BCom 3rd Year Different Audit Notes Study Material
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BCom Different Audits in Auditing Notes Study Material
AUDIT OF SOLE TRADER
Sole Traders are not legally required to get their accounts audited. Some sole traders get their accounts audited when their area of operation is large or when they do not have direct control over transactions. Despite the fact that audit by qualified auditors is not compulsory for them, but it is quite usual for sole proprietors to get their accounts audited if they are receiving their income from different sources and the accounts are being maintained by someone else. Sometimes audit becomes essential for income tax purposes.
Many a time, the auditor of a sole trader also prefers his client accounts and checks their accuracy.(BCom Different Audits Notes Study Material)
Appointment. Auditors of sole propriety concerns are appointed by the sole trade himself and he determines the scope of audit as well as conditions under which it will be carried out.(BCom Different Audit in Auditing Notes Study Material)
Although the auditor in such a situation does not perform his work under any statue, but he will have the right to check and examine all the books of accounts and call for necessary information, these, are his basic rights without which his duty will not be complete. He has the duty to carry out audit with care and diligence and bring to notice of his client any error or discrepancy he may notice.
AUDIT OF PARTNERSHIP FIRM
There is no law which requires a partnership firm to get its accounts audited, but partners may get the accounts of partnership firm audited for their convenience.
Appointment of Auditors. The auditor to audit the accounts of a firm is usually appointed by the partners either on the basis of a decision taken by them or to comply with a condition in the partnership agreement. The remuneration of auditor is fixed by the partners. It is important that the letter of appointment should clearly state the nature and scope of audit which is to be carried out.
The auditor may, particularly, ensure application of accounting standards prescribed by the Institute of Chartered Accountants of India. In case the firm is required to get its accounts audited under the requirements of any statute, the auditor will have to qualify the report in case of non-compliance with the accounting standards.(BCom Different Audits Notes Study Material)
Matters to be considered before starting audit. Before starting the audit the auditor should examine the partnership agreement and note the provisions therein as regards the following matters:
(1) Capital Contributions. The amount of capital that shall be contributed by each partner-whether it will be fixed or could be varied from year-to-year.
(2) Profit or loss sharing ratio. The proportions in which the profit shall be divided among the partners or losses shall have to be contributed by them; whether the losses shall be borne by the partners or whether any of the partners will not be required to do so.(BCom Different Audits Notes Study Material)
(3) Maintenance of accounts. The provisions as regards maintenance of books of account and the matters which must be taken into account for determining the profits of the firm available for division among the partners e.g., creation of reserves, provision for depreciation, etc.
(4) Borrowing powers. Borrowing capacity of the partnership.
(5) Interest on capital and on drawings. The rate at which interest will be allowed on the capitals and loans provided by partners and the rate at which it will be charged on their drawings and current accounts.
(6) Salaries and drawings. Whether any salaries are payable to the partners of withdrawals are permitted against shares of profits and, if so, to what extent?
(7) Management. Duties of the partners as regards the management of business of the firm; also, the partners who shall act as managing partners.
(8) Operation of bank accounts. Who shall operate the bank account of the firm? How will the surplus funds of the partnership be invested?
(9) Restrictions on powers of partners. Limitations and restrictions that have been agreed upon, the rights and powers of partners.
Advantages of Audit of a Partnership Firm. On broad considerations, the advantages of audit of accounts of a partnership could be stated as follows:
(1) Ease in settlement of accounts. Audited accounts provide a convenient and reliable means of settling accounts between the partners and, thereby, the possibility of occurrence of a dispute among them is mitigated.
(2) Ease in settlement on of accounts when partners leave. On the retirement or death of a partner, audited accounts, which have been accepted by the partners, constitute a reliable evidence for computing the amounts due to the retiring partner or to the representative of the deceased partner in respect of his share of capital, profits and goodwill.(BCom Different Audits Notes Study Material)
(3) Ease in getting loans and evidence on sale of business. Audited statement of accounts are relied upon by the banks when advancing loans, as well as by prospective purchasers of the business, as evidence of the profitability of the concern and its financial position.(BCom Different Audit Notes Study Material)
(4) For admission of new partner. Audited statements of account can be helpful in the negotiations to admit a person as a partner, especially when they are available for a number of past years.(BCom Different Audit Notes Study Material)
(5) Safeguard for dormant partners. An audit is an effective safeguard against any undue advantage being taken by a working partner or partners especially in the case of those partners who are not actively associated with the working of the firm.(BCom Different Audits in Auditing Notes Study Material)
From the foregoing discussion about the audit of a partnership it would be observed that like the audit of every other commercial undertaking, it culminates in the verification of the Balance Sheet and the Statement of Profit and Loss to ensure that these exhibit a true and fair state of affairs of the firm.
