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AprojectReportonVERIFICATIONOFASSETS&
LIABILITIES
SubmittedToMissBHAVANA
A.VCOLLEGEVASAI(W)SemesterV
T.Y.BBI(20010-11)
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GROUP MEMBERS
IVAN MENEZES 27
SRIRAJ NAIR 35
SHRADHA GODSE 10
MANALI GHARAT 08
HEMA BRAHME 01
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CONTENTS:
INTRODUCTIONTOAUDIT
AUDITSINACCOUNTINGTYPESOFAUDITOR
MEANINGOFVERIFICATION
SCOPE&OBJECTIVEOFVERIFICATION
SIXTEENPRINCIPLESOFVERIFICATIONVERIFICATIONOFTRANSACTIONS
VERIFICATIONOFSPECIFICASSETS
VERIFICATIONOFSPECIFICLIABILITIES
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INTRODUCTION TO AUDIT:ThegeneraldefinitionofanAUDITisanevaluationofa
person,organization,system,process,enterprise,projectorproduct.Thetermmostcommonlyreferstoauditsinaccounting,butsimilarconceptsalsoexistinprojectmanagement,qualitymanagement,andforenergyconservation.
Anexaminationandverificationofacompany'sfinancialandaccountingrecordsandsupportingdocumentsbya
professional,suchasaCertifiedPublicAccountant. AnauditisanIRSexaminationofanindividualorcorporationstaxreturn,toverifyitsaccuracy.Therearethreetypesofaudits:correspondenceaudits(theIRSmailsarequestforadditionalinformation),officeaudits(aninterviewisconductedatalocalIRSoffice),andfieldaudits(aninterviewisconductedatataxpayer'splaceofbusiness,foracorporatetaxreturn).Sincethereisalwaysthechanceofan
audit,expertsrecommendkeepinggoodrecordstosupportalltheinformationinareturn.Thereasondetailedandaccuratebookkeepingissoimportantisthattheburdenofproofisonthefiler,nottheIRS.
http://www.businessdictionary.com/definition/examination.htmlhttp://www.businessdictionary.com/definition/verification.htmlhttp://www.investorwords.com/992/company.htmlhttp://www.businessdictionary.com/definition/accounting-records.htmlhttp://www.businessdictionary.com/definition/supporting-document.htmlhttp://www.investorwords.com/815/Certified_Public_Accountant.htmlhttp://www.investorwords.com/2648/IRS.htmlhttp://www.businessdictionary.com/definition/examination.htmlhttp://www.businessdictionary.com/definition/individual.htmlhttp://www.investorwords.com/4913/tax_return.htmlhttp://www.businessdictionary.com/definition/accuracy.htmlhttp://www.businessdictionary.com/definition/type.htmlhttp://www.businessdictionary.com/definition/information.htmlhttp://www.businessdictionary.com/definition/office.htmlhttp://www.investorwords.com/2866/local.htmlhttp://www.businessdictionary.com/definition/field.htmlhttp://www.investorwords.com/623/business.htmlhttp://www.investorwords.com/6775/corporate_tax.htmlhttp://www.investorwords.com/6775/corporate_tax.htmlhttp://www.investorwords.com/4244/return.htmlhttp://www.businessdictionary.com/definition/expert.htmlhttp://www.businessdictionary.com/definition/accurate.htmlhttp://www.investorwords.com/541/bookkeeping.htmlhttp://www.businessdictionary.com/definition/burden-of-proof.htmlhttp://www.businessdictionary.com/definition/burden-of-proof.htmlhttp://www.businessdictionary.com/definition/filer.htmlhttp://www.businessdictionary.com/definition/filer.htmlhttp://www.businessdictionary.com/definition/burden-of-proof.htmlhttp://www.businessdictionary.com/definition/burden-of-proof.htmlhttp://www.investorwords.com/541/bookkeeping.htmlhttp://www.businessdictionary.com/definition/accurate.htmlhttp://www.businessdictionary.com/definition/expert.htmlhttp://www.investorwords.com/4244/return.htmlhttp://www.investorwords.com/6775/corporate_tax.htmlhttp://www.investorwords.com/6775/corporate_tax.htmlhttp://www.investorwords.com/623/business.htmlhttp://www.businessdictionary.com/definition/field.htmlhttp://www.investorwords.com/2866/local.htmlhttp://www.businessdictionary.com/definition/office.htmlhttp://www.businessdictionary.com/definition/information.htmlhttp://www.businessdictionary.com/definition/type.htmlhttp://www.businessdictionary.com/definition/accuracy.htmlhttp://www.investorwords.com/4913/tax_return.htmlhttp://www.businessdictionary.com/definition/individual.htmlhttp://www.businessdictionary.com/definition/examination.htmlhttp://www.investorwords.com/2648/IRS.htmlhttp://www.investorwords.com/815/Certified_Public_Accountant.htmlhttp://www.businessdictionary.com/definition/supporting-document.htmlhttp://www.businessdictionary.com/definition/accounting-records.htmlhttp://www.investorwords.com/992/company.htmlhttp://www.businessdictionary.com/definition/verification.htmlhttp://www.businessdictionary.com/definition/examination.html -
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AUDITS IN ACCOUNTING:
Auditsareperformedtoascertainthevalidityandreliabilityofinformation;alsotoprovideanassessmentofasystem'sinternalcontrol. The goal of an audit is to express an opinion on theperson/organization/system(etc)inquestion,underevaluationbasedonworkdoneonatestbasis.Duetopracticalconstraints,an audit seeks to provide onlyreasonable assurancethat thestatements are free from material error. Hence, statisticalsamplingisoftenadoptedinaudits.Inthecaseoffinancialaudits,asetoffinancialstatementsaresaidtobetrueandfairwhentheyarefreeofmaterialmisstatements-aconceptinfluencedbybothquantitativeandqualitativefactors.
Audit is avitalpartofaccounting.Traditionally,auditsweremainly associated with gaining information about financial
systems and the financial records of a company or a business(seefinancial audit). However, recent auditing has begun toincludeother informationabout the system, suchas informationabout security risks, information systems performance (beyondfinancial systems), and environmental performance. Asa result,
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thereare now professionsconducting securityaudits, ISaudits,andenvironmental.
