Unit 2

Audit Procedure

Q1) Explain vouching.

A1)

Vouching is the examination of transactions of a business together with documentary and other evidence of sufficient validity to satisfy an auditor that such transactions are in order, have been properly authorized and are correctly recorded in books.

Objects of Vouching -

The auditor must take care of following while vouching-

Vouching of Cash Book -

Cash Receipts :

(i) Internal check should be examined.

(ii)    Issue of receipts and use of receipt books should be checked.

(iii) System of depositing the receipts into bank should be checked.

(iv)  Auditor must obtain the list of all memorandum books like cash diary, Kuchi Rokar Bahi, Pucci Rokar Bahi, etc.

(v)    Vouchers must be serially numbered and the name, amount date in vouchers must tally with the accounting records.

(vi)  Accounting records unsupported by vouchers must be probed.

(vii)    Soiled, unissued or cancelled receipts should not be torn but checked along with counterfoils.

Important points while vouching Cash Payments-

Vouching sales book

a)  On the basis of copies of sales invoices.

b) Help from other books like orders received book, goods outward book, correspondence, etc.

c)  Intensive examination of goods sold of the end of the year and beginning of new year.

d)  Recording of only actual sales.

e)  Help from statements of accounts of debtors.

f)    Audit of totals and postings of sales book.

Vouching of Sales Returns Book

Vouching Purchases

Vouching of Purchases Returns Book -

Vouching of Journal

Vouching Ledger Postings -

Vouching of various receipts -

Vouching of Payments :

1. Purchase of Goods : Payment voucher, purchase order, builty, material received note, inspection report, bank statement, rates, quantity and terms of purchases, stores ledger, goods inward register, authorization, cash purchase register.

2. Payment to Creditors : Receipt by customer, statement of account, invoice copy, discount and allowances, and other deeds.

3. Salaries & Wages : Payment voucher, attendance register, salary sheet, wage roll, time keeping record, bank statement, PF, ESIC, overtime sheets, cash book or bank book, ledger,

4. Payment for Acquisition of Assets : Payment voucher, account head, sale/purchase agreement, title deed, bank statement, transfer deed, valuer certificate, stamp duty, broker’s statement, auctioneer’s note, fixed asset register, cash/bank book, authorization by BOD, Articles of association, etc.

5. Payment of Taxes (Income Tax, Sales Tax) : Computation of tax, copy of challan of advance tax, TDS certificates, challan of self assessment tax, return, etc.

6. Travelling Expenses : Voucher tour program, schedule, TADA rules, expense voucher, receipts,etc.

7. Preliminary Expenses : Memorandum & Articles of association, registry, Cheque no., bills & receipts, rate of stamps, vouchers, etc.

Q2) Explain Verification of assets and liabilities.

A2)

Verification of Assets & Liabilities

Verification is the process of substantiation involved in proving that a statement account or item is accurate and stated properly. It is an enquiry into the value, ownership & title, existence and possession, and presence of any charge on the assets as stated in the balance sheet.

Objects of Verification –

Position of Auditor as regards valuation of assets –

An auditor is not a valuer or a technical expert. So he has to rely upon the valuation made by directors, partners, technical experts, surveyors, etc. However he must ensure that the valuation is fair and reasonable and based upon some accepted principles.

Verification of fixed assets -

(i) Goodwill -

(a)    Existence : Whether purchased or acquired. Self generated goodwill is not said to be in existence.

(b)   Records : Check the fixed asset register.

(c)    Right of Ownership : Check purchase agreement, purchase consideration and MOU between the parties.

(d)   Valuation and proper amortization as per AS-14, i.e. 5 years.

(e)    Proper presentation and disclosure.

(ii) Freehold Properly :Which is in the name and title of owner.

(a)  Ownership:Check the sale deed.

(b) Mortgage: Check the mortgage deed.

(c)  Change in asset due to sale, purchase or construction work should be enquired and duly recorded.

(d) Revenue expenses regarding repairs and maintenance should be written off in P & L Account.

(e) The auditor must enquire into the existence, valuation and presentation in balance sheet.

(iii) Leasehold Property :

 It has two owners and both have qualified rights over it. The following points to be considered :

(a)  Ownership : Lease deed should be examined.

