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CS Executive Programme Module - IIDecember - 2013

Paper - 5 : Company Accounts and Auditing Practices

Part - A : Company Accounts

Chapter - 1: Share Capital

2013 - Dec [1] (a)

When shares are issued at a price higher than the face value, they are said to be issued

at premium. Thus, the excess of issue price over the face value is the amount of

premium.

The premium on issue of shares must not be treated as revenue profits on the contrary

it must be regarded as capital receipt. The Act requires that when a company issues

shares at a premium whether for cash or otherwise a sum equal to the aggregate

amount of the premium collected on shares must be credited to a separate account

called “Securities Premium Account”. There are no restrictions in the Companies Act

on the issue of shares at a premium, but there are restrictions on its disposal.

U/S 78 of the Act, the Securities Premium Account may be used wholly or in part for:

(i) Issuing fully paid bonus shares to the members.

(ii) Writing off preliminary expenses of the company.

(iii) Writing off the expenses of or the commission paid or discount allowed on any

issue of shares or debentures of the company.

(iv) Providing for the premium payable on the redemption of any redeemable

preference shares or of any debentures of the company.

In addition, according to Sec. 77A, a company may purchase its own shares or other

specified securities out of the Securities Premium Account.

Solved ScannerSolved ScannerSolved ScannerSolved Scanner Appendix CS Executive Programme Module - II Paper - 5 2

2013 - Dec [2] (a)

Journal Entries

Forfeiture

Equity Share capital (1,000 x 7) Dr. 7,000

Security Premium A/c (1,000 x 2) Dr. 2,000

To Share forfeiture (1,000 x 3) 3,000

To Equity Share Allotment (1,000 x 4) 4,000

To Equity Share First call (1,000 x 2) 2,000

(Being 1,000 share forfeited).

Y Re issue

C Bank A/c Dr. (600 x 8.5) 5,100

Share forfeiture A/c Dr. (600 x 1.5) 900

To Equity share competed (600 x 10) 6,000

(Being 600 share re issue as fully paid up for 8.5 per share)

C Share forfeiture A/c Dr 900

To capital Reserves 900

(Being transfer of net gain on Re-issue of 600 forfeited share to capital reserve)

i.e.

2013 - Dec [2A] (i)

Conditions for Bonus issue:

(a) The bonus issue is not made unless the partly-paid shares if any are made fully

paid-up.

(b) The company has not defaulted in payment of interest or principal in respect of

fixed deposits and interest on existing debentures or principal on redemption.

(c) The company has sufficient reason to believe that it has not defaulted in respect

of payment of statutory dues of the employees such as contribution to provident

fund, gratuity, bonus, ets.

(d) A company which announces its bonus issue after the approval of the BOD must

implement the proposal with in a period of six months from the date of such

approval and shall not have the option of changing the decision.

(i) The AOA of the company shall contain a provision for capitalisation of

reserves etc.

(ii) If there is no such provision in the articles the company shall pass a resulation

at its general body meeting making provisions in the AOA for capitalisation.


2013 - Dec [3] (a)

Statement Showing the Liability of underwriters

Under writers A B C D

Gross Liability 2,00,000 1,50,000 1,00,000 50,000

Less: marked Application 2,20,000 90,000 1,10,000 10,000

Balance (20,000) 60,000 (10,000) 40,000

Less: Unmarked

Application (Note: 1)

8,000 6,000 4,000 2,000

Resultant Liability, or

(surplus)

(28,000) 54,000 (14,000) 38,000

Less: Surplus of A&C

allocated to B&D in the

Ratio of gross liability

28,000 31,500 14,000 10,500

Net Liability Nil 22,500 Nil 27,500

Note 1: Total number of application received 4,50,000 and 2,20,000 + 90,000 +

1,10,000 + 10,000. 4,30,000 share received as marked application so unmarked

application will be 20,000 (4,50,000 - 4,30,000) unmarked application are allocated in

the ratio of gross liability.