Infinancial accounting, an audit is an independentassessment of the fairness by which a company's financialstatementsarepresentedbyitsmanagement. Itisperformedbycompetent, independent and objective person(s) known asauditorsoraccountants,whothenissueanauditor'sreportbasedontheresultsoftheaudit.
Incost accounting, it is a process for verifying the cost ofmanufactureorproductionofanyarticle,onthebasisofaccountsasregardsutilizationofmaterialorlabourorotheritemsofcosts,maintainedbythecompany.Insimplewordsthetermcostauditmeansasystematicandaccurateverificationofthecostaccountsand recordsandchecking of adherence to theobjectives of thecostaccounting.
The Definition forAuditing and Assurance Standard (AAS)1byICAI- "Auditing is the independentexamination of financialinformation of any entity, whether profit oriented or not, andirrespectiveofitssizeorlegalform,whensuchanexaminationisconductedwithaviewtoexpressinganopinionthereon."
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TYPES OF AUDITORS:
Auditorsoffinancialstatementscanbeclassifiedintotwocategories:
External auditor /Statutory auditorisanindependentPublicaccountingfirmengagedbytheclientsubjecttotheaudit,toexpressanopiniononwhetherthecompany'sfinancial
statementsarefreeofmaterialmisstatements,whetherduetofraudorerror.Forpublicly-tradedcompanies,externalauditorsmayalsoberequiredtoexpressanopinionovertheeffectivenessofinternalcontrolsoverfinancialreporting.Externalauditorsmayalsobeengagedtoperformotheragreed-uponprocedures,relatedorunrelatedtofinancialstatements.Mostimportantly,externalauditors,thoughengagedandpaidbythecompanybeingaudited,areregardedasindependentauditors.
ThemostusedexternalauditstandardsaretheUSGAASoftheAmericanInstituteofCertifiedPublicAccountants;andtheISAInternationalStandardsonAuditingdevelopedby
http://en.wikipedia.org/wiki/External_auditorhttp://en.wikipedia.org/wiki/Statutory_auditorhttp://en.wikipedia.org/wiki/Statutory_auditorhttp://en.wikipedia.org/wiki/Public_accountinghttp://en.wikipedia.org/wiki/Public_accountinghttp://en.wikipedia.org/wiki/Financial_statementshttp://en.wikipedia.org/wiki/Financial_statementshttp://en.wikipedia.org/wiki/Publicly-traded_companieshttp://en.wikipedia.org/wiki/Internal_controlshttp://en.wikipedia.org/wiki/Financial_reportinghttp://en.wikipedia.org/w/index.php?title=Independent_auditor&action=edit&redlink=1http://en.wikipedia.org/wiki/GAAShttp://en.wikipedia.org/wiki/American_Institute_of_Certified_Public_Accountantshttp://en.wikipedia.org/wiki/International_Standards_on_Auditinghttp://en.wikipedia.org/wiki/International_Standards_on_Auditinghttp://en.wikipedia.org/wiki/American_Institute_of_Certified_Public_Accountantshttp://en.wikipedia.org/wiki/GAAShttp://en.wikipedia.org/w/index.php?title=Independent_auditor&action=edit&redlink=1http://en.wikipedia.org/wiki/Financial_reportinghttp://en.wikipedia.org/wiki/Internal_controlshttp://en.wikipedia.org/wiki/Publicly-traded_companieshttp://en.wikipedia.org/wiki/Financial_statementshttp://en.wikipedia.org/wiki/Financial_statementshttp://en.wikipedia.org/wiki/Public_accountinghttp://en.wikipedia.org/wiki/Public_accountinghttp://en.wikipedia.org/wiki/Statutory_auditorhttp://en.wikipedia.org/wiki/External_auditor -
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theInternationalAuditingandAssuranceStandardsBoardoftheInternationalFederationofAccountants.
Internalauditorsareemployedbytheorganizationtheyaudit.Theyperformvariousauditprocedures,primarilyrelatedtoproceduresovertheeffectivenessofthecompany'sinternalcontrolsoverfinancialreporting.DuetotherequirementofSection404oftheSarbanesOxleyActof2002formanagementtoalsoassesstheeffectivenessoftheirinternalcontrolsoverfinancialreporting(asalsorequiredoftheexternalauditor),internalauditorsareutilizedtomakethis
assessment.Thoughinternalauditorsarenotconsideredindependentofthecompanytheyperformauditproceduresfor,internalauditorsofpublicly-tradedcompaniesarerequiredtoreportdirectlytotheboardofdirectors,orasub-committeeoftheboardofdirectors,andnottomanagement,sotoreducetheriskthatinternalauditorswillbepressuredtoproducefavorableassessments.
ThemostusedInternalAuditstandardsarethoseoftheInstituteofInternalAuditors.
Consultantauditorsareexternalpersonnelcontractedbythefirmtoperformanauditfollowingthefirm'sauditingstandards.Thisdiffersfromtheexternalauditor,whofollowstheirownauditingstandards.Thelevelofindependenceistherefore
somewherebetweentheinternalauditorandtheexternalauditor.Theconsultantauditormayworkindependently,oraspartoftheauditteamthatincludesinternalauditors.Consultantauditorsareusedwhenthefirmlackssufficientexpertisetoauditcertainareas,orsimplyforstaffaugmentationwhenstaffarenotavailable.
http://en.wikipedia.org/wiki/International_Auditing_and_Assurance_Standards_Boardhttp://en.wikipedia.org/wiki/International_Federation_of_Accountantshttp://en.wikipedia.org/wiki/Internal_auditorhttp://en.wikipedia.org/w/index.php?title=Section_404&action=edit&redlink=1http://en.wikipedia.org/wiki/Sarbanes_Oxley_Acthttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Managementhttp://en.wikipedia.org/wiki/Institute_of_Internal_Auditorshttp://en.wikipedia.org/wiki/Institute_of_Internal_Auditorshttp://en.wikipedia.org/wiki/Consultanthttp://en.wikipedia.org/w/index.php?title=Auditing_standards&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Auditing_standards&action=edit&redlink=1http://en.wikipedia.org/wiki/Consultanthttp://en.wikipedia.org/wiki/Institute_of_Internal_Auditorshttp://en.wikipedia.org/wiki/Institute_of_Internal_Auditorshttp://en.wikipedia.org/wiki/Managementhttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Sarbanes_Oxley_Acthttp://en.wikipedia.org/w/index.php?title=Section_404&action=edit&redlink=1http://en.wikipedia.org/wiki/Internal_auditorhttp://en.wikipedia.org/wiki/International_Federation_of_Accountantshttp://en.wikipedia.org/wiki/International_Auditing_and_Assurance_Standards_Board -
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Qualityauditorsmaybeconsultantsoremployedbytheorganization.