(b) Mortgage : Relevant deed should be perused.

(c)  Revenue expenses : To be charged to P & L.

(d) Existence, valuation and presentation B/S to be checked.

(iv) Plant & Machinery :

(a)    Existence : Physical verification to be conducted, additions and deductions to be checked.

(b)   Records : Check the fixed asset register.

(c)    Ownership : Invoice receipt and purchase order to be checked.

(d)   Revenue and capital expenditure should be properly accounted for.

(e)    Proper presentation and disclosure under the schedule of fixed assets.

(v) Furniture, fixture and fittings :

The auditor has to verify the existence, records, changes ,ownership, valuation, presentation and disclosure in the balance sheet, along with depreciation.

(vi) Motor Vehicles :

The auditor has to verify the existence, fixed asset register, log books, invoices, registration book, incidental charges like insurance and road tax, depreciation, licences etc.

 (vii) Copyrights, patents, trademarks, loose tools

Check the existence ownership, valuation, presentation in balance sheet, respective registers, write off etc.

(viii) Investments :

a)  Ownership: name of client, pledge or lien of investments, Classification: trade or non trade, long term, short term, stock in trade.

b) Physical verification: obtain relevant certificates, etc.

c)  Changes: broker’s purchase note or sale note should be checked.

d)  Valuation and disclosure :Current investments should be valued at lower of cost or fair market value. Long term investments should be valued at historical cost of acquisition.

(ix)Inventory :

a)  Classification of inventory : Stores and spare parts, loose tools, raw materials, material in process, finished goods, waste or by products.

b) Existence and records in the stock register to be verified.

c)  Right of ownership : Invoices, documentary evidence to be checked.

d)  Valuation : According to AS-2, valuation is done on cost or NRV whichever is lower.Method is FIFO or weighted average and method is not changed, unless required.

e)  Presentation and disclosure in Balance Sheet.

(x)Debtors, Loans and Advances:

a)  List of debtors to be obtained.

b) Correspondence with debtors.

c)  Inquiry into discount and bad debts, provision for bad debts.

d)  Securities.

e)  Presentation and disclosure in Balance Sheet.

f)    Classification of debtors according to age, security and reliability, bad and doubtful.

 (xi) Loans and Advances.:

g)  Names & Amounts involved.

h)  Terms and Conditions of loan.

i)    Regularity of repayment.

j)    Steps for recovery/repayment of overdues.

Verification of Liabilities

Steps for verification

The nature, timing and extent of substantive procedures to be performed is a matter of professional judgement of the auditor which is based on the auditor’s evaluation of the effectiveness of the related internal controls.

Q3) Explain Company Auditor – Appointment, Powers, Duties and Liabilities.

A3)

Modes of Appointment of AuditorsThe First Auditor:

a) The first auditor of a company shall be appointed by the board of directors within one month of the date of registration of the company. If the Board fails to appoint within the said period of one month, the company in general meeting may appoint the first auditors.

b) The first auditors shall hold office from the date of appointment to the conclusion of the first annual general meeting of the company.

Appointment of Subsequent Auditors [Sections 224 (1), (IB) and (1C)]:

At every annual general meeting, the auditor are appointed or reappointed by every company by passing an ordinary resolution. The appointment of auditors at an annual general meeting is an item of ordinary business. Such auditor holds office from the conclusion of the meeting in which they are appointed to the conclusion of the next annual general meeting.

Appointment of Auditors by Central Government [Section 224(3)]:

Where at any Annual General Meeting, no auditors are appointed or reappointed, in that case within 7 days of such a meeting, the company shall intimate this to the central government who may appoint a person to fill the vacancy.

Compulsory Reappointment of Retiring Auditor (Section 224(2)]:

 At an annual general meeting, a retiring auditor by what so ever authority appointed, shall be reappointed except under any of the following situations:

(a)    Where he is not qualified for reappointment

(b)   Where he has given the company notice in writing of his unwillingness to be reappointed.

(c)    Where a resolution has been passed at that meeting appointing somebody instead of him or providing expressly that he shall not be reappointed.