Introduced in 2009, in limited liability partnerships, liability of some or all the partners is limited to the extent of capital contributed by them.
Audit of Limited Liability Partnership (LLP)
An LLP is under obligation to maintain annual accounts reflecting true and fair view of its state of affairs. A “Statement of Accounts and Solvency” in prescribed form has to be filed by every LLP with the Registrar every year.
Accounts of limited liability partnerships are not required to be mandatorily audited except when its turnover exceeds forty lakhs or where the capital contribution exceeds twenty five lakhs rupees.
Appointment of Auditor. The auditor of LLP are appointed by the designated partners at any time for the first financial year, but before the end of first financial year, at least thirty days prior to the end of each financial year.
The partners may fill any casual vacancy of auditors.
Maintenance of books of accounts.
LLP’s are required to maintain books of accounts which shall contain:
(a) Particulars of all sums of money received and expended and the matters in respect of which the receipt and expenditure takes place,
(b) A record of the assets and liabilities of the firm.
(c) Statement of costs of goods purchased, inventories, work-in-progress, finished goods and costs of goods sold, by the firm.
(d) Any other particulars which the partners may decide.
Auditor’s Duty Regarding Audit of LLP
- The auditor should get definite instructions, in writing, as to the work to be done by him.(BCom 3rd Year Different Audits Notes Study Material)
- The auditor should state:
(a) Whether the records of the firm appear to be correct and reliable.
(b) Whether he was able to obtain all information and explanation necessary for his work.(BCom Different Audit in Auditing Notes Study Material)
(c) Whether any restriction was imposed upon him.
- The auditor should read the agreement of the firm and note the following provisions:
(i) What is the nature of the business of the firm ?
(ii) Amount of capital contributed by each partner.
(iii) Interest allowed in respect of additional capital contributed.
(iv) Duration of partnership.
(v) Drawings allowed to the partners.
(vi) Salaries, commission etc. payable to partners.
(vii) Borrowing powers of the firm.
(viii) Rights and duties of all the partners.
(ix) Method of settlement of accounts between partners at the time of admission, retirement, or death etc.(BCom Different Audits Notes Study Material)
(x) Profit sharing ratio.
- If partners maintain minute book of meetings the auditor should refer it for any resolution passed regarding the accounts.
Banking Companies are governed by the Banking Regulation Act, 1949, as well as by the relevant provisions of the Companies Act, 2013, which apply to the Banking Regulation Act except in so far as the said provisions are inconsistent with the provisions of the Banking Regulation Act, 1949.
Section 5(b) of the Banking Regulation Act, 1949, has defined the term banking as then below:
“The accepting, for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.”(BCom Different Audit Notes Study Material)
Meaning of Banking Company
Section 5(c) of the Banking Regulation Act provides that any company which transacts the bank business in India is said to be banking company. The foreign companies which transact the banking business in India come within the purview of the definition of banking company. The Act also provides that the companies engaged in manufacture of goods and accept deposit from the public for the financing of the business are not considered banking companies.
Restrictions on Business
- A banking company cannot carry on any business except those business which are mentioned in Sec. 6(i) of the Act.
- Under Sec. 8, a bank is prohibited from carrying on directly or indirectly any trading business such as buying and selling of goods.
- Under Sec. 19, specific restrictions are placed on the nature of business of subsidiary companies which can be formed for purposes specified therein or for such purposes as are incidental to the business of banking.
- A banking company is not allowed to hold shares (whether as pledge, mortgagee or absolute owner) of other companies exceeding 30 per cent of its own paid-up capital and reserves or 30 per cent capital of such companies, whichever is less.(BCom Different Audit Notes Study Material)
- A banking company is not allowed to make loans or advances on the security of its own shares or grant unsecured loans or advances to any of its Directors or to firms or private companies in which it is directly or indirectly interested.
- It cannot hold any immovable property for a period exceeding seven years except for its own use. Any land or building received by it in satisfaction of a claim or debt must be disposed of within seven years or such a time as extended by the Reserve Bank of India.