MEANING OF VERIFICATION:Verificationisaprocessbywhichanauditorsatisfieshimself
abouttheaccuracyoftheassetsandliabilitiesappearinginthebalancesheetbyinspectionofthedocumentaryevidenceavailable.confirmationoftheassetsandliabilitiesappearinginthebalancesheet.Thus,verificationincludesverifying
(i) theexistenceoftheassets;(ii) legalownershipandpossessionoftheassets;(iii) ascertainingthattheassetisfreefromanycharge;and(iv) correctvaluation
Ofcourse,itisnotpossiblefortheauditortoverifyeachand
everyasset.ItwasheldinKingstonCottonMillscasethat"itisno
partofanauditor'sdutytotakestock.Noonecontendsthatitis.Hemustrelyonotherpeopleforthedetailsofstockintradeinhand".
However,asperthedecisiongiveninMeKessonandRobinscase(1939)theauditormustphysicallyinspectsomeof
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theassets.Nowtheauditorhastoreportwhetherthebalancesheetshowstrueandfairviewofthestateofaffairsofthecompany.Hence,heisrequiredtoverifyalltheassetsandliabilitiesappearinginthebalancesheet.Incaseoffailure,the
auditorcanbeheldliablefordamages.
Accordingtothe'StatementofAuditingPractices'issuedbyICAI,
Theauditor'sobjectinregardtoassetsgenerallyistosatisfythat
Theyexist;
Theybelongtotheclient;
They are in the possession of the client or persons
authorisedbyhim;
They are not subjected to undisclosed encum-branchesorlien.
They are stated in the balance sheet at properamounts in accordance with sound accountingprinciplesand
Theyarerecordedintheaccount."
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Verification includes confirmation of the
following :
Thattheassetswereinexistenceonthedateofthebalance
sheet;
That the assets had been acquired for the purpose ofbusinessonly;
Thattheassetshadbeenacquiredunderaproperauthority;
Thattherightofownershipoftheassetsvestedintheorganization;
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SCOPE OF VERIFICATION
Verification includes confirmation of the following:
1.Thattheassetswereinexistenceonthedateof thebalance
sheet;
Thattheassetshadbeenacquiredforthepurposeofbusinessonly;Thattheassetshadbeenacquiredunderaproperauthority;
That the right of ownership of the assets vested in theorganization;
Thattheassetswerefreefromanycharge;andthattheassets
wereproperlyvaluedanddisclosedinthebalancesheet.
OBJECT OF VERIFICATION:
Following are the objects of verification of assets and liabilities:
Toshowcorrectvaluationofassetsandliabilities.Toknowwhetherthebalancesheetexhibitsatrueandfairview
ofthestateofaffairsofthebusiness.
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Tofindoutwhethertheassetswereinexistence.Tofindouttheownershipandtitleoftheasset.Todetectfrauds
anderrors.Toverifythearithmeticalaccuracyofthebooksofaccounts.
To find out whether there is an adequate internal controlregardingacquisition,utilizationanddisposalofassets.
Toensurethattheassetshavebeenrecordedproperly.
While conducting verification following points should be
considered by the auditor:
Existence:
The auditor should confirm that all theassets of the company are physically existing on the dateofBalanceSheet.
Possession: The auditor has to verify that the assets are in thepossessionofthecompanyonthedate ofBalanceSheet.
Ownership: The auditor shouldconfirmthat theassetislegally
ownedbythecompany.
Charge or lien:
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Theauditorshouldverifywhethertheassetissubjecttoanychargeorlien
Record :
Theauditorshouldconfirmthattheassetsandliabilities
arerecordedinthebooksandthereisnocomissionofanyassetorliability.
Audit report:
UnderMAOCARO'88,theauditorhastoreportwhetherthemanagementhasconductedphysicalverificationoffixedassetsandstockandthedifferences,ifany,betweenthephysicalinventory,andtheinventoryasperthebooks.
Events after Balance Sheet date :
Theauditorshouldfindoutwhetheranyeventafterthe
dateofBalanceSheethasaffectedanyitemsofassetsandliabilities.
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Sixteen Principles of Verification:
Adequateandeffectiveverificationisanessentialelementofallarmslimitationanddisarmamentagreements.
Verificationisnotanaiminitself,butanessentialelementintheprocessofachievingarmslimitationanddisarmamentagreements.
Verificationshouldpromotetheimplementationofarmslimitationanddisarmamentmeasures,buildconfidenceamongStatesandensurethatagreementsarebeingobservedbyallparties.
Adequateandeffectiveverificationrequiresemploymentof
differenttechniques,suchasnationaltechnicalmeans,internationaltechnicalmeansandinternationalprocedures,includingon-siteinspections.
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Verificationinthearmslimitationanddisarmamentprocesswillbenefitfromgreateropenness.
Armslimitationanddisarmamentagreementsshouldincludeexplicitprovisionswherebyeachpartyundertakesnottointerferewiththeagreedmethods,proceduresandtechniquesofverification,whentheseareoperatinginamannerconsistentwiththeprovisionsoftheagreementandgenerallyrecognizedprinciplesofinternationallaw.
Armslimitationanddisarmamentagreementsshouldincludeexplicitprovisionswherebyeachpartyundertakesnottousedeliberateconcealmentmeasureswhichimpedeverificationofcompliancewiththeagreement.
Toassessthecontinuingadequacyandeffectivenessoftheverificationsystem,anarmslimitationanddisarmament
agreementshouldprovideforproceduresandmechanismsforreviewandevaluation.Wherepossible,time-framesforsuchreviewsshouldbeagreedinordertofacilitatethisassessment.