(d)   Where notice has been given or an intending resolution to appoint some person in the place of a retiring auditor passed, but by reason of the death, incapacity or disqualification of that person the resolution cannot be proceeded with.

Appointment in case of Causal Vacancy [Sec. 224 (6)]:

Where a vacancy is caused by the resignation of an auditor, the company in a general meeting shall only fill the vacancy. The Board of Directors may fill casual vacancy in the office of an auditor caused by any other reason than a resignation, while any such vacancies continues the remaining auditor or auditors, if any, may continue to act the auditor or auditors. Any auditor appointment in a casual vacancy shall hold office until the conclusion of the next annual general meeting.

Appointment by special Resolution (Sec. 224 A):

In case of a company in which not less than 25% of the subscribed share capital is held, whether singly or in any combination, by

a. A public financial institution, or a government company or the Central Government or any state government, or

b. Any financial or other institution established by any provincial or State Act, in which a State Government holds not less than 51 % of the subscribed share capital, or

c. A nationalised bank or an insurance company carrying on general insurance business,

The appointment or reappointment at each annual general meeting of the company, an auditor or auditors shall be made by a special resolution. It the company fails to pass such a special resolution for making the appointment of an auditor or auditors

it shall be deemed that no auditor or auditors had been appointed by the company at its annual general meeting. In such a case, the Central Government may appoint a person to act as the auditor of the company.

Appointment of Auditors of Government Companies (Sec. 619):

Appointment of auditors in case of a government Company is subject to the provisions of Sec 619 which overrides Sec 224 to Sec 233 dealing with appointment, etc., of the auditors in the case of nongovernment companies. The auditor of a Government Company shall be appointed or reappointed by the Comptroller and Auditor General of India; however the appointment shall be subject to ceiling limits as per Sec 224 (1B).

Removal of Auditor

Different modes of removal:

(a) Removal of first auditors before expiry of term [Section 224(5)]: The company may remove the first auditor by passing an ordinary resolution at a general meeting (usually extra ordinary general meeting. No special notice is required for such removal under s. 225. However, procedure prescribed under section 225(2) and (3) shall be followed. Although Nomination notice is required to given to the members of the company at least 14 days before the date of the meeting by this way only any other person may be appointed in place of removed auditor.

(b) Removal of subsequent auditor before expiry of their term: The company may, after obtaining the previous approval of the Central Government, remove the auditors before the expiry of their term by passing an ordinary resolution. No special notice is required for such removal. However, procedure prescribed under section 225(2) and (3) shall be observed.

(c) Removal at an AGM of first or subsequent auditor: The company may, at an annual general meeting, provide expressly that a retiring auditor shall not be reappointed or appoint an auditor other than a retiring auditor. Special notice shall be required for such. The remaining procedure prescribed under section 225(2) and (3) shall be followed for his removal.

Procedure prescribed under section 225(2) and (3) :

(b) The notice for removal of an auditor shall be sent forthwith by the company to the auditor.

(c) After receiving notice auditor has the following rights :

(i) Right to be heard orally at the meeting.

(ii) Right to make a representation in writing to the company (not exceeding reasonable length).

(iii)Right to get his representation circulated among the members.

(d) Where a request is made by the auditor to circulate the representation, it shall be the duty of the company :

(i) to send a copy of the representation to every member of the company; and

(ii) to state the fact of the representation having been made in the notice given to the members.

(e) When representation is not sent by the company:

If a copy of the representation which was not sent as aforesaid because the representation was received too late or because of the company’s default, the auditor may require that the representation shall be read out at the meeting by himself.

(f) Intervention by Central Government:

The copies of the representation need not be sent out and the representation need not be read out at the meeting if the Central government is satisfied that this right is being abused by the auditor to secure needless publicity for defamatory matter. The Central government may order the company’s costs on such an application to be paid by the auditor, notwithstanding that he is not a party to the application. The application to the Central government may be made either by the company or by any other remember or director or other person.

Rights of Auditors [Section 227]-

1. Rights of Auditors to access books of accounts An auditors of a company shall have a right of access at all times to the books and accounts and vouchers of the company, whether kept at the head office of the company or elsewhere.

2. Right to obtain information and explanations [227(1)]:

An auditor of the company is entitled to require from the officer of the company such information and explanation as he may think necessary for the performance of his duties as an auditor.