Chapter - 2 : Debentures

2013 - Dec [1] (b)

Debenture Suspense A/c Dr. 40,00,000

To Debentures A/c 40,00,000

(Being issue of 0% 40,000, 14% debenture of ` 100 each as collateral security for a

bank loan of ` 25,00,000 as per Board Resolution dated)

(B/s of X Ltd. as at. )

Particulars Note

I. Equity & Liability

Non Current Liabilities

Long term borrowing 1 4,00,000

Current Liabilities

Short term loan 2 25,00,000


II. Assets

Non Current Asset

Other non Current Asset 3 4,00,000

Note:

1. Long term Borrowings

40,000; 14% Debentures of `̀̀̀ 100 each 4,00,000

(Issued as collateral security as per contra)

2. Short term borrowings

Bank Loan 25,00,000

(Secured by issue of 40,000, 14% debenture of `̀̀̀ 100 each as collateral security)

3. Other not Current Asset

Debenture Suspense A/c 4,00,000

(Issued as collateral security as per cotra)

2013 - Dec [2] (b)

Journal Entries in the book of Zenith limited.

Date Particulars

10.04.12 Bank a/c Dr 12,25,000

Discount on Issue of Debenture Dr 25,000

To 12% convertible Debenture a/c 12,50,000

(Being Debenture Issue)

31.3.2013 12% Convertible, Deb. Dr. 25,000

To Debenture holder 25000

(Being conversion Debenture holder

for 2500 Debenture)

Debenture holder Dr. 25000

To 14% Preference Share 20,000

To security Premium 5,000

(Being 200 preference share Issued

at premium)


Chapter - 3 : Final Accounts of Companies

2013 - Dec [1] (c)

Remuneration to Director :

1. The remuneration payable to the directors of a company including any managing

or whole time director shall be found out in accordance with and subject to the

provisions of section 198 and this section either by the articles of the company or

by a resolution or if the articles so require by a special resolution passed by the

company in general meeting.

2. A director may be paid fees for attending each meeting of the board or a committee

thereof.

3. A whole time director or a managing director may be paid either by way of a

monthly payment or at a certain percentage not exceeding :

(i) 5% of net profits for one such director, and

(ii) If there is more than one such director, 10% for all of them together.

4. A director who is neither whole time director nor a managing director may be paid

remuneration by way of monthly, quarterly or annual payment with the approval of

Central Government or by way of commission of company special resolution

authorise. Such payment provides such remuneration shall not exceed :

(i) 1% of net profits of the company if the company has whole time director or

managing director or a manager and.

(ii) In any other case 3% of the net profits of the company, It may be increased

with the approval of Central Government.

5. Overall limit to all managerial person shall be 11% of Net Profit u/s 349.

2013 - Dec [2] (c)

Provision and reserves : According to companies Act, 1956, the term “Provision”

means “any amount written off or retained by way of providing for depreciation,

renewals or dimunition in the value of assets, or retained by way of providing for any

known liability of which the amount cannot be determined with substantial accuracy.

Thus, a provision may be created either (i) for a known reduction in the value of an

asset or (ii) for a known liability, the amount of which can not be ascertained a

accurately.

The Companies Act, 1956, gives a negative defination of “reserve”. According to the Act

the term “reserve” shall not include “any amount written off or retained by way of

Providing for depreciation renewals, or diminution in the value of assets or retained by

way of providing for any known liability.


2013 - Dec [2A] (ii)

Name of the Company Moon Ltd.

Statement of Profit and loss for the year ended 31st March, 2010

(As per New Schedule VI)

(`̀̀̀ in..........)

Particulars Note No.

Figures

for the

current

reporting

period

Figures

for the

previous

reporting

period

I. Revenue from operations 1 xxx

II. Other income 2 xxx

III. Total Revenue (I + II) xxx

IV. Expenses :

Cost of materials consumed

Purchases of Stock-in Trade 3 xxx

Changes in inventories of finished

Goods works-in progress and Stock-in-

Trade

4 xxx

Employee benefits expense 5 xxx

Finance costs 6 xxx

Depreciation and amortization expenses 7 xxx

Other expenses 8 xxx

Total expenses xxx

V. Profit before exceptional and extra-

ordinary items and tax (III-IV)

xxx

VI. Exceptional items

VII. Profit before extraordinary items and tax

(V-VI)

