small company audit

8/10/2019 small company audit

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1.1 INTRODUCTION

Economic decisions in every society must be based upon the information

available at the time the decision is made. For example, the decision of a bank to make

a loan to a business is based upon previous financial relationships with that business,

the financial condition of the company as reflected by its financial statements and

other factors.

If decisions are to be consistent with the intention of the decision makers, the

information used in the decision process must be reliable. Unreliable information can

cause inefficient use of resources to the detriment of the society and to the decision

makers themselves. In the lending decision example, assume that the barfly makes the

loan on the basis of misleading financial statements and the borrower Company is

ultimately unable to repay. As a result the bank has lost both the principal and the

interest. In addition, another company that could have used the funds effectively was

deprived of the money.

As society become more complex, there is an increased likelihood that unreliable

information will be provided to decision makers. There are several reasons for this:

remoteness of information, voluminous data and the existence of complex exchange

transactions

As a means of overcoming the problem of unreliable information, the decision-

maker must develop a method of assuring him that the information is sufficientlyreliable for these decisions. In doing this he must weigh the cost of obtaining more

reliable information against the expected benefits.

A common way to obtain such reliable information is to have some type of

verification (audit) performed by independent persons. The audited information is

then used in the decision making process on the assumption that it is reasonably

complete, accurate and unbiased.

CHAPTER 1 - INTRODUCTION OF AUDIT


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1.2 MEANING OF AUDITING

The word audit is derived from the Latin word audire which means to hear. It is

an important tool of management. It is concerned with making an analytical and

critical analysis of the books of accounts, checking and verification of evidence in

support of entries appearing in the books of accounts, and ascertaining the authenticity

of the financial statements. It is also concerned with the examination of accounting

data to determine the extent of an audit examination is too made on the basis of

evidential document such as invoice, money receipts and other records by the

authorized representative of the client. Auditor has used to send for the accountants

and hear whatever they had to say in connection with the accounts. The auditor has tolook into the facts behind figures and he must certify their accuracy. Auditing is to

ascertain the balance sheet and profit and loss account that they show a true and fair

view of the financial state of affairs of a concern. The Institute of Charted

Accountants of India has issued a number of statements of standard auditing practices

and accounting standards for guidance of Auditor of India

1.3 ORIGIN AND EVOLUTION

The term audit is derived from the Latin term 'audire,' which means to hear. In

early days an auditor used to listen to the accounts read over by an accountant in order

to check them

Auditing is as old as accounting. It was in use in all ancient countries such as

Mesopotamia, Greece, Egypt. Rome, U.K. and India. The Vedas contain reference to

accounts and auditing. Arthasashthra by Kautilya detailed rules for accounting and

auditing of public finances.

The original objective of auditing was to detect and prevent errors and frauds

Auditing evolved and grew rapidly after the industrial revolution in the 18th

century With the growth of the joint stock companies the ownership and management

became separate. The shareholders who were the owners needed a report from an

independent expert on the accounts of the company managed by the board of directors


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who were the employees.

The objective of audit shifted and audit was expected to ascertain whether the

accounts were true and fair rather than detection of errors and frauds.

In India the companies Act 1913 made audit of company accounts compulsory

With the increase in the size of the companies and the volume of transactions

the main objective of audit shifted to ascertaining whether the accounts were true and

fair rather than true and correct. Hence the emphasis was not on arithmetical accuracy

but on a fair representation of the financial efforts

The companies Act. 1913 also prescribed for the first time the qualification of

auditors

The International Accounting Standards Committee and the Accounting

Standard board of the Institute of Chartered Accountants of India have developed

standard accounting and auditing practices to guide the. accountants and auditors in

the day to day work

The later developments in auditing pertain to the use of computers in

accounting and auditing.

In conclusion it can be said that auditing has come a long way from hearing of

accounts to taking the help of computers to examine computerised accounts

1.4 DEFINITION

The term auditing has been defined by different authorities.

1. Spicer and Pegler:"Auditing is such an examination of books of accounts and

vouchers of business, as will enable the auditors to satisfy himself that the

balance sheet is properly drawn up, so as to give a true and fair view of the

state of affairs of the business and that the profit and loss account gives true

and fair view of the profit/loss for the financial period, according to the best of

information and explanation given to him and as shown by the books; and if

not, in what respect he is not satisfied."


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2. Prof. L.R.Dicksee. "Auditing is an examination of accounting records

undertaken with a view to establish whether they correctly and completely

reflect the transactions to which they relate.

3.

The book "an introduction to Indian Government accounts and audit"

"issued by the Comptroller and Auditor General of India, defines audit "an

instrument of financial control. It acts as a safeguard on behalf of the proprietor

(whether an individual or group of persons) against extravagance, carelessness

or fraud on the part of the proprietor's agents or servants in the realization and

utilization of the money or other assets and it ensures on the proprietor's behalf

that the accounts maintained truly represent facts and that the expenditure has

been incurred with due regularity and propriety. The agency employed for this

purpose is called an auditor."


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2.1 IMPORTANCE OF AUDITING

For Business

1. Errors are Located

Auditing is helpful for business. The error can be located through it. The location

and correction of error is possible through auditing. The true and fair information

about business is available.