It is needless to emphasize that the auditor of a banking company should be well familiar with the important provisions of the Banking Regulations Act, especially those relating to accounts. Though it would not be possible to quote here each and every such provision, yet some very important points are given below:
The restrictions imposed are briefly put hereunder:
(i) A banking company cannot employ or be managed by a Managing Agent.
(ii) It cannot pay to its employees remuneration or a part of remuneration:
(a) which takes the form of commission or of a share in the profits of the company except bonus, or
(b) a remuneration which is, in the opinion of the Reserve Bank, excessive.
(ii) All appointments or re-appointments of Managing Directors (not liable to retire by rotation), managers or chief executive officers must be made with the previous approval of the Reserve Bank. Such appointments shall not be effective unless approved by the Reserve Bank.(BCom Different Audit Notes Study Material)
(iv) No banking company incorporated in India shall have as a director any person who is a director of any other banking company or who is a director of other companies which among themselves are entitled to exercise voting rights in excess of 20 per cent of the total voting rights of all the shareholders of the banking company.(BCom Different Audit Notes Study Material)
(v) The chairman, director, auditor, etc., of a banking company are deemed to be public servants for the purposes of the Indian Penal Code.
- Capital and Reserves
(i) Under See 11, no banking company can commence or carry on business in India unless the requirements in respect of minimum paid up capital and reserves as mentioned therein are duly complied with.(Different Audits Study Material)
(ii) In case of a banking company incorporated outside India, a minimum prescribed ties, the value of its paid up capital and reserves shall not be less than fifteen lakhs of rupees, and in it has a place of business in Mumbai or Kolkata or both, twenty lakhs of rupees) shall be kept deposited with the Reserve Bank of India in the form of cash or unencumbered approved Securities or partly in cash or partly in Securities.(BCom Different Audit Notes Study Material)
(iii) Under Sec. 12, the authorized capital of a banking company cannot be less than one half of its subscribed capital and the paid-up capital not be less than one-half of the subscribed capital.(BCom Different Audit Notes Study Material)
(iv) A banking company cannot create any charge on unpaid capital and any such charge is invalid.(BCom Different Audits in Auditing Notes Study Material)
(v) Under Sec. 13, a banking company cannot pay, directly or indirectly, by way of commission, brokerage, discount, remuneration in any form in respect of any shares issued by it, more than 212% of the paid-up value of the shares.
(i) Under Sec. 17, every banking company incorporated in India shall maintain a Reserve Fund and shall, out of the net profits of each year and before declaring any dividend, transfer 20% of the profits to the Reserve Fund irrespective of the fact that the amount of the Reserve Fund is equal to the paid-up capital. Banking companies incorporated outside India (and operating in this country) have to maintain a reserve of 20% of their net profit earned in India. This amount shall have to be deposited with the Reserve Bank in addition to the amount deposited under Sec. 11 of the Banking Regulations Act.
(The net profits are to be calculated as under Sec. 198 of the Companies Act, 2013.)
(ii) If any sum has been appropriated from the Reserve Fund or the Share Premium Account, it should be reported to the Reserve Bank within 21 days of such appropriation.(BCom Different Audit Notes Study Material)
(c) Cash Reserves
(i) Under Sec. 18, every banking company not being a Scheduled Bank shall maintain a Cash Reserve with itself or with the Reserve Bank or the State Bank of India or any other bank notified by the Central Government in this behalf, a sum equal to at least 3% of the total of its time and demand liabilities in India and shall submit to the Reserve Bank before the fifteenth day of every month a return showing the amount so held on Friday of each week of the preceding month with particulars of its time and demand liabilities in India on each such Friday.
(ii) Under Sec. 42 of the Reserve Bank Act, every Scheduled Bank is required to maintain Cash Reserve of some fixed amount as specified therein (i.e., an average daily balance, the amount of which shall not be less than 3 per cent of the time and demand abilities), however, this amount may be raised up to 15 per cent of the total time and demand liabilities (Sec, 18). The Reserves Bank can ask any Scheduled Bank to deposit with it an additional amount which should not exceed fifteen per cent of its time demand liabilities.
Besides the above requirements, a banking company is required to maintain in India, cash, gold and unencumbered securities amounting to not less than twenty-five per cent of its total time and demand liabilities. Assets in India of every banking company should not be less than seventy-five per cent of its time and demand liabilities in India at the close of 1st Friday of every quarter.
For the purpose of dividend, Sec. 15 may be reproduced hereunder:
(1) No banking company shall pay any dividend on its shares until all its capitalized expenses including preliminary expenses organization expenses commission, brokerage, amounts of losses incurred and any other item of expenditure not represented by tangible assets) have been completely written-off.