VIII. Extraordinary Items

IX. Profit before tax (VII-VIII)

X. Tax expense :

1. Current tax

2. Deferred tax

9 xxx


XI. Profit (Loss) for the period from

continuing operations (VII-VIII)

xxx

XII. Profit/(loss) from discontinuing operations

XIII. Tax expense of discontinuing operations

XIV. Profit/(loss) from discontinuing

operations (after tax) (XII-XIII)

XV. Profit (loss) for the period (XI + XIV)

XVI. Earnings per equity share:

1. Basic

2. Diluted

Notes :

1. Revenue from Operation :

Sales (Net) xxx

2. Other Income

Dividend xxx

3. Purchase of Stock-in-Trade

Purchases xxx

Less: Cost of goods/articles distributed among xxx xxx

customers free of cost

4. Changes in inventories :

Opening Stock xxx

(-) Closing Stock xxx

xxxx

5. Employee Benefit Expenses :

Salaries and wages xxx

Less: Director’s remuneration xxx

xxx

Less: Wages for installation of electrical fitting xxx xxx

Directors’ remuneration xxx

xxxx

6. Finance Costs:

Discount on issue of debentures xxx

Preliminary expenses written-off xxx

Interest on Bank overdraft xxx


Interest on debentures xxx

Add: Outstanding xxx xxx

Interim Dividend xxx

xxx

(Note : Discount on issue of debentures and Preliminary expenses are written-off as per

requirements of New Schedule VI)

7. Depreciation & Amortisation :

Furniture xxx

Technical know-how (written off) xxx xxx

8. Other Expenses:

Selling Expenses xxx

Preliminary Expenses xxx

Bad debts xxx

Audit fees xxx

Advertisement xxx xxx

9. Current Tax:

Provision for tax xxx

Chapter - 4 : Corporate Restructuring

2013 - Dec [1] (e)

The following are the distinguishing features pooling of interest method and purchase

method of accounting for amalgamations:

Pooling of Interest Method Purchase Method

(i) This method is applicable for

amalgamations which are in the

nature of merger.

This method is applicable for

amalgamations which are in the nature of

purchase.


(ii) Assets, liabilities, reserves and

profit and loss account of the

transferor company are all

incorporated through journal in the

financial statements of transferee

company. Hence, there is a

wholesome and total aggregation

of financial figures.

There is only a partial aggregation, as

only assets and liabilities are combined

with that of assets and liabilities of the

transferee company. Reserves and profit

and loss account are not incorporated.

Hence, there is partial aggregation of

financial figures.

(iii) No goodwill or capital reserve

account is to come about as a

result of difference between the

consideration paid and the net

assets taken over by the

transferee company. The

difference is to be adjusted in

general reserve or other reserves.

The difference of consideration paid and

the net assets taken over by the

transferee company is either goodwill or

capital reserve.

(iv) No account called amalgamation

adjustment account is to be

brought into books, as all the

reserves are taken into the books

of the transferee company.

The transferee company has to carry

forward any statutory reserve for legal

compliance by debiting amalgamation

adjustment account and crediting

statutory reserve account. The

amalgamation adjustment account will be

shown on the assets side of balance

sheet of the transferee company under

the head Miscellaneous Expenditure.

2013 - Dec [2] (d)

Restructuring may be of the following type

(i) Financial restructuring which deals with the restructuring of capital base and

raising finance for new projects.

(ii) Technological restructuring which involves, inter alia, alliances with other

companies to exploit technological expertise.

(iii) Market restructuring which involves decisions with respect to the product market

segments, wher the company plans to operate based on its core competencies.

(iv) Organizational restructuring which involves establishing internal structures and

procedures for improving the capability of the personnel in the organization to

respond to changes.


2013 - Dec [3] (c)

Calculation of Purchase consideration as per Net Assets Method

Particulars Amount (`)

Assets

Fixed Assets (above 10%) 60,50,000

Investment 25,00,000

Current Assets 27,00,000

Total (A) 1,12,50,000

Liabilities

13% Debenture (at 10% Premium ) 27,50,000

Current Liabilities 15,00,000

Total (B) 42,50,000

Purchase consideration (A-B) 70,00,000

Chapter - 5 : Consolidation of Accounts

2013 - Dec [4] (b)

Consolidate Balance Sheet as on

31st December 2012

Shareholder’s Fund Notes to Amount (`)

