Auditing SEM-6: Company Audit
Auditing SEM-6: Company Audit
AUDITING
SEM-6
COMPANY AUDIT
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The auditor should verify the entries in the journal regarding the issue
of such shares.
He should examine or inspect the details of prospectus or statement in
lieu of prospectus in respect of such contract with the vendors,
promoters, underwriters etc.
He should check the copies of the contract with all above mentioned
parties.
In case of issue of such shares registered Auditor has to verify that
company has been filed with the Registrar of Companies within one
month of the allotment Sec. 75 (1)(b).
In case of no written document of a contract, he must verify that
whether the Registrar has been informed of the particulars of the
contractor not.
In case of Bonus shares, auditor should examine the minute books of
the Directors and shareholders. He has to verify the entry made for it
and the auditor has to check that the amount of shares issued for
consideration other than cash should be shown separately in the-
Balance-sheet.
Inspection of Directors' Minute Book it resolution was passed to give
notice.
Necessary entries are given in the books of account. The received
amount should be transferred to the credit of forfeited share account. It
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Act, 1956.
(3) Accounting system: Which type of accounting system has been
employed by the company, in case of any weak point, he must examine it
thoroughly and make suggestions to remove it.
(4) Books of Accounts : The Auditor must obtain a list of all the books
vouchers, supporting evidence maintained in the office of the company,
He also try to check the names of the keepers of such books, and it must
be duly signed by the authority. The Auditor must have to give in his
report that the books of accounts which has been examined are true and
correct and the financial position is True and fair.
(5) Internal check system: If the system is in operation he should . get,
if possible, a written statement to that effect and examine the system.
(6) List of officers: In case of a company auditor must get a copy, or list
of the officers which include names, addresses, duties powers etc,
(7) Documents of the company: The business of accompany runs
according to the provisions of the Act. The following documents are
required as per the Act : (i) Articles of Association, Memorandum of
Association; prospectus and other important documents, Memorandum of
Association must have at least the name of the company.
Objects, capital including classification of shares, nominal value of
shares names of promoters, first directors, solicitor bankers etc. are also
required
(8) Nature of the company: In case of the company who has purchased
the. business, auditor must know the particulars of relevant agreements,
purchase consideration, methods for it, etc. in case of a newly started,
particulars of such a business e.g. location, product; market of a product,
registered office, head office, factory, building, depots etc. and also which
type/nature of business is run by the , company-trading, manufacturing, or
any other?
Lastly, the auditor must have information in respect of directors,
shareholders, list, holding of directors in the share capital of the company.
List of public and private limited companies in which they are directors.
Also inquire whether its properties-fixed assets are properly insured or not.
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(1) Meaning: The report that is sent to the members and which is
discussed at the statutory meeting is known as the statutory report.
Statutory Audit is that audit which is required to be performed by the
auditor prior to the statutory meeting of the company. The auditing of
Statutory Report is called "Statutory Audit". The Report is certified by the
director and after that it is certified by the auditor but it should be before
the statutory meeting. The audit of and issue of certificate of the Report is
based on the terms of the Statutory Report.
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DIVISIBLE PROFITS
Q. 1 What is capital profit? State the auditor's
duties in respect of distribution of dividends out
of capital profits.
(1) Meaning : Capital profit is not normal profit. Capital profits are not
earned during the ordinary, regular course of the business. Profits which
are not earned on account of trading, or operational activities are called
capital profits. It is known as Non-Trading profit of the business e.g. the
surplus of the revaluation of fixed assets.
(2) Sources : The Capita! profits may be computed in the following
circumstances :
(A) Profits earned on the business purchased but before obtaining a
certificate of commencement of business.
(B) Premium received on issue of shares or debentures.
(C) Profits made on the reissue of forfeited shares.
(D) Profits earned on the sale of fixed assets.
(E) Surplus on the bona-fide revaluation of the assets.
(3) Auditor's duty regarding capital profits : Auditor should see
that the company has not declared dividend out of capital profits unless;
(i) The Articles of Association of the company may permit for such
declaration.