3. Right to visit branch offices and access to branch account [Sec. 228(2)]:

Where the accounts of any branch office are audited by a person other than the company’s auditor, the company’s auditor is entitled to visit the branches, if he deems it necessary to do so for the performance of his duties as an auditor.

4. Right to receive notice and attend general meeting [Sec. 231]:

The auditor has the right of-

a)  receiving all the notices and other communication relating to any general meeting of a company which any member of the company is entitled to have

b) He is entitled to attend any general meeting and

c)  He is entitled to be heard at any general meeting which he attends on any part of the business which concern’s him as an auditor.

5. Right to make representation [Sec. 225]:

The retiring auditor is-

a)  Entitled to receive a copy of the special notice intending to remove him or proposing to appoint any other person as auditor.

b) Further, the retiring auditor sought to be removed has a right to make his representation in writing and request that the same be circulated amongst the members of the company.

c)  In case, the same could not be circulated, the auditor may require that the presentation shall be read out at the general meeting. The auditor also has the right to be heard at the general meeting.

6. Remuneration of the Auditor [Section 224(8)]:

Auditor is entitled to receive remuneration as follows

a. Where appointed by the Board of Director

When an auditor is appointed by the Board of Directors, remuneration is also fixed by them.

b. Where appointed by shareholders:

In this case the remuneration is determined by the share holders at the AGM.

c. If appointed by the Central Government

In this case the remuneration is fixed by the Central Government.

d. If appointed by the Comptroller and Auditor General of India: the remuneration should be fixed by the co. in general meeting.

 7. Right to correct any wrong statement

 8. Right to have legal and technical advice.

Duties of Auditors:

1. Duty as to enquiry [Sec. 227(1A)]:

Without prejudice to the rights given under s. 227 (1) auditor must enquire into following matters:

(a) Whether loans and advances made by the company on the basis of security:

(i) have been properly secured and

(ii) whether the terms on which they have been made are not prejudicial to the interest of the company or its members;

(b) Whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company;

(c) Whether the company is an investment company or a banking company, whether so many of the assets of the company as consists of shares, debentures and other securities have been sold at a price less than at which they were purchased by the company;

(d) Whether loans and advances, made by the company have been shown as deposits;

(e) Whether personal expenses have been charged to revenue account; and

(f) Where it is stated in the books and papers of the company that any shares have been allotted for cash, whether the cash has actually been so received, whether the position as stated in the accounts books and the Balance Sheet is correct, regular and not misleading.

2. To report to members.

3. To specify a few things in the report.

4. Duties under section 227(4A).

5. To report for inclusion in prospectus.

6. To certify the Statutory Report.

7. Duties regarding Investigation.

8. To submit report on the Balance Sheet and P. & L. Account appended to the declaration of solvency at the time of voluntary winding up.

Liabilities of an Auditor:

A. Civil Liabilities B. Criminal Liability

(A.) Civil Liabilities:

1. Liability for Negligence:

If the auditor owes some duty towards the plaintiff (the person who files a suit in the court), and he does not discharge his duties with reasonable skill and care, resulting in a loss to the plaintiff, the auditor is guilty of negligence.

2. Liability for Misfeasance:

If the auditor does not approach and perform his duties it is misfeasance an auditor is liable to indemnity only if the following things are proved against him:

3. Civil Liability under Indian Companies Act:

a. Under section 62: If an auditor who can also be the auditor of the company gives untrue statement as expert in the prospectus issued by the company, he is liable to indemnify to each person who, believing the prospectus applied to purchase any shares or debentures and who has suffered loss due to the untrue statement.

b. According to Section 543 of Indian Companies’ Act: The Court can compel an auditor to indemnify the company an amount deemed fit by the Court with regard to the being wound up, if he is held guilty of misfeasance and breach of trust.

Civil Liability towards Third Party:

1. Not liable for negligence: In regard to civil liabilities an auditor can be compelled to indemnify only if the auditor owed duty towards the plaintiff. Regarding company audit, as already stated, an auditor is appointed by company, therefore, he owes duty only to the company. If loss is suffered by third party due to negligence or misfeasance of the auditor, the auditor cannot be liable for it. It is only just because there is no contract between the auditor and third party.