Equity Share Capital

6,000 shares @ 10 each 60,000

Reserve & Surplus

General Reserve 12,000

Profit & Loss Account 3 40,000

Capital Reserve 1 12,400

Non Controlling Interest 2 17,600

Non Current Liabilities Nil


Current Liabilities

Trade Payable [10,000 + 8,000] 18,000

Total 1,60,000

Non Current Assets

Fixed Assets [44,000 + 60,000] 1,04,000

Investment [52,000 - 5,20,000] Nil

Current Assets [20,000 + 36,000] 56,000

Total 1,60,000

Note: 1 Note: 2

Cost of Control 4,000 shares 80% Non Controlling Interest 20%

Investment 52,000 Equity Share 10,000

Equity Share (40,000) Post Profit of Suby 7,600

Pre Profit of Suby (20,400)

ROD (4,000)

Capital Reserve 12,400 Total 17,600

Note: 3

Consolidated Profit & Loss Account

Opening 4,000

+ Profit for the Year 30,000

+ Post Profit of Suby 10,000

- ROD (4,000)

40,000


Working Note: 1

Analysis of Profit

Pre Post Total

G/R 10,000 – 10,000

P/L 8,000 20,000

18,000 20,000

Div. Paid – 5,000

18,000 25,000

T/A25,000 x

12,500 (12,500)

30,500 12500

Div. Paid (5,000) –

25,500 12,500

H.80 20,400 10,000

M.20 5,100 2,500

Chapter - 6 : Valuation of Shares and Intangible Assets

2013 - Dec [2A] (iii)

Super Profit Method: In this case the future maintainable profits of the firm are

compared with the normal profit for the firm. Normal earnings of a business can be

judged only in the light of normal rate of earning and capital employed in the business.

However, this method of valuing goodwill would require the following information:

(i) A normal rate of return for representative firms in the industry.

(ii) The fair value of capital employed.

(iii) Estimated future maintainable profit.

2013 - Dec [3] (b)

Normal profit of Real Ltd. ` 5,000

Less: Dividend of preference

Share (10,000 x 5%) = 500

Profit available to Equity share capital 4,500

Normal Rate of Return of Equity Share capital 8%


Normal value of Equity Share of 20,000 Share = 4,500

8%

= 56,250

Calculation of 5,000 Equity Share Capital = 56,250 x 5,000

20,000

= ` 14062.5

Chapter - 7 : Liquidation of Company

2013 - Dec [4] (a)

Z Limited (in Liquidation)

Liquidator’s final statement of A/c

Receipt Amount Payment Amount

Cash & Bank

Balance

3,00,000 Liquidation

expenses

1,09,000

Liquidator

Commission

(49,00,000 x 3%)

1,47,000

Amount Realize

Trade Receivable 8,00,000

Stock 6,00,000

Furniture & Fixture 3,00,000 Debentures holder:

Plant & Machinery 20,00,000 Principal 10,00,000

Land & Building 12,00,000 Interest (Note: 1) 2,25,000

Creditors (Note: 2) 12,75,000

Contributors

Call on equity

shareholder

30,000 x 2.65

(W. Note 3)

79.500 By Preference

Share

20,00,000

Arrears of dividend 4,00,000


Equity Shareholder

@ 12.35 on 10,000

shares (Note - 3)

1,23,500

52,79,500 52,79,500

Working Note: 1

Note: 1

Interest

C Out standing 1,50,000

C from 31.12.12 to 30.06.13 75,000

2,25,000

Note: 2

Amounts payable to Equity shareholder

C Equity share capital

(7,50,000 + 18,00,000) 25,50,000

C Less: Surplus available to Equity shareholding 44,000

C Loss: to be to born by Equity Share holders 25,06,000

C Loss: per Equity Share (2,50,600 ÷ 40,000) 62.65

Each Equity share of ` 75 paid up (75 - 62.65) 12.35

Calls from Equity share of ` 60 paid up (62.65 - 60) 2.65

Working Note: 2

Preferential 1,52,000

unsecured 11,23,000

12,75,000

Working Note: 3

Amount payable/Receivable from equity shareholders

Total equity capital (Paid up capital)

(7,50,000 + 18,00,000) 25,50,000

Less: Balance available after payment to crs, expenses

& preference share (52,00,000 - 51,56,000) (44,000)

Loss to be borne by 40,000 equity share 25,06,000

Loss per share (25,06,000 ÷ 40,000) = 62.65

Hence, amount of call on ` 60 paid share (62.65 - 60) = 2.65

Refund on ` 75 paid share (75.00 - 62.65) = 12.35


Chapter - 8 : Corporate Financial Reporting

2013 - Dec [1] (d)

Concept of Economic Value Added EVA : EVA is the surplus generated by an

organisation after meeting an equitable charge towards the providers of capital. It is

basically a benchmark to measure an organisation’s earning efficiency.