(ii) It must have been realized in cash.
(iii) It must have been computed after the proper valuation of the
assets, (iv) The Capital losses are made good.
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AUDIT PROGRAMMES
Q. 1 Draft audit programme on a "Self-finance commerce
college."
The following special points should be observed by the auditor:
(1) Examine carefully the University Act. He must also refer the trust deed
or constitution of the self-finance college.
(2) Go through the minutes book and carefully study the resolutions and
official orders.
(3) Examine the internal check-system or an internal audit system.
(4) The auditor must check the cash receipts on account of fees. He must
vouch from the fees register and the counter foils of the fees receipt
issued. He must also compare the fees receipt with the application forms
approved and signed by the principal of the college or by the Head of the
Managing committee.
He should check that fees other than tuition fees like examination
fees, library fees, caution money, hostel fees, sport fees etc, are credited
to their respective heads. Income from donation, if permissible, income
from investment, if any, Govt. Grant should be properly verified. Income
from endowment, if any, should be separately vouched.
(5) Payments: The auditor should see that management expenses are
not mixed up with the college expenses. He should vouch all the expenses
carefully. He should see that the internal check system-regarding purchase
of stationery, provisions etc. is proper.
Salary paid to teaching and non-teaching staff should be verified. He
should see that the increments to the staff are within the rules and
approved by the managing committee. He should also check the leave
records and statutory deduction and tax deduction. He should also see
that the adequate provisions for provident fund, gratuity, medical aid etc.
are made.
He should examine the cases of fee-concession and scholarship. It
must be within rules should have been and sanctioned by the committee.
(6) Verification: The auditor must verify the cash on hand, petty cash on
hand and Bank balance. He must also verify the balances as regards to
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INVESTIGATION
An audit is the inspection, examination or verification of a person,
organization, system, process, enterprise, project or product. It is
used to determine the authenticity and validity or to ensure that a
process is being followed. Also, an audit is mainly used in accounting
to ensure the validity and reliability of information in the statements
and that the information is free from material error. An audit can be
done anytime.
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Audit Investigation
Description Audit means the Investigation means an
inspection, examination inquiry, or is the act of
or verification of a detail examination of
person, organization, activities so as to
system, process, achieve certain
enterprise, project or objectives.
product.
Owners Audit is conducted on Investigation may be
behalf of owners only conducted either by
and they make the owner of the
appointment. undertaking or by an
outsider.
Purpose To determine the true Varies from business to
and fair view. business
Process Routine process Investigation is not a
regular process
Scope It includes only an It covers an
examination of the examination of the
accounts of a business accounts bur also
covers an inquiry into
other matter that are
connected with the
purpose for which it is
undertaken
Period Year or six months May cover several
years
Employees Does not examine May examine
personally personally
Sequence Usually conducted Usually conducted after
before investigation of the audit of accounts
accounts
Person performing work Audit is to be Investigation may be
conducted by a take on even by a non-
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1. Cause Of Selling :-
The investigator should pay special attention to this point that why
the seller wants to sell the business? He should see that it is a
genuine case of sale.
3. Checking Of Liabilities :-
Investigator should verify that liabilities of the business are properly
valued. It should be compared the figures shown and decide that it is
correct or not.
4. Value Of Assets :-
Investigator should check that the assets have been properly valued
and sufficient depreciation has been provided on these assets.
8. Competition Situation :-
He should also check the competition situation which the concerned
firm is facing in the market.
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2. Use Of Loan :-
Investigator should also examine that for which purpose loan will be
used. It should be used properly for that object for which it is
demanded.
6. Description Of Property :-
Investigator should give full description about the real property,
plant, building and decoration.
7. A List Of Investment :-
He should give the list of all the investment shown in the books
which market value.
8. Earning Capacity :-
Investigator should check the earning capacity of the borrowers. He
should verify the profit and loss accounts of the past several years. If
earning capacity is better then repaying capacity will also be better.
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9. Suggestions :-
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Investigator should also suggest the ways and means to protect the
business from fraud.
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