(2) Notwithstanding anything to the contrary contained in Sub-Sec. (1) or in the Companies Act, 2013, a banking company may bay dividends on its shares without writing off:
(i) The depreciation, if any, in the value of its investments in approved Securities in any case where such depreciation has not actually been capitalized or otherwise accounted for as a loss:
(ii) The depreciation, if any, in the value of its investments in shares, debentures or bonds (other than approved securities) in any case where adequate provision for such depreciation has been made to the satisfaction of the auditor of the banking company.(BCom Different Audits in Auditing Notes Study Material)
(iii) The bad debts, if any, in any case where adequate provision for such debts has been made to the satisfaction of the auditor of the banking company.
As stated earlier, a Statutory Reserve Fund is required to be created out of the profits before the declaration of any dividend. These provisions are also applicable to nationalised banks and regional rural banks.
- Annual Accounts
According to Sec. 29, a banking company incorporated in India is required to prepare at the end of each Calendar Year a Balance Sheet and Profit and Loss Account as on the last working day of the year in respect of all business transacted by it (every banking company incorporated outside India, in respect of all its business transacted in India) in the forms as prescribed in the Third Schedule of the Act or as near thereto as circumstances permit.
Provided that in the case of a banking company incorporated outside India, the profit & loss account may be prepared as on a date not earlier than two months before the last working day of the year.
The Balance Sheet and Profit & Loss Account in case of a banking company incorporated in India must be signed by the Manager or the principal officer of the company and when there are more than three directors of the company, by at least three of those directors or by all the directors if there are not more than three directors, and in case of a banking company incorporated outside India, by the manager or agent or the principal officer of the company in India.
Section 30 of the Act is reproduced hereunder:
1 The Balance Sheet and Profit and Loss Account prepared in accordance with Sec. 29 shall be audited:
(a) in the case of a banking company incorporated in India, by a person duly qualified under any law for the time being in force to be an auditor of companies.
(b) in the case of a banking company incorporated outside India, either by such auditor as aforesaid, or by a person duly qualified to be an auditor under the law of country in which the company is incorporated.
(1-A) Notwithstanding anything contained in any law for the time being in force or any contract to the contrary every banking company shall, before appointing re-appointing or removing any auditor obtain the previous approval of the Reserve Bank.(BCom Different Audit in Auditing Notes Study Material)
(1-B) Without prejudice to anything contained in the Companies Act, 2013, or other law for the time being in force, where the Reserve Bank is of the opinion that it necessary in the public interest or in the interests of the banking company to audit accounts of the banking company in relation to any transaction or class of transactions specified in the order and the auditor shall comply with such directors and make a report of such audit to the Reserve Bank and forward a copy thereof to the company.(BCom Different Audits in Auditing Notes Study Material)
(1-C) The expenses, or incidental to, the audit of the transactions or class of transactions specified in the order made by the Reserve Bank shall be borne by banking company.(BCom Different Audits in Auditing Notes Study Material)
(2) The auditor shall have the powers of, exercise the functions vested in and discharge the duties and be subject to the liabilities and penalties imposed on, auditors of companies by Sec. 143 of Companies Act, 2013.
- Branch Office Audit
Under Sec. 5(cc) of the Banking Regulation Act, 1949, ‘Branch’ or ‘Branch Office in relation to a banking company means any Branch or Branch Office, whether called a Pay Office or Sub-pay Office or by any other name, at which deposits are received, cheques cashed or money lent, and for the purposes of Sec. 35, includes any place of business where any other form of business referred to in Sub-Sec. (1) of Sec. 6 is transacted.(BCom Different Audit Notes Study Material)
Appointment of Branch Auditor
The following can be appointed as Branch Auditor to audit the accounts of a branch of a bank:
(i) The Statutory Auditor of the Bank;
(ii) Any person who is qualified to be appointed as auditor of the Bank;
(iii) In the case of a Branch in the Foreign Country:
(a) Any person as in (i) and (ii) above, or
(b) Any person who is qualified for appointment as an auditor of a bank according to the laws of that country.(BCom Different Audit Notes Study Material)
If it is decided by the company to appoint any person other than the company’s auditor to audit the accounts of the Branch Office, the appointment shall be made at the General Meeting of the Shareholders. However, the meeting may authorize the Board of Directors to make the appointment. In both the cases, the person so appointed should be a qualified auditor. Even if the Board makes the appointment, it shall be made in consultation with the company’s auditor.