2. Frauds are Discovered

Auditing is helpful for business. The discovery of fraud is possible through it. The

guilty persons can be held responsible. The auditing accounts show fair about

business.

3. Loans Become Easy

Auditing is useful for business. Lenders for granting loans accept the auditors

accounts. The reputation of borrowers increases due to auditing. Thus auditing

accounts help the businessman to expand his activities.

4. Advise about Weakness

Auditing is useful for business. The people can seek advise from auditors. The

auditors are professional and they know their work very well. They can spotlight

the grey area. It is the duty of the business man to act upon the advise of the

auditors.

5.

High Moral Values

Auditing is essential for business. There is moral check on the management and

other staff. Auditing puts the pressure on the staff of work honestly. There is no

pending work so there is less chance of errors and frauds.

CHAPTER 2 - IMPORTANCE, ADVANTAGES,

DISADVANTAGES AND LIMITATIONS OF AUDIT


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6. Tax Payments

Auditing is useful for business, tax authority accept audited accounts for

assessment of taxes. There is no further inquiry or investigation from department.

The audited accounts lessen the worries of business people.

For Owners

7.

Efficiency Improves

Auditing is beneficial for business. The auditing determines the efficiency of

employees. The training and qualifies management is an asset for any business.

Such management can play dynamic role in framing and implementing the

policies.

8. Dispute is Settled

Auditing is essential for business. The audited accounts are helpful to settle the

disputes. The audited accounts become the basis of making decisions. The dispute

may relate to infringement of patents or trademarks.

9. Planning Becomes Possible

Auditing is helpful for business. The audits accounts present true and fair view of

business activities. The facts and figures can be used to prepare budge and

estimates for the next years. The projected cash receipts and payments, income

statement and balance sheet can be prepared.

10. Improvement of Internal Control

Auditing is helpful for business. The auditor can point out the weakness of internal

control system. The business management can take steps to remove these

weaknesses. The effective control systems are essential for large-scale business

enterprises.

11. Fluctuation in Profits


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Auditing is helpful for business. The auditor can make the detailed study to find of

fluctuation in profits. There are various reasons for changes in profits. The auditor

can determine the true cause of such changes.

12. High Credit Rating

The auditing is beneficial for business. The auditing accounts increase the credit

standing of any business house. The lenders can rely on audited accounts for

granting credit facility. In fact auditing is a screening test of business entity.

13. Listing at Stock Exchange

The auditing is beneficial for business. The listing of securities at stock exchange

is optional. The public limited companies can get registration at stock exchange.

Stock exchange management for registration purpose accepts the audited accounts.

14. Shareholders Protection

Auditing is beneficial for owners. The shareholders feel that their rights are

protected through auditing. They can know the performance of management.

Audited accounts help to determine the value of shares.

15. Partner Satisfaction

Auditing is helpful for partners. The sleeping partner feels satisfaction when there

are audited. The managing partners can use business property for their personal

benefit. There is moral check on managing partners.

16. Proprietors

Auditing is useful for proprietors. The audited accounts help the sole traders that

their business is going on properly. The error and fraud are pointed out auditors.

The owners can determine the efficiency of their employees or assistants.

17. Beneficiary

Auditing is valuable for beneficiaries. The auditor of a trust can nominate any

person as trustee to look after the property of a trust. Auditing can safeguard the


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right of beneficiaries. There is a moral check on the trustee to follow the by laws

of trust.

18. Deceased Estate

The auditing is helpful for dependents of decreased person. The audited accounts

presents true and fair view of financial statements. The family can rely on audited

accounts for distributing the estate of deceased person.

19. Insolvency

The auditing is beneficial for creditors. The audited accounts show true and fair

view of state of affairs of sole proprietorship or partnership. The creditor can get

their money first and then owners can get refund of capital. The audited accounts

help to settle the cases at an early date. For Government

20. Better Performance of Tax Department

Auditing is beneficial for government. Tax officers accept the audited accounts.The assessment order can be issued without further clarification. There is saving of

money and time due to audited accounts. The performance of tax officers is

improved.

21. Exact Revenue Amount

Auditing is beneficial for government. The collection of revenue is possible at an

early date. The people are allowed to deposit various kinds of taxes. The recoveryof income is made at the start of the year. The government can start welfare project

on the basis of total revenue collected.

22. Progress of Economy

Auditing is essential for government policies. The true fair view is stated in

audited accounts. The stage of economic progress can be determined. The

government can take measures to raise the rate of economic growth.


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23. Purchase of Private Business

Auditing is helpful for government. The private business houses may not work in

favour of general public. The government can take over such business units. The

purchase price is decided on the basis of auditing of accounts.

24. Sale of Government Business

Auditing is useful for government. The policy can be framed on the basis of

audition accounts. The management comes to know the value of business. The

government can sell stateowned unit to private sector. The bid price is settled on

audited accounts.

