also applies to profit and loss item to check the account balances and their presentation.

Vouching enable the auditor to know whether the transactions are genuine and valid to enable the auditor to report on the financial statements.

Verification process encompasses the inquiry into the ownership/ title, existence, valuation, completeness and presentation of assets and liabilities in the balance sheet.

Vouching is the substantive testing/examination of transaction at their POINT OF ORIGIN.

Verification usually deals with the FINAL BALANCE in the Final Accounts viz the balance sheet and profit and loss

VOUCHING VERIFICATION

Nature of work:It examines the entries relating to transactions

Nature of work:It examines the assets & liabilities in the balance sheet

Time :It is done throughout the year

Time : It is done at the end of the year

Basis:It is based on documentary examination

Basis:It includes personal as well as documentary examination

Valuation:It does not include valuation.

Valuation:It includes valuation

VERIFICATION v/s VALUATION

Verification Valuation

Meaning:verification means determining the accuracy of assets and liabilities shown in the balance sheet.

Meaning:valuation means testing the accuracy of the asset and liabilities.

Scope:The scope of verification is wide.

Scope:The scope of valuation is limited

Execution: Verification is executed by auditor.

Execution: Valuation executed by the client's staff.

Nature :The nature of verification is objective.

Nature:The nature of valuation is subjective.

Proof :It proves the existence, ownership & title

Proof:It certifies the correct value of Asset & Liability

Evidence :Title deeds, receipts & payments.

Evidence :Certificate from owners/directors.

The basic primary objective is expression of opinion as to truthfulness and fairness of financial statements.

ACCORDING TO DE PAULA- “The main object of an audit is to ascertain that the balance sheet and profit and loss account of undertaking do show true and fair view of its financial position and earnings”.

This object has statutory recognition in India and has been clearly stated in section 227 of the companies Act 1956. It requires the auditor of a company to state whether in his opinion the accounts give a “true and fair view” in case of balance sheet, of the state of company’s affairs as at the end of financial year and incase of the profit and loss account, of the profit or loss for the financial year.

PRIMARY OBJECTIVE OF AN AUDIT

Pretention and preventions of frauds and errors is a major secondary objective of an audit.

A “true and fair view” cannot be expressed by the auditor on the basis of accounts which have material misstatements resulting from errors and fraudulent manipulations.

‘Fraud’ refers to intentional misstatement which is material to the financial statements, management , employees or third parties may get involved in committing frauds to obtain an illegal advantage of personal gain.

Fraud generally involves either misappropriation of assets that maybe called ‘employee

SECONDARY OBJECTIVE OF AN AUDIT

In “a dictionary for accountants” Eric L- Kohler defines the secret reserve as, ‘the amount by which the net worth has been deliberately understated – a hidden reserve.

Such a condition exists where the assets are omitted or under-valued or where liabilities are over-stated.

The term does not represent any actual account bearing that name.’

thus a reserve which is not disclosed in the balance sheet of the

entities called a “secret reserve”, hidden reserve or an inner reserve .

SECRET RESERVE

Some of the ways of creating secrete reserves are given below:

• By writing off excessive depreciation on fixed assets

• By undervaluing the closing stock

• By charging capital expenditure to reserves• By surprising sales

• By making excessive provisions for bad debts

• By making excessive provisions for contingencies

SECRET RESERVE

Window dressing is the art of showing a substantially better financial position of the company that it is in reality.

A sound financial position is painted on the face of the balance sheet by concealing the actual state of affairs.

In window dressing, assets are over valued , liabilities are under valued and profits are over stated or, if there are losses they are under stated.

It is one of the methods of manipulating accounts , but it does not necessarily involve misappropriation of cash or goods .

WINDOW DRESSING

1. Charging inadequate depreciation on fixed assets.

2. Providing inadequate reserves for bad and doubtful debts.

3. Charging revenue expenditure to capital account

4. Over valuing closing stock at the end of the year .

5. Showing actual liabilities as contingent liabilities.

6. Showing fictitious credit sales & thereby over valuing debtors.

7. Showing fictitious assets.

8. Creating inadequate provision for outstanding expenses.

DIFFERENT WAYS OF WINDOW DRESSING

1. It helps by attracting more applicants for shares or debentures in case of fresh issue of shares .

2. It helps in getting more remuneration to the managerial personnel when it is given on the basis of percentage of net profit.

3. It helps in getting easy finance facilities like bank overdraft or loan from bank and other financial institutions

4. It helps in getting more favourable credit terms on purchase from suppliers .

5. More goodwill can be demanded in the case of absorption and in the case of admission of a new partner .

OBJECTS/BENEFITS OF WINDOW DRESSING

TEEMING & LADING

•Teeming and lading is one of the methods of misappropriation of cash.

•Under this method, the money received from the first customer is misappropriated by the cashier.

•The money received from the subsequent customer is then credited to the account of the first customer and this process continues till such a time that the cashier is able to replace the money misused by him, or such time that the cashier is caught.

•The auditor can detect such a fraud by taking the following steps :

i. The auditor should verify the system of internal control and check regarding receipt of cash from customers and the deposits take place into bank.

ii. The auditor should scrutinize the Debtor’s Accounts, especially those accounts which show part payment.

iii. He should co-relate the dates of cash receipts from debtors with the date on which the amount is deposited into the bank.

iv. He should get the balance confirmation certificates from debtors.

v. He should check the discount allowed column in the cash book with the prevailing discount rate.

TEEMING & LADING

CONCLUSION

BIBLIOGRAPHY

ACKNOWLEDGEMENTS

We are heartily thankful to Professor Afsha Kirkire , Professor Ashok Vanjani and our co-ordinator Professor Deshpande, whose encouragement, guidance and support from the initial to the final level enabled us to develop an understanding of the subject.

Lastly, We offer my regards and blessings to all of those who supported us in any respect during the completion of the project.

PRESENTED BY :

JAPJIV SINGH ANAND 18

SAHIL GANGWANI 20SHIKHA SACHDEV 23KOMAL RATANPAL 27JHANVI PATEL 49FAHAD HINGORA 59SHUBHDA VARDE 60

THANK YOU