2. Liability for fraud: An auditor is not liable to third party for negligence or misfeasance but if he is guilty of fraud, he shall be held liable to the third party also.

B. Criminal Liability :

Criminal Liability under Companies’ Act1. Violation of section 57.

Q4) Explain Company Auditor – Appointment.

A4)

Modes of Appointment of Auditors The First Auditor:

a) The first auditor of a company shall be appointed by the board of directors within one month of the date of registration of the company. If the Board fails to appoint within the said period of one month, the company in general meeting may appoint the first auditors.

b) The first auditors shall hold office from the date of appointment to the conclusion of the first annual general meeting of the company.

Appointment of Subsequent Auditors [Sections 224 (1), (IB) and (1C)]:

At every annual general meeting, the auditor are appointed or reappointed by every company by passing an ordinary resolution. The appointment of auditors at an annual general meeting is an item of ordinary business. Such auditor holds office from the conclusion of the meeting in which they are appointed to the conclusion of the next annual general meeting.

Appointment of Auditors by Central Government [Section 224(3)]:

Where at any Annual General Meeting, no auditors are appointed or reappointed, in that case within 7 days of such a meeting, the company shall intimate this to the central government who may appoint a person to fill the vacancy.

Compulsory Reappointment of Retiring Auditor (Section 224(2)]: At an annual general meeting, a retiring auditor by what so ever authority appointed, shall be reappointed except under any of the following situations:

(e)    Where he is not qualified for reappointment

(f) Where he has given the company notice in writing of his unwillingness to be reappointed.

(g)   Where a resolution has been passed at that meeting appointing somebody instead of him or providing expressly that he shall not be reappointed.

(h)    Where notice has been given or an intending resolution to appoint some person in the place of a retiring auditor passed, but by reason of the death, incapacity or disqualification of that person the resolution cannot be proceeded with.

Appointment in case of Causal Vacancy [Sec. 224 (6)]:

Where a vacancy is caused by the resignation of an auditor, the company in a general meeting shall only fill the vacancy. The Board of Directors may fill casual vacancy in the office of an auditor caused by any other reason than a resignation, while any such vacancies continues the remaining auditor or auditors, if any, may continue to act the auditor or auditors. Any auditor appointment in a casual vacancy shall hold office until the conclusion of the next annual general meeting.

Appointment by special Resolution (Sec. 224 A):

In case of a company in which not less than 25% of the subscribed share capital is held, whether singly or in any combination, by

a. A public financial institution, or a government company or the Central Government or any state government, or

b. Any financial or other institution established by any provincial or State Act, in which a State Government holds not less than 51 % of the subscribed share capital, or

c. A nationalised bank or an insurance company carrying on general insurance business,

The appointment or reappointment at each annual general meeting of the company, an auditor or auditors shall be made by a special resolution. It the company fails to pass such a special resolution for making the appointment of an auditor or auditors

it shall be deemed that no auditor or auditors had been appointed by the company at its annual general meeting. In such a case, the Central Government may appoint a person to act as the auditor of the company.

Appointment of Auditors of Government Companies (Sec. 619):

Appointment of auditors in case of a government Company is subject to the provisions of Sec 619 which overrides Sec 224 to Sec 233 dealing with appointment, etc., of the auditors in the case of nongovernment companies. The auditor of a Government Company shall be appointed or reappointed by the Comptroller and Auditor General of India; however the appointment shall be subject to ceiling limits as per Sec 224 (1B).

Removal of Auditor

Different modes of removal:

(a) Removal of first auditors before expiry of term [Section 224(5)]: The company may remove the first auditor by passing an ordinary resolution at a general meeting (usually extra ordinary general meeting. No special notice is required for such removal under s. 225. However, procedure prescribed under section 225(2) and (3) shall be followed. Although Nomination notice is required to given to the members of the company at least 14 days before the date of the meeting by this way only any other person may be appointed in place of removed auditor.

(b) Removal of subsequent auditor before expiry of their term: The company may, after obtaining the previous approval of the Central Government, remove the auditors before the expiry of their term by passing an ordinary resolution. No special notice is required for such removal. However, procedure prescribed under section 225(2) and (3) shall be observed.