Shareholders must earn sufficient returns for the risk they have taken in investing their

money company’s capital. The return generated by the company for shareholders has

to be more than the cost of capital to justify risk taken by the shareholders. The excess

of returns over cost of capital is simply termed as Economic Value Added (EVA). EVA

measures whether the operating profit is sufficient enough to cover cost of capital. If a

company’s EVA is negative, the firm is destroying shareholders wealth even though it

may be reporting positive and growing EPS or Return on Capital employed. (ROCE)

Thus, EVA is just a way of measuring an operation’s real profitability. EVA holds a

company accountable for the cost of capital it uses to expand and operate its business

and shows whether a company is creating a real value for its shareholders or not.

Calculation of EVA

EVA is the measure of financial performance. It is the operating profit after tax less a

charge for the capital, equity as well as debt, which is used in business.

EVA can be calculated as follows :

EVA = NOPAT ! (TCE × WACC)

NOPAT = Net operating profit after tax

TCE = Total Capital Employed

WACC = Weighted average cost of capital

While calculation of NOPAT, the non-operating items like dividend, interest on securities

invested outside the business, non-operating expenses etc. are not considered. The

total capital employed is the sum of shareholders funds as well as loan funds and this

does not include investments outside the business.

In calculating WACC, cost of debt is taken as after tax cost of equity is measured on the

basis of Capital Asset Pricing Method (CAPM). CAPM is traditionally used by the

founders of EVA. Under CAPM. Cost of Equity (Ke) is given by the following :

Ke = Rf + b (Rm - Rf)

where f = Risk free return

Rm = Expected market rate of return

b = Risk coefficient of particular investment

It should be noted that EVA is expressed in terms of rupee figure and not as a

percentage i.e. EVA measures the absolute rupee value of wealth created.


Chapter - 9 : Accounting Standards

2013 - Dec [2] (e)

Objectives of the Accounting Standards Board:

(i) To conceive and suggest areas in which AS need to be developed.

(ii) To formulate AS with a view to assisting the council of the ICAI in evolving and

establishing As in india.

(iii) To examine how for the relevant International AS/IFRS can be adapted while

formulating the As and to adapt the same.

(iv) To review, at regular intervals the AS from the point of view of acceptance or

changed conditions and if necessary revise the same.

(v) To provide from time to time interpretations and guidance on AS.

(vi) To carry out such other functions relating to AS.

Part - B : Auditing Practices

Chapter - 10 : Auditing Concept

2013 - Dec [5] (a)

The auditor assesses the reliability and sufficiency of the information contained in the

underlying accounting records and other source data by:

(A) Making a study and evaluation of accounting systems and internal controls on

which he wishes to rely and testing those internal controls to determine the nature

extent and timing of other auditing procedures,

(B) Carrying out such other tests, enquiries and other verification procedures to

accounting transactions and account balances as he considers appropriate in the

particular circumstances.

The auditor determines whether the relevant information is property disclosed in

the financial statements:

(a) Comparing the financial statements with the underlying accounting records

and other source data to see whether they properly summarize the

transactions and events recorded therein,

(b) Considering the judgement that management has made in preparing the

financial statements accordingly the auditor assessees the selection and

consistent application of accounting policies, the manner in which the

information has been classified and the adequacy of disclosure.


2013 - Dec [6] (a)

Distinction between audit and Investigation is as follows:

1. Legal Binding: Audit of annual financial statement of a company is compulsory

under the companies Act, 1956. However, Investigation is not compulsory under

the companies Act 1956, but voluntary depending upon necessity.