Verificationarrangementsshouldbeaddressedattheoutsetandateverystageofnegotiationsonspecificarmslimitationanddisarmamentagreements.
AllStateshaveequalrightstoparticipateintheprocessofinternationalverificationofagreementstowhichtheyareparties.
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Adequateandeffectiveverificationarrangementsmustbecapableofproviding,inatimelyfashion,clearandconvincingevidenceofcomplianceornon-compliance.Continuedconfirmationofcomplianceisanessentialingredienttobuildingandmaintainingconfidenceamongtheparties.
Determinationsabouttheadequacy,effectivenessandacceptabilityofspecificmethodsandarrangementsintendedtoverifycompliancewiththeprovisionsofanarmslimitation
anddisarmamentagreementcanonlybemadewithinthecontextofthatagreement.
Verificationofcompliancewiththeobligationsimposedbyanarmslimitationanddisarmamentagreementisanactivityconductedbythepartiestoanarmslimitationanddisarmamentagreementorbyanorganizationattherequestandwiththeexplicitconsentoftheparties,andisanexpressionofthesovereignrightofStatestoenterintosucharrangements.
Requestsforinspectionsorinformationinaccordancewiththeprovisionsofanarmslimitationanddisarmamentagreementshouldbeconsideredasanormalcomponentoftheverificationprocess.Suchrequestsshouldbeusedonly
forthepurposesofthedeterminationofcompliance,carebeingtakentoavoidabuses.
Verificationarrangementsshouldbeimplementedwithoutdiscrimination,and,inaccomplishingtheirpurpose,avoidundulyinterferingwiththeinternalaffairsofStatepartiesor
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otherStates,orjeopardizingtheireconomic,technologicalandsocialdevelopment.
Tobeadequateandeffective,averificationregimeforanagreementmustcoverallrelevantweapons,facilities,locations,installationsandactivities.
What Verification of Assets and Liabilities includes
Social Security number:
DeterminewhetheranameandassociatedSocialSecuritynumbermatchthedataintheSocialSecurityAdministrationsrecords
Tax returns:
Ensurethatincometaxdatasubmittedbyapplicants
areaccurateandfreefromfraud
Undisclosed liabilities:
Refreshacreditreportpriortoclosingtoidentifyadditionaldebtorcreditinquiries
Employment:
Confirmanapplicantsemploymentstatus,aswellaslengthofemployment,salary,andposition
Deposit:
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Reviewassetspriortoapprovingaloanbyfindingouthowlonganaccounthasbeenopen,itscurrentstandingandbalance,andifanyoverdraftshaveoccurred
Mortgage :
Receivemortgagepaymenthistory,balance,andmonthlypaymentamountforanexistingmortgage
Rent:
Assesstheabilityoftheapplicanttomakeamonthlymortgagepaymentbasedonmonthlyrentpaymenthistory
Lease:
Determinetheoutstandingliabilityofarentertoalandlord
Insurance:
Determinecoverageforanassetoract
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VERIFICATION OF TRANSACTION:
THE ADUITOR SHOULD BE EXAMINE THE FOLLOWING
ASPECTS :
Legal Aspects:
o Seewhetherthelegalrequirementsgoverningthe
entity,relatingtoinvestments,havebeencompliedwith,
alongwithanyotherconditionsrelatingtoinvestments
whichrestrict,qualifyorabridgetherightofownershipand/ordisposalofinvestments.
Documents:
o Ensurethatthetransactionsforthepurchase/saleof
investmentsaresupportedbydueauthorityand
documentation
Adjustments:
o Whereinvestmentshavebeenpurchasedorsold
cum/exdividend/interest/rights/bonusseewhether
properadjustmentsinthisregardhavebeenmadein
thecost/salesvalueofsecuritiespurchasedorsold
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Rights:
o Examinetheoffercontainedintheletterofrights,in
caseofarightsissue.Wheretherightshavebeenrenouncedorotherwisedisposedofornotexercised,
examinetherelveevantdecisionoftheappropriate
authorityinthisbehalf,asalsothatthesaleproceeds,if
anyhavebeenduelyaccountedfor.
Bonus:
o
Verifytheintimationstotheentityregardingsuchissue,
withaviewtoascertainingtherecieptandrecordingof
thrrequisitenumberofsharedbytheentity.
Market Value:
o Wheretheamountofpurchaseorsaleofinvestment
aresubstantialcheckthepricepaid/receivewithreferencetothestockexchangetationwhereavailable
onorabovethedateofpurchaseofsale.
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VERIFICATION OF SPECIFIC ASSETS
Land and Buildings:
SometimesthetwoassetsareshowntogetherintheBalanceSheet.Nevertheless,theirledgeraccountsshouldalwaysbeseparatedparticularlyinviewofthefactthatbuildingsaresubjecttodepreciationwhilelandingeneralisnot.
Ifthebuildinghasbeenbuiltorisinthecourseofconstruction,underacontracttheauditorshouldverifythedebitbalanceoftheaccountbyreferencetothearchitect'scertificate,aswellasthecontractor'sreceiptsforamountspaid.
Ifthebuildinghasbeenconstructedbytheclient'sownorganisation,itwillbenecessaryfortheauditortoverifythatthebasisuponwhichcostofmaterials,wagesandthe
supervisionchargedhavebeenallocatedtotheaccount,isreasonable.Theexpenseschargedshouldincludealltheexpenditurenecessarytobringthebuildingintoexistenceandtomakeithabitable.Asasafeguardagainstanymistakearisingintheexpenseschargeabletotheasset,theauditorshouldobtainacertificatefroma
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responsibleofficialinrespectoftotalexpenditureincurredontheconstructionofthebuildinguptothedateoftheBalanceSheet.Theamountofexpenditure,wherepossible,shouldalsobecomparedwiththeestimatedcost
ofconstructionwhichmayhavebeenpreparedbyanarchitectorreceivedwiththetenders,ifany,invitedforconstruction.Ifthereisamaterialdiscrepancyintheamountofactualandestimatedexpenditure,causesthereofshouldbereviewed.