25. Inspectors

The auditing is helpful for government. The auditing accounts show the fair value

of all assets. The value of assets. The value of assets is the basis of tax. This issue

can be settle through audited accounts. The auditors are experts in their field. They

know all methods of property valuation. They can issue certified the government

agencies for valuation of property. For General Public

26. Insurers can Settle Claims

Auditing is essential for insurers. The settlement of fire or marine insurance claims

is easy through audited accounts. The policy holders and insurance company can

settle actual loss of property.

27. No Loss to Lenders

Auditing is essential for lenders. The banks and other lenders ask the borrowers to

submit audited accounts before granting loans. The audited accounts are helpful to

check the trust worthiness of customers.

28. Creditor are Protected

Auditing is essential for creditors. They can know the true performance of their

debtors. The creditor can accept this promise only when he feels that debtor is

reliable businessman. Auditor accounts provide basic information about reliability.


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29. Bidders Can Offer High Rate

Auditing is helpful for bidders. Audited accounts provide information about net

worth of any business. The people interested in purchasing the business can rely on

such information. They know the fair value of business. They can offer reasonable

price through open bidding.

2.2 ADVANTAGES OF AUDIT

A. Businessman's point of

view

B. Investor's point of view C. Other Advantages.

1 Detect on of errors and 1 . Protects interest 1. Evaluate financial status

2 Loan from banks 2.Moral check 2.Usting of shares

3 Builds reputation 3. Proper valuation of

investments

3. Settlements of claims

4 Proper valuation of assets 4 Good security 4 Evidence in court

5. Government acceptance 5. Settlement of accounts

6. Update accounts 5. FaciStates calculation o

Purchase. Consternation.

7 Suggestions for

improvement

7 Facilitates taxation

8. Useful for agency

1. Audited accounts are readily accepted by Government authorities like Tax authorities

and Central banks.

2. By auditing the accounts Errors and frauds can be detected and rectified in time.


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3. Audited accounts carry greater authority than the accounts which have not been

audited.

4.

For accessing finance from financial institutions like Banks, previous years audited

accounts are evaluated for determining repayment capability.

5. Regular audit of account create fear among the employees in the accounts department

and exercise a great moral influence on clients staff thereby restraining them from

commit frauds and errors.

6. Audited accounts facilitate settlement of claims on the retirement/death of a partner.

7. In the event of loss of property by fire or on happening of the event insured against,

Audited accounts help in the early settlement of claims from the insurance company.

8. In case of Public Company where ownership is separated from management, auditing

of accounts reassure the shareholders that accounts have been properly maintained,

funds are utilized for the right purpose and the management have not taken any undue

advantage of their position.

9.

To determine the value of the business in the event of purchase or sales of the

business, audited account will be the treated as the base for the evaluation.

10.The audit of accounts by a qualified auditor also help the management to understand

the financial position of the business and also it will help the management to take

decision on various matters like report in internal control system of the organization

or setting up of an internal audit department etc.

11.

If the accounts have been audited by an independent person, disputes between the

management and labor unions on payment of bonus and higher wages can be settled

amicably.

12.

In the event of admission of a new partner, audited accounts will facilitate the

formation of terms and conditions for joining the new partner. Last 3 years audited

accounts will give a general idea about the growth and financial position of the

business to the new partner.

2.3 DISADVANTAGES OF AUDIT

It is true that auditing as many advantages, but it as some limitations as such

1. Non-detection of errors/frauds: -Auditor may not be able to detect certain frauds

which are committed with malafide intentions.


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2. Dependence on explanation by others:- Auditor has to depend on the explanation

and information given by the responsible officers of the company. Audit report is

affected adversely if the explanation and information prove to be false.

3. Dependence on opinions of others: -Auditor has to rely on the views or opinions

given by different experts viz Lawyers, Solicitors, Engineers, Architects etc. he can

not be an expert in all the fields

4. Conflict with others: - Auditor may have differences of opinion with the

accountants, management, engineers etc. In such a case personal judgment plays an

important role. It differs from person to person.

5. Effect of inflation: - Financial statements may not disclose true picture even after

audit due to inflationary trends.

6. Corrupt practices to influence the auditors: - The management may use corrupt

practices to influence the auditors and get a favorable report about the state of affairs

of the organization.

7. No assurance: - Auditor cannot give any assurance about future profitability and

prospects of the company.

8. Inherent limitations of the financial statements: - Financial statements do not

reflect current values of the assets and liabilities. Many items are based on personal

judgment of the owners. Certain non-monetary facts can not be measured. Audited

statements due to these limitations can not exhibit true position.

9. Auditing is a postmortem examination: auditing work begins where accounting

ends then the auditor is fully depends upon the accounting transaction provided by the

accountant in the throughout the year. So auditing work is not suitable for the current

position of the business. But it is useful to the future business situation.

10.Detailed checking not possible: - Auditor cannot check each and every transaction.

He may be required to do test checking.

2.4 LIMITATIONS OF AUDITING

1. All transactions cannot be checkedIt is not possible for an auditor to check each

and every transaction; he has to check them on sample basis.

2. Evidence is not conclusive Audit evidence is not conclusive in nature the

confirmation of debtors is not conclusive evidence that all amount will be collected,

the conclusions are persuasive rather than conclusive.