(c) Removal at an AGM of first or subsequent auditor: The company may, at an annual general meeting, provide expressly that a retiring auditor shall not be reappointed or appoint an auditor other than a retiring auditor. Special notice shall be required for such. The remaining procedure prescribed under section 225(2) and (3) shall be followed for his removal.

Procedure prescribed under section 225(2) and (3) :

(b) The notice for removal of an auditor shall be sent forthwith by the company to the auditor.

(c) After receiving notice auditor has the following rights :

(i) Right to be heard orally at the meeting.

(ii) Right to make a representation in writing to the company (not exceeding reasonable length).

(iii)Right to get his representation circulated among the members.

(d) Where a request is made by the auditor to circulate the representation, it shall be the duty of the company :

(i) to send a copy of the representation to every member of the company; and

(ii) to state the fact of the representation having been made in the notice given to the members.

(e) When representation is not sent by the company:

If a copy of the representation which was not sent as aforesaid because the representation was received too late or because of the company’s default, the auditor may require that the representation shall be read out at the meeting by himself.

(f) Intervention by Central Government:

The copies of the representation need not be sent out and the representation need not be read out at the meeting if the Central government is satisfied that this right is being abused by the auditor to secure needless publicity for defamatory matter. The Central government may order the company’s costs on such an application to be paid by the auditor, notwithstanding that he is not a party to the application. The application to the Central government may be made either by the company or by any other remember or director or other person.

Q5) Explain Company Auditor  Powers, Duties and Liabilities.

A5)

Rights of Auditors [Section 227]-

1. Rights of Auditors to access books of accounts An auditors of a company shall have a right of access at all times to the books and accounts and vouchers of the company, whether kept at the head office of the company or elsewhere.

2. Right to obtain information and explanations [227(1)]:

An auditor of the company is entitled to require from the officer of the company such information and explanation as he may think necessary for the performance of his duties as an auditor.

3. Right to visit branch offices and access to branch account [Sec. 228(2)]:

Where the accounts of any branch office are audited by a person other than the company’s auditor, the company’s auditor is entitled to visit the branches, if he deems it necessary to do so for the performance of his duties as an auditor.

4. Right to receive notice and attend general meeting [Sec. 231]:

The auditor has the right of-

a)  receiving all the notices and other communication relating to any general meeting of a company which any member of the company is entitled to have

b) He is entitled to attend any general meeting and

c)  He is entitled to be heard at any general meeting which he attends on any part of the business which concern’s him as an auditor.

5. Right to make representation [Sec. 225]:

The retiring auditor is-

a)  Entitled to receive a copy of the special notice intending to remove him or proposing to appoint any other person as auditor.

b) Further, the retiring auditor sought to be removed has a right to make his representation in writing and request that the same be circulated amongst the members of the company.

c)  In case, the same could not be circulated, the auditor may require that the presentation shall be read out at the general meeting. The auditor also has the right to be heard at the general meeting.

6. Remuneration of the Auditor [Section 224(8)]:

Auditor is entitled to receive remuneration as follows

a. Where appointed by the Board of Director

When an auditor is appointed by the Board of Directors, remuneration is also fixed by them.

b. Where appointed by shareholders:

In this case the remuneration is determined by the share holders at the AGM.

c. If appointed by the Central Government.

In this case the remuneration is fixed by the Central Government.

d. If appointed by the Comptroller and Auditor General of India: the remuneration should be fixed by the co. in general meeting.

 7. Right to correct any wrong statement

 8. Right to have legal and technical advice.

Q6) Explain Company Auditor Duties and Liabilities.

A6)

Duties of Auditors:

1. Duty as to enquiry [Sec. 227(1A)]:

Without prejudice to the rights given under s. 227 (1) auditor must enquire into following matters:

(a) Whether loans and advances made by the company on the basis of security:

(i) have been properly secured and

(ii) whether the terms on which they have been made are not prejudicial to the interest of the company or its members;

(b) Whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company;

(c) Whether the company is an investment company or a banking company, whether so many of the assets of the company as consists of shares, debentures and other securities have been sold at a price less than at which they were purchased by the company;

(d) Whether loans and advances, made by the company have been shown as deposits;

(e) Whether personal expenses have been charged to revenue account; and

(f) Where it is stated in the books and papers of the company that any shares have been allotted for cash, whether the cash has actually been so received, whether the position as stated in the accounts books and the Balance Sheet is correct, regular and not misleading.