Plant and Machinery
IntheabsenceofaPlantRegistercontainingdetailedparticularsofvariousarticlesofmachineryandequipment,showingseparatelyoriginalcost,additiontoandsalesfromitfromtimetotime.Itisnotnormallypracticablefortheauditortoverifytheexistenceofsuchassets.TheauditorsshouldthereforeinsistonaPlantRegisterbeingmaintainedwherethevalueandvarietyofmachineryandplantaresubstantialincomparisonwiththetotaiassetsofthebusiness.
Wheresucharegisteriskept,itiscustomarytoprepareattheendofeachyearastatementfromthePlantRegistershowingopeningbalance,saleandadditiontheretoduringtheyearinrespectofvariousitemsofmachineryandplant.ItstotalisthenreconciledwiththebalanceintheGeneralLedger.
Thecostofaddition,ifany,isverifiedwiththeinvoiceofmachinerysuppliedtogetherwithevidenceinrespectofotherincidentalexpenseschargeabletotheaccount,includinginstallationexpenses.Ifanyoftheadditionrepresentsthecostofmachinerymanufacturedbytheconcernwithitsownmaterialandbyitsownlabour,the
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basisonwhichtheexpenditurehasbeenallocatedshouldbeverified.Inaddition,acertificateisobtainedfromtheengineerresponsibleforthemanufactureoftheplantconfirmingthetotalcostofmanufacture.
Incaseanyitemormachineryhasbeenscrapped,destroyedorsoldtheauditorshouldascertainthattheprofitorlossarisingthereonhasbeencorrectlydeterminedwhichhaseitherbeendisclosedintheProfitandLossAccountorcreditedtotheCapitalReserve.Inappropriatecircumstances,acertificateshouldbeobtainedfromaseniorofficialthatthishasbeendone.
Thoughitisthedutyofthemanagementtoensurethatfixed
assetsareinexistence,theauditoralsoshould,periodicaily,physicallyexaminevariousitemsofplantandmachineryandotherfixedassets,say,onceineverythreeorfiveyears,dependinguponthesizeoftheconcern.
Certaincompanies,forconvenienceofinspectionattachtoeachunitofplantandmachineryametallicdiscbearingthenumberatwhichitisshowninthePlantRegister.
Whenanassethasbeenrevalued,depreciationshouldbeprovidedontherevisedvalueandnotonthehistoricalvalue.
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Leasehold Property
Various steps involved in the verification of leasehold rights are
stated below:
Inspecttheleaseorassignmentthereoftoascertaintheamountofpremium,ifany,forsecuringthelease,anditstermsandconditions;andthattheleasehasbeendulyregistered.Aleaseexceedingoneyearisnotvalidunlessithasbeengrantedbyaregisteredinstrument(section107oftheTransferofPropertyAct,1882).
Ascertainthatalltheconditions,thefailuretocomplywithwhichmightresultintheforfeitureorcancellationofthelease,e.g.,paymentofgroundrentontheduedates,insuranceofproperty,itsmaintenanceinasatisfactorystateofrepairs,etc.prescribedbythelease,arebeingdulycompliedwith.
Examinethecounterpartofthetenants'agreements,ifpartoftheleaseholdpropertyhasbeensublet.
Makecertainthatdueprovisionsforanyclaimthatmightariseunderthedilapidationclauseontheexpiryoftheleasehasbeenmade,and,ifnosuchprovisionhasbeenmade,drawtheclient'sattentiontothematter.
Ensurethattheoutlayaswellasanylegalexpensesincurredtoacquiretheleasewhichareshownasanasset
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intheBalanceSheetare'tieingwrittenoffataratewhichcouldcompletelywipeofftheassetovertheunexpiredtermofthelease.
Aleaseholdproperty,evenwherenopremiumhasbeen
paidforitsacquisition,maysometimecometohaveaconsiderablevalue.Insuchacase,itmaynotbeadvisabletocontinuetoshowtheassetasifithasnovalueNevertheless,wheretheleaseholdrightshavebeenrevaluedthatfactshouldbeclearlyshownonthebalancesheettilltheaccounthasbeencompletelywrittenoff.
Intangible Assets
AnIntangibleAssetisanidentifiablenon-monetaryasset,withoutphysicalsubstance,heldforuseintheproductionorsupplyofgoodsorservices,forrentaltoothers,orforadministrativepurposes.Enterprisesfrequentlyexpendresources,orincurliabilities,ontheacquisition,development,maintenanceorenhancementofintangibleresourcessuchasscientificortechnicalknowledge,designandimplementationofnewprocessesorsystems,
licenses,intellectualproperty,marketknowledgeandtrademarks(includingbrandnamesandpublishingtitles).Commonexamplesofitemsencompassedbythesebroadheadingsarecomputersoftware,patents,copyrights,motionpicturefilms,customerlists,mortgageservicingrights,fishinglicences,importquotas,franchises,customerorsupplierrelationships,customerloyalty,marketshareandmarketingrights.Goodwillisanotherexampleofanitemofintangiblenaturewhicheitherarisesonacquisitionorisinternallygenerated.Ifanitemcovereddoesnotmeetthedefinitionofanintangibleasset,expendituretoacquireitorgenerateitinternallyisrecognisedasanexpensewhenitisincurred.However,iftheitemisacquiredinanamalgamationinthenatureof
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purchase,itformspartofthegoodwillrecognisedatthedateoftheamalgamation(seeparagraph55).
Someintangibleassetsmaybecontainedinoronaphysicalsubstancesuchasacompactdisk(inthecaseof
computersoftware),legaldocumentation(inthecaseofalicenceorpatent)orfilm(inthecaseofmotionpictures).Thecostofthephysicalsubstancecontainingtheintangibleassetsisusuallynotsignificant.Accordingly,thephysicalsubstancecontaininganintangibleasset,thoughtangibleinnature,iscommonlytreatedasapartoftheintangibleassetcontainedinoronit.
Insomecases,anassetmayincorporatebothintangible
andtangibleelementsthatare,inpractice,inseparable.IndeterminingwhethersuchanassetshouldbetreatedunderAS10,AccountingforFixedAssets,orasanintangibleassetunderthisStatement,judgementisrequiredtoassessastowhichelementispredominant.Forexample,computersoftwareforacomputercontrolledmachinetoolthatcannotoperatewithoutthatspecificsoftwareisanintegralpartoftherelatedhardwareanditistreatedasafixedasset.Thesameappliestotheoperatingsystemofacomputer.Wherethesoftwareisnotanintegralpartoftherelatedhardware,computersoftwareistreatedasanintangibleasset.