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3. Not easy to detect some fraudsIts not easy for an auditor to detect the deeply laid

frauds which involves acts designed to conceal them such as forgery, false

explanation, and not recording transaction and so on.

4.

Audit cannot assure about profitability or efficiency of management Even

though the accounts are audited it doesnt that the user can take granted the future

profitability or prospects of concern as audit dont comment on efficiency of the

management.

5. Rely on expertsThe auditor has to rely on experts like lawyers, engineers, valuers

etc. for estimation of contingent liability and valuation of fixed assets.

3.1 THE IMPORTANCE OF AN AUDIT SYSTEM TO COMPANIES

Auditing is a means of evaluating the effectiveness of a company's internal controls.

Maintaining an effective system of internal controls is vital for achieving a company's

business objectives, obtaining reliable financial reporting on its operations, preventing

fraud and misappropriation of its assets, and minimizing its cost of capital. Both

internal and independent auditors contribute to a company's audit system in different

but important ways.

Business Objectives

Having an effective audit system is important for a company because it enables it to

pursue and attain its various corporate objectives. Business processes need various

forms of internal control to facilitate supervision and monitoring, prevent and detect

irregular transactions, measure ongoing performance, maintain adequate business

records and to promote operational productivity. Internal auditors review the design of

the internal controls and informally propose improvements, and document any

material irregularities to enable further investigation by management if it is warranted

under the circumstances.

Risk of Misstatement

CHAPTER 3 - THE IMPORTANCE OF AN AUDIT SYSTEM

TO COMPANIES AND ACCOUNTING STANDARDS


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Auditors assess the risk of material misstatement in a company's financial reports.

Without a system of internal controls or an audit system, a company would not be able

to create reliable financial reports for internal or external purposes. Thus, it would not

be able to determine how to allocate its resources and would be unable to know which

of its segments or product lines are profitable and which are not. Additionally, it could

not manage its affairs, as it would not have the ability to tell the status of its assets and

liabilities and would be rendered undependable in the marketplace due to its inability

to consistently produce its goods and services in a reliable fashion. Accordingly, an

audit system is crucial in preventing debilitating misstatements in a company's records

and reports.

Fraud Prevention

Internal audit serves an important role for companies in fraud prevention. Recurring

analysis of a company's operations and maintaining rigorous systems of internal

controls can prevent and detect various forms of fraud and other accounting

irregularities. Audit professionals assist in the design and modification of internal

control systems the purpose of which includes, among other things, fraud prevention.

An important part of prevention can be deterrence, and if a company is known to have

an active and diligent audit system in place, by reputation alone it may prevent an

employee or vendor from attempting a scheme to defraud the company.

Cost of Capital

The cost of capital is important for every company, regardless of its size. Cost of

capital is largely comprised of the risk associated with an investment, and if an

investment has more risk, an investor will require a higher rate of return to invest.

Strong audit systems can reduce various forms of risk in an enterprise, including its

information risk (the risk of material misstatement in financial reporting), the risk of

fraud and misappropriation of assets, as well the risk of suboptimal management due

to insufficient information on its operations.

3.2 ACCOUNTING RECORDS AND FINANCIAL STATEMENT

MAINTAINED BY THE COMPANY


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Good record keeping is an important part of monitoring business performance. It also

makes it easier for small business owners to meet their taxation obligations.

Appropriate and up-to-date financial records provide the necessary information for

managing the business efficiently and making sound business decisions.

To help you maintain your daily financial records, you should consider:

Setting up either a manual or electronic record keeping system that suits your

needs,

Recording your business transactions accurately and promptly, How to keep

daily financial records

Preparing a summary account (including income and expenditure) at the end of

each month.

Maintaining good financial records starts with a good system and well-organized

business records. The system can be a simple one and does not need to be

complicated.

Disclosure of Accounting Policies

To ensure proper understanding of financial statements, it is necessary that all

significant accounting policies adopted in the preparation and presentation of

financial statements should be disclosed.

Such disclosure should formpart of the financial statements.

It would be helpful to the reader of financial statements if they are all

disclosed as such in one place instead of being scattered over several

statements, schedules and notes.

Examples of matters in respect of which disclosure of accounting policies

adopted will be required are contained in paragraph 14. This list of examples is

not, however, intended to be exhaustive.

Any change in an accounting policy which has a material effect should be

disclosed. The amount by which any item in the financial statements is

affected by such change should also be disclosed to the extent ascertainable.


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Where such amount is not ascertainable, wholly or in part, the fact should be

indicated. If a change is made in the accounting policies which has no material

effect on the financial statements for the current period but which is

reasonably expected to have a material effect in later periods, the fact of such

change should be appropriately disclosed in the period in which the change is

adopted.

Disclosure of accounting policies or of changes therein cannot remedy a wrong

or inappropriate treatment of the item in the accounts.

Main Principles

All significant accounting policies adopted in the preparation and presentation

of financial statements should be disclosed.

The disclosure of the significant accounting policies as such should form part

of the financial statements and the significant accounting policies should

normally be disclosed in one place.