2. Object in View: Audit is conducted to ascertain whether the financial statements

show a true and fair view. Investigation is conducted with a particular object in

view, viz to know financial position, earning capacity, prove fraud, invest capital,

etc.

3. Period Covered: Audit is conducted on annual basis. Investigation may be

conducted for several years, at a time say for three years.

4. Parties for whom conducted: Audit is conducted on behalf of shareholders (or

proprietor, or partners). Investigation is usually conducted on behalf of outsiders

like prospective buyers, investors, unders etc.

5. Documents: Audit is not carried out of audited financial statements. Investigation

may be conducted even though the accounts have been audited.

6. Extent of work: Audit is normally conducted on test verification basis. Investigation

is a thorough examination of Books of Accounts.

7. Report: Audit report of a company is addressed to shareholders (or propreitors or

partners). Investigation report is addressed to the party on whose instruction

investigation was conducted.

Chapter - 11 : Types of Company Audit

2013 - Dec [5] (b)

The provisions regarding qualification and disqualification of the statutory auditor of a

company are contained in section 226 of the companies Act, 1956.

Qualification of Statutory Auditor:

As per sec 226 of the company Act 1956, A practicing Chartered Accountant within the

meaning of the Chartered Accountant Act 1949 or a firm of practicing Chartered

Accountant where all the partners are practicing Chartered Accountant may be

appointed as the “Statutory Auditor” of the company.

Disqualification of statutory Auditor:

following persons shall not be qualified for appointment as auditor of a company:

(a) A body corporate;

(b) An officer or employee of the company;

(c) A person who is a partner, or who is in the employment, or an officer or employee

of the company;


(d) A person who is indebted to the company for an amount exceeding one thousand

rupees, or who has given any guarantee or provided any security in connection

with the indebtness of any third person to the company for an amount exceeding

one thousand rupees;

(e) A person holding any security of that company after a period of one year from the

date of commencement of the companies (Amendment) Act, 2000.

2013 - Dec [5] (c)

There are some difference between statutory Auditor and Internal Auditor. The details

are as given below:

1. Appointment: Internal Auditor is appointed by the management of the organisation

while the statutory Auditor is appointed by owners i.e shareholder for a company.

First statutory Auditors of a company are appointed by Board of Directors.

2. Qualification: Qualification of a statutory Auditor are prescribed in the companies

Act, 1956. In case of a company, a practicing Chartered Accountants or a firm of

practicing Chartered Accountants can only be appointed as a statutory auditor.

There are no fixed qualifications for the position of an internal auditor.

3. Objects: The main object of the Statutory audit is to form an opinion on the

financial statement of the organisation. Auditor has to state that whether the

financial statement are showing the true and fair view of the affairs of the

organisation or not. The main object of the internal audit is to detect and prevent

the errors and frauds.

4. Scope: The scope of the statutory audit is fixed by the companies Act, 1956. It

cannot be changed by mutual consent between the auditor and the management

of the audited business unit. The scope of the internal audit is fixed by the mutual

consent of the auditor and the management of the unit under audit.

5. Report: The statutory auditor submits his report to the shareholder of the company

in its general meeting. The internal auditor submits his report to the management

of the company who is also his appointing authority.

6. Removal: The procedure for the removal of the statutory auditor is very complex.

Only the company in the general meeting can remove the auditor. It also has to

take permission of the Central Government. The management of the entity can

easily remove internal auditor. No permission of Central Government is required.

2013 - Dec [6] (b)

Section 233 A of the Companies Act, 1956 deals with the matter relating to special

Audit. Special Audit can be ordered by Central Government if it is of the opinion:

(a) That the affairs of any company are not being managed in accordance with sound

business principles or prudent commercial practices; or


(b) That any company is being managed in a manner likely to cause serious injury or

damage to the interests of the trade industry or business to which it pertains’ or

(c) That the financial position of any company is such as to endanger its solvency; the

Central Government may at any time by order direct that a special audit of a

company’s accounts for such period or periods as may be specified in the order,

shall be conducted and may by the same or a different order appoint either a

Chartered Accountant as defened in clause (b) of sub section (1) of section 2 of

Chartered Accountants Act, 1949, or the company’s auditor himself to conduct

such special audit.

Chapter - 13 : Internal Control

2013 - Dec [6] (c)

There are two types of techniques used in internal control system. Preventive internal

control technique and Detective Control techniques.