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Patterns D ies Loo se Tools etc.
Severalentitieshavelargeinvestmentsinsuchassetswhichhavearelativelyshortusefullifeandlowunitcost.Evidently,itisadifficultmatter,underthecircumstances,toprepareaseparateaccountforeachsuchassetsalthoughacarefuicontroloversuchpropertyisnecessary.
Ontheseconsiderations,someentitieschargeoffsmalltoolsandothersimilaritemstoProductionAccountasandwhentheyarepurchasedanddonotplaceanyvalueon
theunusedstockontheBalanceSheet.Nevertheless,arecordofissuesandreceiptsoftoolstoworkmeniskept,asacheckonthesamebeingpilferedandamemorandumstockaccountofdiesandpatternsisalsomaintained.Inotherconcerns,thecostoftools,dies,etc.purchasedisdebitedtoappropriateassetsaccount,andaninventoryoftheunuseditemsattheendoftheyearispreparedandvalued;thesumtotalofopeningbalanceandpurchasereducedbythevalueofclosingstock,as
disclosedbytheinventory,ischargedofftoProductionAccountinrespectofsuchassets.Ontheotherhand,someconcernscarrysuchassetsattheirbookvaluesattheendofthefirstyearandchargeoffthecostofallthepurchasesinthesubsequentyeartotheProduction
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Accountonthepleathattheyrepresentcostofreplacement.
Themostsatisfactorymethod,however,isthatofpreparinganinventoryofserviceablearticles,atthecloseofeachyear,andrevaluingtheassetsonthisbasis,thevariousarticlesincludedintheinventorybeingvaluedatcost.Care,however,shouldbetakentoseethattheinventorydoesnotincludeanywornoutordefectivearticlesthelifeofwhichhasalreadyrunout.
Furniture Fittings and Fixtures:
Thecostoftheseassetsshouldbeverifiedbyreferencetotheinvoicesofsuppliers.Alltheexpenditureincidentaltotheirpurchasealsoshouldbedebitedtotheappropriateassetaccount.
Further,theauditorshouldcarefullyscrutinisethedetailsofthecostofadditionsdebitedtotheseaccountssoastoascertainthatonlythecostofgenuineadditionshasbeendebitedtosuchaccounts.
Inthecaseofassetsinregardtowhichthereisadangerofiossthroughpilferage,thereshouldbeasatisfactory
systemofstockcontroloverthem.
ItrequiresthateacharticleoffurnitureisenteredinaStockRegisterbeforeitspriceispaidandthestock
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numberunderwhichitisenteredispaintedoveritalsothatattheendofeachperiod,aninventoryispreparedandreconciledwiththeStockRegisterandcostofallthearticleswhichbecomesunserviceableorhavebeenlostis
writtenoffunderproperauthority.
Bills Receivable:
Ifpossible,theauditorshouldattendonthelastdayoftheaccountingperiodtoinspectthebillsinhandandagreetheirtotalwiththebalanceintheBillsReceivableAccount.Ifverificationispostponedtillsometimeaftertheexistenceofthebillswhichhadmaturedinbetweenthetwodatesshouldbeverifiedwiththeentriesinrespectofcashcollectedforthem.IfsomebillswerediscountedafterthedateoftheBalanceSheet,thecollectionoftheirproceedsshouldbeverified.IfanybillsweredishonoredafterthedateoftheBalanceSheet,theauditorshouldascertainwhatportion,ifany,oftheamountwillnotberecoveredandensurethatprovisionforthesamehasbeenmade.Whereanewbillisreportedtohavebeentakeninlieuofabillwhichhasmatured,theauditor
shouldinspectthebill.WhereanumberofbillsarefoundtohavebeendiscountedbeforethecloseoftheyeartheauditorshouldseethattheamountofthebillssodiscountedisshownasacontingentliabilityontheBalanceSheet.Ifsomeofthebillsarewithbankersfor
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collection,theauditorshouldobtainacertificatefromthem.
Generally,itwillbethedutyoftheauditortoensurethatthebillswereproperlydrawnandstampedandthattheywerenotdishonoured.Wheresomeofthebillsweredishonoured,theauditorshouldensurethattheyhavebeennotedandprotested.
Verification of Specific Liabilities:
Verification of Liabilities
The term liability in its usual and ordinarysense refers
to a state of being under legal obligation. Like verificationand valuation of assets,verification of liabilities is an equally importantaspect of auditing. If liabilities are
not properly verified and valued, thebalance sheet of a business enterprise will notexhibit a true and fairview of its state of affairs. Therefore, the auditor should see
thatliabilities are genuine and duly authorized. He must obtain a certificatefrom a
responsible official of the client, stating that to the best of hisknowledge and belief:1.All liabilities, whether for purchase or expense or on any other
account existing at the date of the balance sheet, have beenincluded in the books of accounts.
2.All the contingent liabilities have either been disclosed in a footnote to the balance sheet or have been provided for. Re
Westminster Road Construction and engineering Co. Ltd. (1932),
it was held that all the expense and liabilities which thecompany could be expectedto have incurred had been dulyrecorded in the books of accounts. While delivering
thejudgment in the case, Justice Bennett Observed:It was settled law that an auditor did not discharge his duty if he merely saw
that the balance sheet accurately represented what was shown by the books on the
material date. If the auditor found that a company in the course of its businesswasincurring liabilities of a particular kind, and that the creditors sent in their
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invoices after an interval, and that liabilities of the kind in question must have been
incurred during the accountancy period under audit, and that when he was makinghis audit a sufficient time had not elapsed for the invoices relating to such
liabilities to have been received and recorded in the companys books, it became
his duty to make specific inquiries as to the existence of such liabilities and alsobefore he signed a certificate as to the accuracy of the balance sheet, to go through
the invoice files of the company, in order to see that no invoices relating toliabilities had been omitted.