2. To report to members.

3. To specify a few things in the report.

4. Duties under section 227(4A).

5. To report for inclusion in prospectus.

6. To certify the Statutory Report.

7. Duties regarding Investigation.

8. To submit report on the Balance Sheet and P. & L. Account appended to the declaration of solvency at the time of voluntary winding up.

Liabilities of an Auditor:

A. Civil Liabilities B. Criminal Liability

(A.) Civil Liabilities:

1. Liability for Negligence:

If the auditor owes some duty towards the plaintiff (the person who files a suit in the court), and he does not discharge his duties with reasonable skill and care, resulting in a loss to the plaintiff, the auditor is guilty of negligence.

2. Liability for Misfeasance:

If the auditor does not approach and perform his duties it is misfeasance an auditor is liable to indemnity only if the following things are proved against him:

4.   The auditor owned duty to the plaintiff:

5.   He failed to discharge his duty;

6.   The plaintiff suffered loss due to non-performance of duty by the auditor.\

3. Civil Liability under Indian Companies Act:

a. Under section 62: If an auditor who can also be the auditor of the company gives untrue statement as expert in the prospectus issued by the company, he is liable to indemnify to each person who, believing the prospectus applied to purchase any shares or debentures and who has suffered loss due to the untrue statement.

b. According to Section 543 of Indian Companies’ Act: The Court can compel an auditor to indemnify the company an amount deemed fit by the Court with regard to the being wound up, if he is held guilty of misfeasance and breach of trust.

Civil Liability towards Third Party:

1. Not liable for negligence: In regard to civil liabilities an auditor can be compelled to indemnify only if the auditor owed duty towards the plaintiff. Regarding company audit, as already stated, an auditor is appointed by company, therefore, he owes duty only to the company. If loss is suffered by third party due to negligence or misfeasance of the auditor, the auditor cannot be liable for it. It is only just because there is no contract between the auditor and third party.

2. Liability for fraud: An auditor is not liable to third party for negligence or misfeasance but if he is guilty of fraud, he shall be held liable to the third party also.

B. Criminal Liability :

Criminal Liability under Companies’ Act1. Violation of section 57.

Q7) Explain verification of assets.

A7)

Verification is the process of substantiation involved in proving that a statement account or item is accurate and stated properly. It is an enquiry into the value, ownership & title, existence and possession, and presence of any charge on the assets as stated in the balance sheet.

Objects of Verification –

Position of Auditor as regards valuation of assets –

An auditor is not a valuer or a technical expert. So he has to rely upon the valuation made by directors, partners, technical experts, surveyors, etc. However he must ensure that the valuation is fair and reasonable and based upon some accepted principles.

Verification of fixed assets -

(i) Goodwill -

(a)  Existence : Whether purchased or acquired. Self generated goodwill is not said to be in existence.

(b) Records : Check the fixed asset register.

(c)  Right of Ownership : Check purchase agreement, purchase consideration and MOU between the parties.

(d) Valuation and proper amortization as per AS-14, i.e. 5 years.

(e) Proper presentation and disclosure.

(ii) Freehold Properly :

Which is in the name and title of owner.

(a)  Ownership:Check the sale deed.

(b) Mortgage: Check the mortgage deed.

(c)  Change in asset due to sale, purchase or construction work should be enquired and duly recorded.

(d) Revenue expenses regarding repairs and maintenance should be written off in P & L Account.

(e) The auditor must enquire into the existence, valuation and presentation in balance sheet.

(iii) Leasehold Property :

 It has two owners and both have qualified rights over it. The following points to be considered :

(a)  Ownership : Lease deed should be examined.

(b) Mortgage : Relevant deed should be perused.

(c)  Revenue expenses : To be charged to P & L.

(d) Existence, valuation and presentation B/S to be checked.

iv) Plant & Machinery :

(a)  Existence : Physical verification to be conducted, additions and deductions to be checked.