Preventive control techniques are designed to discourage errors or irregulatorie from

occurring. They are proactive in nature that helps to insure departmental objectives are

being met. Examples of preventive control techniques are

(1) Segregation of Duties: Duties are segregated among different people to reduce

the risk of error or inappropriate action. Normally, responsibilities for authorizing

transactions (approval), recording transactions (accounting) and handling the

related assets (custody) are divided.

(2) Approvals, Authorisation And Verifications: Management authorizes

employees to perform certain activities and to execute certain transactions within

limited parameters. In addition, management specifies those activities or

transactions that need supervisory approval before they are performed or executed

by employees. A supervisory approval implies that he or she has verified and

validated that the activity or transaction conforms to established policies and

procedures.

(3) Security of Assets (Preventive and Detective): Access to equipment,

inventories, securities, cash and other assets is restricted; assets are periodically

counted and compared to amounts shown on control records.

2013 - Dec [6A] (iii)

Internal control is broadly defined as a process, effected by an entity’s board of

directors, management and other personnel, designed to provide reasonable assurance

regarding the achievement of objectives in the following categories:

1. Effectiveness and efficiency of operations

2. Reliability of financial reporting

3. Compliance with applicable Lows and Regulations


Internal control is different from internal audit as follows:

Internal Audit Internal Control

(1) Internal Auditing is on independent,

objective assurance and consulting

activity designed to add value and

improve an organisat ion’s

operations. It helps the organisation

accomplish its objectives by

bringing a systematic, disciplined

approach to evaluate and improve

the e f fec t iveness o f r i sk

management , contro l and

governance process.

(1) Internal control is the system of

control established by the

management in order to carry on

business in an orderly and efficient

manner, ensure adherence to

management policies, safeguard

assets and completeness of

records.

(2) Internal audit system is

comparatively a narrow concept.

(2) Internal control system is a broad

concept.

(3) Internal audit system is to be

implemented as per the suitability of

the organisation.

(3) Internal control system is necessary

for every organisation.

(4) Internal Audit is primarily a

backward looking activity.

(4) The primary objective of internal

control system is to prevent the

occurance of proud.

Chapter - 15 : Audit Engagement and Documentation

2013 - Dec [6A] (i)

Verification is made on the basis of vouching so verification is a part of vouching. Even

though they have some differences which are as follows:-

(1) Meaning:

Verification is the act of checking title, possession and valuation of assets but

vouching is the act of checking the records with the help of evidential documents.

(2) Nature:

Verification is specially related to the assets and liabilities but vouching is related

to all the accounting documents.

(3) Person:

Generally, assistant staff or auditor performs the work of vouching but auditor

himself perform the work of verification.

(4) Time:

Vouching is made at the Begining of auditing but verification is made at the end of

auditing or at the time of checking Balance Sheet.


2013 - Dec [6A] (ii)

General guidelines for the perparation of working papers are:

(1) Clarity and Understanding:

As a preparer of audit documentation, slip back and read your work of objectively.

Would it be clear to another auditor? Working papers should be clear and

understandable without supplementary oral explanations with the information the

working papers reveal, a reviewer should be able to readily determine their

purpose, the nature and scope of the work done and the preparer’s conclusion.

(2) Completeness and Accuracy:

As a reviewer of documentation, if you have to ask the audit staff basic questions

about the audit, the documentation probably does not really serve the purpose.

Work papers should be complete, accurate and support observations, listing,

conclusions, and recommendations. They should also show the nature and scope

of work performed.

(3) Pertinence:

Limit the information in working papers to matters that are important and necessary

to support the objectives and scope established for the assignment.

(4) Logical Arrangement:

File the working papers in a logical order.

(5) Legibility and Neatness:

Be neat in your work. Working papers should be legible and as neat as practical.

Sloppy work papers may loss their worth as evidence.

Crowding and writing between lines should be avoided by anticipating space needs

and arranging the work papers before writing.

(6) Safety:

Keep your work papers safe and retrievable.

(7) Initial and Date:

Put your initials and date on every working paper.

(8) Summary of Conclusions:

Summarize the results of work performed and identify the overall significance of

any weakness or exceptions found.

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