In the light of the above decision, it can beinferred that it is quite essential for an auditor to see that:
All liabilities have been clearly stated in the balance sheet;
All he liabilities stated in the balance sheet relate to the
business itself;
They represent genuine and duly authorized transactions; and
No item of liabilities has been omitted, under or over-stated, i.e.,
all liabilities appear at their actual figures in the balance sheet.
It should also be noted that liabilities are not valued like assets. Therefore, it wouldbe sufficient on the part of auditor to satisfy himself about the correct disclosure of
information in respect of every item appearing in the liabilities side of the balancesheet of a business concern.
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Verificationofliabilitiesmaybecarriedoutbyemployingthefollowingprocedures:
ExaminationofRecords
DirectConfirmationProcedure
ExaminationofDisclosure
AnalyticalReviewProcedures
ObtainingManagementRepresentations
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LOANS BORROWINGS:
Theauditorshouldsatisfyhimselfthattheloansobtainedare
withintheborrowingpowersoftheentity.
Theauditorshouldcarryoutanexaminationoftherelevantrecordstojudgethevalidityandaccuracyoftheloans.
Inrespectofloansandadvancesfrombanks,financialinstitutionsandothers,theauditorshouldexaminethatthebookbalancesagreewiththestatementsofthelenders.Heshouldalsoexaminethereconciliationstatements,ifany,preparedbytheentityinthisregard.
Theauditorshouldexaminetheimportanttermsintheloanagreementsandthedocuments,ifany,avidencingchargein
respectofsuchloansandadvances.Heshouldparticularlyexaminewhethertherequirementsoftheapplicablestatueregardingcreationandregistrationofchargeshavebeencompliedwith.
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Incasethevalueofthesecurityfallsbelowtheamountoftheloanoutstanding,theauditorshouldexaminewhethertheloanisclassifiedassecuredonlytotheextentofthemarketvalueofthesecurity.
Whereshort-termsecuredloanshavebeendisclosedseparatelyfromothersecuredloans,theauditorshouldverifythecorrectnessoftheamountofsuchshort-termloans.
Whereinstallmentoflong-termloansfallingduewithinthe
nexttwelvemonthshavebeendisclosedinthefinancialstatementstheauditorshouldverifythecorrectnessoftheamountofsuchinstallments.
Theauditorshouldexaminethehirepurchaseagreementsforthepurchaseofassetsbytheentityandensurethecorrectnessoftheamountsshownasoutstandingintheaccountsandalsoexaminethesecurityaspect.Futureinstallmentsunderhirepurchaseagreementsforthepurchaseofassetsmaybeshowedassecuredloans.
Thedifferedpaymentcreditsshouldbeverifiedwithreferencetotheimportanttermsintheagreement,includingduedatesofpaymentsandguaranteesfurnishedbythebanks.Theauditorshouldalsoverifythehundies/billsacceptedseparately.
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Creditors Other Current Liability:
Theauditorshouldchecktheadequacyofcut-offprocedures
adoptedbytheentityinrelationtotransactionsaffectingthecreditoraccounts.Forexample,theauditormayexaminethedocumentsrelatingtoreceiptofgoodsfromsuppliersduringafewdaysimmediatelybeforetheyear-endedandverifythattherelatedinvoiceshavebeenrecordedaspurchasesofthecurrentyear.
Theauditorshouldcheckthetotalofthecreditorsbalancesagreeswiththerelatedcontrolaccount,ifany;thedifference,ifany,shouldbeexamined.
Theauditorshouldexaminethecorrespondenceandotherrelevantdocumentaryevidencetosatisfyhimselfaboutthevalidity,accuracyandcompletenessofcreditors/acceptance.
Theauditorshouldverifythatinthecaseswhereincomeis
collectedinadvanceforservicestoberenderedinfuture,theunearnedportion,notapplicabletotheperiodunderaudit,isnotrecognizedasincomeoftheperiodunderauditbutisshowninthebalancesheetasapartofcurrentliabilities.
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Whileexaminingscheduleofcreditorsandotherschedulessuchasthoserelatingtoadvancepayments,unclaimed
dividendsandotherliabilities,theauditorshouldpayspecialattentiontothefollowingaspects:
LongOutstandingItems
Unadjustedclaimsforshortsupplies,poorquality,discount,
commission,etc.
Liabilitiesnotcorrelated/adjustedagainstrelatedadvances
Authorizationandcorrectnessoftransfersfromoneaccount
toanother.
Basedonthisexaminationaforesaid,theauditorshould
examinewhetheranyadjustmentsinaccountsarerequired.
Incasethereareanyunusualpaymentsaroundtheyear-end,theauditorshouldexaminethemthoroughly.Inparticular,theauditorshouldexamineiftheentriesrelatingtoanysuchpaymentshavebeenreservedinthesubsequentperiod.
Theauditorshouldreviewsubsequenttransactionstoidentify/confirmmaterialliabilitiesoutstandingatthebalance
sheetdate.
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Provisions:
Thetermprovisionmeansamountsretainedbywayofproviding
fordepreciationinvalueofassetsorretainedbywayofprovidingforanyknownliabilitytheamountofwhichcannotbedeterminedwithsubstantialaccuracy.Provisionsincludethoseinrespectofdepreciationordiminutioninthevalueofassets,productswarranties,servicecontractsandguarantees,taxesandlevies,gratuity,proposeddividend,etc.Theguidancenote,however,doesnotdealwithprovisionsfordepreciationordiminutioninthevalueofassets.