(b)             Records : Check the fixed asset register.

(c)              Ownership : Invoice receipt and purchase order to be checked.

(d)             Revenue and capital expenditure should be properly accounted for.

(e)              Proper presentation and disclosure under the schedule of fixed assets.

(v) Furniture, fixture and fittings :

The auditor has to verify the existence, records, changes ,ownership, valuation, presentation and disclosure in the balance sheet, along with depreciation.

(vi) Motor Vehicles :

The auditor has to verify the existence, fixed asset register, log books, invoices, registration book, incidental charges like insurance and road tax, depreciation, licences etc.

 (vii) Copyrights, patents, trademarks, loose tools:

Check the existence ownership, valuation, presentation in balance sheet, respective registers, write off etc.

(viii) Investments :

a)  Ownership: name of client, pledge or lien of investments, Classification: trade or non trade, long term, short term, stock in trade.

b) Physical verification: obtain relevant certificates, etc.

c)  Changes: broker’s purchase note or sale note should be checked.

d)  Valuation and disclosure :Current investments should be valued at lower of cost or fair market value. Long term investments should be valued at historical cost of acquisition.

(ix)Inventory :

a)  Classification of inventory : Stores and spare parts, loose tools, raw materials, material in process, finished goods, waste or by products.

b) Existence and records in the stock register to be verified.

c)  Right of ownership : Invoices, documentary evidence to be checked.

d)  Valuation : According to AS-2, valuation is done on cost or NRV whichever is lower.Method is FIFO or weighted average and method is not changed, unless required.

e)  Presentation and disclosure in Balance Sheet.

(x)Debtors, Loans and Advances:

a)  List of debtors to be obtained.

b) Correspondence with debtors.

c)  Inquiry into discount and bad debts, provision for bad debts.

d)  Securities.

e)  Presentation and disclosure in Balance Sheet.

f)    Classification of debtors according to age, security and reliability, bad and doubtful.

(xi) Loans and Advances.:

a)  Names & Amounts involved.

b) Terms and Conditions of loan.

c)  Regularity of repayment.

d)  Steps for recovery/repayment of overdues.

 Q8) Explain verification of liabilities.

A8)

Verification of Liabilities

Steps for verification-

The nature, timing and extent of substantive procedures to be performed is a matter of professional judgement of the auditor which is based on the auditor’s evaluation of the effectiveness of the related internal controls.

Q9) Explain  vouching of payment.

A9)

Vouching of Payments :

1. Purchase of Goods : Payment voucher, purchase order, builty, material received note, inspection report, bank statement, rates, quantity and terms of purchases, stores ledger, goods inward register, authorization, cash purchase register.

2. Payment to Creditors : Receipt by customer, statement of account, invoice copy, discount and allowances, and other deeds.

3. Salaries & Wages : Payment voucher, attendance register, salary sheet, wage roll, time keeping record, bank statement, PF, ESIC, overtime sheets, cash book or bank book, ledger,

4. Payment for Acquisition of Assets : Payment voucher, account head, sale/purchase agreement, title deed, bank statement, transfer deed, valuer certificate, stamp duty, broker’s statement, auctioneer’s note, fixed asset register, cash/bank book, authorization by BOD, Articles of association, etc.

5. Payment of Taxes (Income Tax, Sales Tax) : Computation of tax, copy of challan of advance tax, TDS certificates, challan of self assessment tax, return, etc.

6. Travelling Expenses : Voucher tour program, schedule, TADA rules, expense voucher, receipts,etc.

7. Preliminary Expenses : Memorandum & Articles of association, registry, Cheque no., bills & receipts, rate of stamps, vouchers, etc

Q10) Explain vouching of sales book.

A10)

Vouching sales book

a)  On the basis of copies of sales invoices.

b) Help from other books like orders received book, goods outward book, correspondence, etc.

c)  Intensive examination of goods sold of the end of the year and beginning of new year.

d)  Recording of only actual sales.

e)  Help from statements of accounts of debtors.

f)    Audit of totals and postings of sales book.

Q11) Explain vouching of various recepits.

A11)

Vouching of various receipts -

Q12) Explain vouching of journal.

A12)

Vouching of Journal-