Any change in the accounting policies which has a material effecting the

current period or which is reasonably expected to have a material effect in later

periods should be disclosed. In the case of a change in accounting policies

which has a material effect in the current period, the amount by which any

item in the financial statements is affected by such change should also be

disclosed to the extent ascertainable. Where such amount is not ascertainable,

wholly or in part, the fact should be indicated.

If the fundamental accounting assumptions, viz. Going Concern, Consistency

and Accrual are followed in financial statements, specific disclosure is not

required. If a fundamental accounting assumption is not followed, the fact

should be disclosed.

3.3 MEANING AND DEFINE OF AUDIT REPORT AND AUDIT

CERTIFICATE


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Audit Report

An auditor, under Section 227 (2) of the Companies Act, 1956, is required to make a

report to the shareholders of the company whether the books of accounts examined by

him exhibit true and fair view of the state of affairs of the business.

The auditor submits his report to his client giving clear and concise information of the

result of audit performed by him. The fact or information contained in the auditor's

report is not available from any other source.

The statutory auditor of a company has to express his professional opinion about the

truth and fairness of the state of affairs of the company as shown by the Balance Sheet

and of the profit or loss as shown by the Profit and Loss Account in addition to other

information in his report.

Audit Certificate - Definition

The general purpose of an audit certificate is to give to the Commission reasonable

assurance that eligible costs (and, if relevant, the receipts) charged under the project

are calculated and claimed by the contractors in accordance with the relevant legal and

financial provisions of the FP6 legal texts, including contractual provisions.

When an auditor certifies a financial statement, it implies that the contents of the

statement are reliable as the auditor has vouched for the exactness of the data. The

term certificate is, therefore, used to mean confirmation of the truth and correctness

of something after a verification of certain exact facts. An auditor may therefore

certify the circulating figures of a newspaper or the value of imports and exports of a

company.

The term certificate should not be confused with the term report'. While a cert ificate

affirms the truth and correctness of a fact, figure or a statement, a report is generally a

statement of facts or an expression of opinion regarding the truth and fairness of the

facts, figures and statements.

Difference between Audit Report & Audit Certificate


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1. A report means simply an expression of opinions Whereas a Certificate means that

the person issuing or signing the certificate vouchsafes the truth of the statement made

by him

2. The Auditor Report is based on facts, estimates and assumptions whereas Auditor's

Certificate is based on actual facts

3. Auditor Report is not a guarantee of the absolute correctness & accuracy of the

books of accounts. But the auditor certificate serves as a guarantee of the absolute

correctness & accuracy of the books of accounts

4. If the Auditor Report is later on found to be wrong, he cannot be held responsible

since he has given merely his opinion on the state of affairs of the company. But if the

duly signed certificate is found as wrong, he will be held responsible.

3.4 TYPE OF AUDIT REPORT

An audit report is an appraisal of a small businesss complete financial status.

Completed by an independent accounting professional, this document covers a

companys assets and liabilities, and presents the auditors educated assessment of the

firms financial position and future. Audit reports are required by law if a company is

publicly traded or in an industry regulated by the Securities and Exchange

Commission (SEC). Companies seeking funding, as well as those looking to improve

internal controls, also find this information valuable. There are four types of audit

reports.

1. Unqualified Opinion

Often called a clean opinion, an unqualified opinion is an audit report that is issued

when an auditor determines that each of the financial records provided by the small

business is free of any misrepresentations. In addition, an unqualified opinion

indicates that the financial records have been maintained in accordance with the

standards known as Generally Accepted Accounting Principles (GAAP). This is the

best type of report a business can receive.


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Typically, an unqualified report consists of a title that includes the word

independent. This is done to illustrate that it was prepared by an unbiased third

party. The title is followed by the main body. Made up of three paragraphs, the main

body highlights the responsibilities of the auditor, the purpose of the audit and the

auditors findings. The auditor signs and dates the document, including his address.

2. Qualified Opinion

In situations when a companys financial records have not been maintained in

accordance with GAAP but no misrepresentations are identified, an auditor will issue

a qualified opinion. The writing of a qualified opinion is extremely similar to that of

an unqualified opinion. A qualified opinion, however, will include an additionalparagraph that highlights the reason why the audit report is not unqualified.

3. Adverse Opinion

The worst type of financial report that can be issued to a business is an adverse

opinion. This indicates that the firms financial records do not conform to GAAP. In

addition, the financial records provided by the business have been grossly

misrepresented. Although this may occur by error, it is often an indication of fraud.

When this type of report is issued, a company must correct its financial statement and

have it re-audited, as investors, lenders and other requesting parties will generally not

accept it.

4. Disclaimer of Opinion

On some occasions, an auditor is unable to complete an accurate audit report. This

may occur for a variety of reasons, such as an absence of appropriate financial

records. When this happens, the auditor issues a disclaimer of opinion, stating that an

opinion of the firms financial status could not be determined.

3.5 ESSENTIALS OF GOOD AUDIT REPORT

The essentials of good audit report are as follows:


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1. Title

An auditor report must have appropriate title, such as Auditors Report. It is helpful

for the reader to identify the auditors report. It is easy to distinguish it from other

reports. The management can issue any report about the business performance. The

title o the report is essential.