Theauditofprovisionsprimarilyinvolvesexaminingthereasonablenessandadequacyoftheamountsprovidedfor.Theauditorshouldalsoexaminethattheprovisionsmadearenotinexcessofwhatisreasonablyrequired.Provision for Taxes and Duties:
Theadequacyoftheprovisionfortaxationfortheyear
shouldbeexamined.Thepositionregardingtheoveralloutstandingliabilityoftheentityasthedateofbalancesheetshouldbereviewed.Inrespectofassessmentscompleted,revisedorrectifiedduringtheyear,theauditorshouldexaminewhethersuitableadjustmentshavebeenmadeinrespectofadditionaldemandsorrefunds,asthecasemaybe.Similarly,he
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shouldexaminewhetherexcessprovisionsorrefundshavebeenpropelyadjusted.Therelevantordersreceiveduptothetimeofauditshouldbeconsideredand,onthisbasis,itshouldbeexaminedwhetheranyshortprovisionshavebeenmadegood.If
thereisamaterialtaxliabilityforwhichnoprovisionismadeintheaccounts,theauditorshouldqualifyhisreportinthisrespectevenifthereservesareadequatetocovertheliability.Provision for Gratuity:
Theauditorshouldexaminewhethertheentityisrequiredto
paygratuitytoitsemployeesbyvirtueoftheprovisionsofthePaymentofGratuityAct,1972intermsofagreementwithemployeesand,ifso,whetherprovisionforaccuringgratuityliabilityhasbeenmadebytheentity.Theauditorshouldexaminetheadequacyofthegratuityprovisionwithreferencetotheactuarialcertificateobtainedbytheentity.Incasetheentityhasnotobtainedsuchanactuarialcertificate,theauditorshouldexaminewhetherthemethodfollowedbyitforcalculatingtheaccuringliabilityforgratuityisrational.
Provision for Bonus:
Inthecaseofprovisionforbonus,theauditorshouldexaminewhethertheliabilityisprovidedforinaccordancewiththepaymentofBonusAct,1965and/oragreementwiththeemployeesorwardofcompetentauthority.Wherethebonus
actuallypaididinexcessoftheamountrequiredtobepaidaspertheprovisionsoftheapplicablelaw/agreement/award,theauditorshouldspecificallyexaminetheauthorityforthesame.Provisions for dividends:
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Theauditorshouldexaminethatdividendsareprovidedfor
asperapplicableprovisionsoftherelevantlawsandrulesframedthereunder,relevantagreementsandresolutions.
Other Provisions:
Whereprovisionsaremadeforliabilitiesthatmayariseon
accountofproductwarranties,servicecontracts,performancewarranties,etc.theauditorshouldexaminetheprovisionsmadeareinaccordancewithaccountingstandard(AS)4,contingenciesandeventsoccurringafterBalanceSheetdateissuedbytheinstituteofchartedaccountantsofIndia.Theauditorshouldalsoexaminethereasonablenessofthebasisadoptedforquantifyingtheprovisionwithreferencetotherelevantagreements.
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Share Capital
Capital is not the liability of the company sofar as the going concernprinciple is concerned. Still, the auditor isrequired to verify its correctness so that
he can report on thecorrectness of the balance sheet.The steps to be taken for verifying the sharecapital of the company covering
several phases has been enumeratedas below:
Check the authorized sharecapital with the relevant clause of
the Memorandum of Association.
Obtain a list of shareholders, check with the register of members,and verify the capital account.
Obtain a schedule showing the movement during the year in the
above account. Verify entries in respect of the additions on the
account of issue of new shares.
The following work in this respect should be carried out:
See that the allotment of the shares has been madecomplying with the legal provisions.
See that the issuing capital does not exceed the authorized
capital.
Examine resolution of the Board in respect of allotment ofthe shares.
Vouch the money received on applications and allotmentand on calls, if any,
with the counterfoil of the receipt book,bank statement and advices andother relevant availableevidence.
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If in accordance with the provisions of the Memorandumand Articles of
Association and prospectus, the directorsare required to take up theirqualification shares, see thatcompany has received the required amount.
In case where the shares were allotted for considerationother than cash,
examine the contract constituting theallottees title to the shares and thedirectors minutes
If the shares were issued at a premium, see that premiumhad been shownseparately and not under the share capital.
If the shares were issued at the discount the auditor shouldsee that it was duly
authorized and in accordance with theprovisions of the Act. In this regard,
the auditor shouldsatisfy himself in respect of the following matters:
It was a subsequent issue of the shares since the
first issue cannot be at discount.
The issue of share at discount was authorized by an
ordinary resolution passed in a general meeting ofthe company.
The resolution stated the maximum rate of thediscount at which shares were issued.
Not less than one year must, at the date of issue
have elapsed since the date of the company was
entitled to commence business.
The shares to be issued at discount must be issued
within the six months after the date on which the
issue is sanctioned by the Board.
Every prospectus shall contain particulars of the
discount allowed on the issue of shares or so muchof that discount as has notbeen written off on thedate of issue of the prospectus.
In the case of forfeiture of shares, the auditor should satisfy
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himself on the following points:
(a)The procedure as laid down in the Articles relating to
forfeiture of shares were followed i.e., the forfeiture waspermitted by the Articles
of the company and the DirectorsResolution forfeiting the shares was passed.
(b)Examine the entries in the books of accounts for theforfeiture of shares, and ensure that the necessary
adjustments were made in the register of members.
(c)Where the forfeited shares were sold or re-issued, see that
the issue of such shares was authorized by the directors andthe amount of discountdid not exceed the amount alreadyreceived thereon from the defaulting
shareholders.
(d)Any capital profit or re-issue of forfeited shares should betransferred to the capital reserve.
5.If shares were allotted to the foreign nationals, examine thepermission given by the related legal authorities.
6.Where the company has issued redeemable preference shares,verify the terms on which they were issued with prospectus.
7.Examine the rights attaching to the various types of shares in theArticles of Association of the company.
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Debentures:
Examine the Memorandum and Articles ofAssociation of the company to
ascertain its borrowings powers and theextent and mode of borrowings. If the
directors are empowered toborrow on behalf of the company, examine thedirectors minutesregarding the issue of debentures and the mortgage of thecompanysproperty. A copy of debentures creating and evidencing the
chargeshould be inspected and the receipts of money should be dulyvouched. Any
redemption should be vouched with the minutesauthorizing the redemption.
Bills Payable:
The method of verification of bills payable
should include the following steps:
1. Obtain a schedule of bills payable. Check it with bills payablebook.
2.Check casts of the schedule.
3.Examine the unpaid bills. Trace their subsequent payments into
the cashbook of succeeding period.
4.Verify to see that as far as possible there are no bills payable left
out and not entered in the books of accounts.
5.Obtain confirmation from the parties to whom bills of large
amount, if any, have been issued.
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6.Verify the calculation of the interest on bills payable.
7.if bills payable were issued out of a regular counterfoil book, go
through the running number of bills issued and examine the
counterfoils with the bills payable register.