2. Addressee

The addressee may be shareholder or board of director of a company. The auditor can

audit financial statements of any business unit as per agreement. The report should be

appropriately addressed as required by engagement letter and legal requirements. The

report is usually addresses to the shareholders or the board of directors.

3. Identification

The audit report should identify the financial statement that have audited. The

financial statement may include trading profit and loss accounts, balance sheet and

statement of changes in financial position and sources and application of frauds

statement. The report should include the name of the entity. Moreover the data and

period covered by the financial statement are also stated in it.

4. Reference to Auditing Standards

The audit report should indicate the auditing standard or practice followed in

conducting the audit. The international auditing guidelines need assurance that the

audit has been conducted as per set standards.

5. Opinion

The auditors report should clearly state the auditors opinion on the presentation in

the financial statement of the entitys financial position and the result of its operations.

The statement give a true and fair view is an auditors opinion. This opinion is usually

based on national standard or international accounting standards.

6. Signature


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The audit report should be signed in the name of the audit firm, the personal name of

the auditor or both as appropriate.

7. Auditors Address

The address of auditor is stated in the audit report. The name of city is stated in the

report for information of the readers.

8. Date of Report

The report should be dated. It informs the reader that the auditor considered the effect

on the financial statements and in his report of events or transactions about which he

become aware the occurred up to that date.

Qualified audit reports

It is necessary to firstly identify the circumstances which can give rise to a

qualification.

These are as follows:

Uncertainty arising from either a limitation upon the scope of the auditors work or an

inability to obtain any evidence regarding doubts which exist in relation to an

unresolved matter.

Disagreements arising from factual discrepancies, unsuitable accounting policies,

inadequate or misleading disclosures given in the financial statements or failure to

comply with an accounting standard or legislation. Some of these types of

disagreement should be resolved fairly easily with the client so that a qualification can

be avoided, for example a factual disagreement should lead to the financial statements

being amended to reflect the correct view. Other types of disagreement which are

perhaps more subjective will be much more difficult to resolve such as those relating

to the suitability of an accounting policy.

Secondly, it is necessary to decide upon the effect of the circumstances discussedabove.


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These are classified as:

Those having a material but not fundamental effect upon the financial

statements

Those having a fundamental effect upon the financial statements.

Fundamental means that the matter is such as to seriously distort or undermine the

view which is given by the financial statements to the extent that they could mislead

user groups.

An except for qualification will be given when the matter is a material but not

fundamental uncertainty or disagreement. An example of an uncertainty could be the

destruction of a part of the clients accounting records leading to a limitation of scope

being imposed upon the auditors work because audit evidence is then unavailable. An

example of a disagreement under this heading could be a failure by a client to apply a

reasonable depreciation policy to a particular class of fixed assets, however in both of

these examples the effect is not pervasive to the view which the financial statements

give as a whole.

3.6 GENERALLY ACCEPTED AUDITING STANDARDS

The generally accepted auditing standards (GAAS) are the standards you use for

auditing private companies. GAAS come in three categories: general standards,

standards of fieldwork, and standards of reporting.

Keep in mind that the GAAS are the minimum standards you use for auditing private

companies. Additionally, the Public Company Accounting Oversight Board (PCAOB)

has adopted these standards for public (traded on the open market) companies. Each

audit engagement you work on may require you to perform audit work beyond whats

specified in the GAAS in order to appropriately issue an opinion that a set of financial

statements is fairly presented. You need to use professional judgment and exercise due

care in following all standards.

General standards: The first three GAAS are general standards that address your

qualifications to be an auditor and the minimum standards for your work product:


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As an auditor, you must have both adequate training and proficiency.

You are independent in both fact and appearance.

You exercise due professional care in performing your auditing tasks.

Standards of fieldwork: The next three GAAS govern how you actually do your job:

Your work is adequately planned, and all assistants are properly supervised.

You gain an understanding of the client and its environment, including internal

controls, to assess the risk of material misstatement in the financial statements

and to plan your audit.

The evidence you gather during the audit is appropriate and sufficient to

evaluate managements assertions on the financial statements.

Standards of reporting: The last four GAAS concern information you must consider

prior to issuing your audit report:

You have to state whether the financial statements are prepared using

generally accepted accounting principles (GAAP).

Just as important is to report whether GAAP are consistently applied for all

financial accounting. Should this not be the case, you have to report any

departures.

You also have to make sure that disclosuresany additional information

needed to explain the numbers on the financial statementsare provided.

Lastly, you have to include your opinion as to whether the financial statements present

fairly in all material respects the financial position of the company under audit.

3.7 ACCOUNTING STANDARDS (CURRENTLY APPLICABLE AND USED

IN COMPANY OR NOT)

Accounting Standards Y/N

AS 1 Disclosure of Accounting Policies Y

AS 2 Valuation of Inventories Y

AS 4 Contingencies and Events Occurring After the Balance Sheet Date Y


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AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in

Accounting Policies

Y

AS 6 Depreciation Accounting Y

AS 9 Revenue Recognition Y

AS 10 Accounting for Fixed Assets Y

AS 13 Accounting for Investments Y

AS 14 Accounting for Amalgamations Y

AS 15 Employee Benefits Y

AS 16 Borrowing Costs Y

AS 18 Related Party Disclosures Y

AS 20 Earnings Per Share Y

AS 22 Accounting for Taxes on Income Y

AS 26 Intangible Assets Y

AS-1DISCLOSURE OF ACCOUNTING POLICIES

Any change and financial impact of such change should be disclosed.

If fundamental assumptions (going concern, consistency and accrual) are not

followed, the fact to be disclosed. Going concern assumption is assessed for a

foreseeable period of one year Accounting Policies adopted by the enterprise should represent true and fair

view of the state of affairs of the financial statements

Major considerations governing selection and application of accounting

policies are: i) Prudence, ii) Substance over form and iii) Materiality.

AS-2VALUATION OF INVENTORIES

The cost of inventories should comprise all costs of purchase, costs of conversion andother costs incurred in bringing the inventories to their present location and condition.


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Corporate Identification Number U31400MH1987PTC042128

NameTIRTHAROOP ELECTRICALS PVT

LTD

RoC RoC-Mumbai

Registration Number 42128

Company Category Company limited by shares

Company Sub Category Indian Non-Government Company

Class of Company Private Company

Authorised Capital (in Rs.) 500,000

Paid up capital (in Rs.) 451,200

Number of Members(Applicable only in case

of company without Share Capital)

-

Date of Incorporation 07 January 1987

Address 17, YASHODEEP APARTMENT, 1356-B,

SHIVAJI ROAD,

Address 2 PANVEL, DIST - RAIGAD

City PANVEL

State Maharashtra

Country INDIA

Pin 410206

Whether listed or not Unlisted

Company Status (for eFiling) Active

4.3 BACKGROUND OF KEY MANAGEMENT PERSONNEL

Being the Second Generation entrepreneur; Mr. Sachin Subhash Gokhale (Director)

son of Mr. Subhas Gokhale, aged 33 years holds a bachelor degree of Commerce and

Diploma in Electrical Engineering from DIESE, Pune. He is qualified Engineer with

more than 10 years of qualitative experience. He has proven track record of

undertaking valued engineering initiatives, establishing new set-ups, streamlining

operations, evolving cost reduction mechanism, producing engineering techniques and

creating a team work environment to enhance productivity with new initiatives and

innovations within the organizations. He is a dynamic young and enterprising youth


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with effective communication skills with great presentation skills. He has the ability to

convert adverse business environment to a favorable business affair.

Mr. Vinay Dattatraya Bhave designated as (HeadSales) aged 49 years,

residing at Flat 201, Kanak Residency, Plot No. 54, MCHS, Near Purohit Hospital,

Old Panvel, Dist. Raigad, Maharashtra-410206. He is a BTech.(Elec.) and holds

Diploma in Electrical Engineering from C.W.I.T., Pune . He is a qualified Engineer

with more than 25 years of qualitative experience in industries like Orkay Polyester,

Hikal etc. Expert at planning and effecting preventive maintenance schedules of

various machineries to increase machine up time and equipment reliability. He is

related to various Social service organizations and is a Founder committee member of

Friends of children organization, a NGO working for poor students. A Member of

Managing Committee of Pen taluka Maternity & Children Welfare Center, a

Charitable Hospital providing Medical Assistance to Poor & Needy people. He is one

of the Founder Managing committee Member of Sobatee a NGO working for

Betterment, Awareness, Education, Environment, Medical Assistance etc for more

than 6 years. He is highly influential with regards to his contacts relating social

welfare cause.

Mr. Vinit Vinayak Joshi designated as (Head - Admin & Logistic) aged 33

years is a resident of At & PostPalaspe, Tal.Panvel, Dist.Raigad Maharashtra-

410206. He holds a Master of Commerce degree and is Finance Management

graduate. He is a well known academician with more than 10 years of qualitative

experience of in guiding and training finance & accounts students. An expert team

builder and player, has an experience in different areas such as Accounts,

Administration and Customer relations. He is a visiting faculty for MBA at various

colleges such as, Mumbai School of Business, S. P. More College, Pillais College etc.

4.4 KEY DELIVERABLES BY THE COMPANY

Overseeing breakdown and preventive maintenance of Spinning, Polyester,

Test Rising, Knitting, Utility Plants and Diesel Generating Sets.

Executing Fault fining and rectification of faults in control circuits, power

circuits or in any type of electrical breakdown in various types of equipments,


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VII Profit before Extraordinary Items and Tax 332215.34 355036.89

VIII Extraordinary Items - -

IX Profit Before Tax 332215.34 355036.89

X Tax Expense

Current Tax

Deferred Tax

-

-

-

-

XI Profit/(LosaJ for the period from

Continuing Operations(IX-X)

332215.34 355036.89

XII Profit/(Loss) from Discontinuing Operations - -

XIII Tax Expense of Discontinuing Operations - -

XIV Profit/(LosaJfrom Discontinuing Operations

(after taxHXII-Xlll)

- -

XV Profitless) for the Period(Xl+XIV) 332215.34 355036.89

XVI Earnings per Equity Share

-Basic

-Diluted

-

-

-

-

5.3 ACCOUNT SCRUTINIZED FROM BALANCE SHEET AND PROFIT AND

LOSS ACCOUNT

Scrutiny: Scrutinizing the accounts generally and, in particular, examining the

composition of final balances; and ascertaining the extent of clearance of the balances

brought forward from the previous year particularly those relating to receivables and

payables, sale or disposal of fixed assets and of inventories.

13. Trade receivables In `(Rupees.)

Particulars as at 31 -Mar-2014 as at 31 -Mar-2013


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It is broad in its applicability as it covers all short-term and long term employee

benefits. For example, annual paid leave (though not en cashable), long-term service

rewards, subsidised goods or services, etc. are also covered.

5.4 DRAFT OF AN AUDIT REPORT

INDEPENDENT AUDITORS REPORT

To, The Members

M/s. Tirtharoop Electricals Pvt. Ltd.


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Maharashtra410 206

Report on Financial Statements:

1. We have audited the accompanying Financial Statements of M/s. Tirtharoop

Electricals Private Limited (the Company) which comprise the Balance Sheet as

at 31st March 2013 and Statement of Profit and Loss for the year ended on that date,

and a summary of significant accounting policies and other explanatory information.

Managements Responsibility for the Financial Statements:

2. Management is responsible for the preparation of these Financial Statements that

give true and fair view of the financial position and financial performance of the

Company in accordance with the Accounting Standards referred to in sub section (3C)

of section 211 of the Companies Act, 1956 (the Act). This responsibility includes

the design, implementation and maintenance of internal control relevant to the

preparation and presentation of the financial statements that give a true and fair view

and are free from material misstatement, whether due to fraud or error.

Auditors Responsibility:

3. Our responsibility is to express an opinion on these financial statements based on

our audit. We conducted our audit in accordance with the Standards on Auditing

issued by the Institute of Chartered Accountants of India. Those Standards require that

we comply with ethical requirements and plan and perform the audit to obtain

reasonable assurance about whether the financial statements are free from material

misstatement.

4. An audit involves performing procedures to obtain audit evidence about the

amounts and disclosures in the financial statements. The Procedures selected depend

on the auditors judgement, including the assessment of the risks of material

misstatement of the financial statement, whether due to fraud or error. In making those

risk assessments, the auditor considers internal control relevant to the companys

preparation and fair presentation of the financial statements in order to design audit

procedures that are appropriate in the circumstances. An audit also includes evaluating

the appropriateness of accounting policies used and the reasonableness of the


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accounting estimates made by management, as well as evaluating the overall

presentation of the financial statements.

5. We believe that the audit evidence we have obtained is sufficient and appropriate to

provide a basis for our Audit opinion.

Opinion:

6. In our opinion, and to the best of our information and according to the explanations

given to us, the financial statements give the information required by the Act in the

manner so required and give a true and fair view in conformity with the accounting

principles generally accepted in India:

(a) in the case of the Balance Sheet, of the state of affairs of the company as at 31st

March, 2014; and

(b) in the case of Statement of Profit and Loss, of the Profit for the year ended on that

date.

Report on Other Legal and Regulatory Requirements:

7. As required by section 227(3) of the Act, we report that:

a. We have obtained all the information and explanations which to the best of our

knowledge and belief were necessary for the purpose of the audit.

b. In our opinion, proper books of account as required by law have been kept by the

company so far as appears from our examination of those books.

c. The Balance Sheet and Statement of Profit and Loss dealt with by this report are in

agreement with the books of account;

d. In our opinion, the Balance Sheet and Statement of Profit and Loss comply with the

Accounting Standards referred to in sub section (3C) of section 211 of the Companies

Act, 1956;

e. On the basis of written representations received from the directors as on 31st

March, 2013 and taken on record by the Board of Directors, none of the directors is

disqualified as on 31st March, 2014 from being appointed as a director in terms of

clause (g) of sub-section (1) of Section 274 of the Companies Act, 1956;


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f. Since the Central Government has not issued any notification as to the rate at which

the cess is to be paid under section 441A of the Companies Act, 1956 nor has it issued

any Rules under the said section, prescribing the manner in which such cess is to be

paid, no cess is due and payable by the Company.

For XXX

CHARTERED ACCOUNTANTS

Place : Mumbai MR. A

Date : 31/08/2014 (Proprietor)

Membership No. 132564

CONCLUSION

The project concluded that, given the complexity and development of

Company, the overall level of compliances with the standards and codes is of high

order. This project gives the correct ideas about how the major areas can be found by

way of effective auditing system i.e. errors, frauds, manipulations etc. form this

auditor get the clear idea show to recommend on the position. Project also contain that

how to conduct of audit of the company, what are the various procedure through


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which audit of company should be done. Form auditing point of view, there is proper

follow up of work done in every organization there no misconduct of transactions is

taken places for that purpose the auditing is very important aspect in todays scenario

form company and point of view.

TYBCom Accountancy Auditing-II

Advanced Auditing Mcom Part-II


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