Rights and Duties of Branch Auditor
The Branch Auditor shall have the same rights and duties as the Statutory Auditor of the bank.(BCom Different Audit in Auditing Notes Study Material)
The report shall be prepared on the same lines as laid down in Sec. 143 of the Companies Act and Sec. 30 of the Banking Regulations Act, 1949. The Branch Auditor shall send his report to the Statutory Auditor of the bank and not to the shareholders.(BCom Different Audits in Auditing Notes Study Material)
The following important points should be noted by the auditor in the audit of accounts of a banking company.(BCom Different Audit Notes Study Material)
- He should, first of all, confirm that his appointment is in order.
- He should see that Annual Accounts of the banking company have been prepared in proper form.(BCom Different Audit Notes Study Material)
- He should examine the system of internal check and control and ascertain whether such a system is adequate or not. Generally, banks have a separate audit department for the examination of day-to-day transactions. The efficacy of such a system should be examined.
- He should visit the bank on the last working day of the year to count the cash himself. If the money has been kept with the Reserve Bank of India or any other bank, he should obtain a certificate confirming the deposit.
- He should specially check the receipt of drafts, cheques, etc., on the last working days which have not been entered in the books.
- He should verify investments and incomes therefrom. It should be seen that such investments have been properly valued.
- He should vouch the interest on loans and advances and ensure that irrecoverable interest is adequately provided for.
- He should verify bills discounted and also discount received in respect of such bills. It is to be ascertained that the rebate on bills discounted and unmatured bills has been carried forward.(BCom Different Audit Notes Study Material)
- Sometimes, a banking company gets a commission from its customers for services rendered to them. If so, such a commission received should be vouched by proper vouchers.(BCom Different Audit Notes Study Material)
- He should verify the securities deposited with bank for safe custody purposes and see that income in respect thereof has been properly accounted for.
- He should see that capital expenditure has been properly dealt with in the books and proper distinction has been made between capital and revenue.
- He should check the balance of current account, fixed deposit and savings bank ledgers with the schedules obtained from the client and ascertain that all interest outstanding on deposits has been provided for.
- All assets and liabilities should be verified and it should be seen that adequate provision has been made for doubtful and bad debts. He should specially check the overdrafts, etc.(BCom Different Audits Notes Study Material)
- He should examine the branch returns and ensure that they are being properly incorporated in the head office books.(Different Audit Notes Study Material)
- He should go through the details of secret reserves, if any, maintained and see that their purpose is genuine.(BCom Different Audit Notes Study Material)
- He should ascertain the adequacy of securities in respect of loans and advances in both cases, fully secured and partly secured.
- He should ensure that 20% of profits before paying dividend is transferred to the Reserve Fund as required under the Act.
- He should see that the provisions of Secs. 11-20 (stated earlier) of the Banking Regulation Act have been fully complied with.
Specimen of Auditor’s Report
We have audited the attached Balance Sheet of the Central Bank Bu Trustee Company, Limited, as at 31st December, 20…, and also the Profit & for the year ended upon that date annexed thereto and report that:
(a) We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit:
(b) In our opinion, proper books of accounts as required by law have been kept by the Company so far as appears from our examination of the books:
(c) The Balance Sheet and Profit & Loss Account under report are in agreement with the books of account;
(d) In our opinion and to the best of our information and according to the explanations given to us, the said accounts with the note thereon give the information required by the Companies Act, 2013, in the manner so required and give a true and fair view:
(i) In the case of the Balance Sheet, of the State of the company’s affairs as at 31st December, 20.., and
(ii) In the case of Profit & Loss Account, of the profit for the year ended on that date. (BCom Different Audits in Auditing Notes Study Material)
Audit of Nationalised Banks
The nationalised banks are governed by the provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 which provided for the nationalisation of fourteen major banking companies. A similar Act was passed in 1980 which provided for the nationalisation of another six banking companies. Many provisions of the Banking Regulations Act also apply to the nationalised banks.(BCom Different Audits in Auditing Notes Study Material)
Some of the important provisions of 1970 Act are given hereunder:
(1) Section 3(4) of the Banking Companies (Acquisition and Transfer of Undertakings). Act, 1970 provides that each nationalised bank shall be a body corporate with perpetual succession and a common seal and shall sue and be sued in its name. It is also provided that each such bank shall carry on and transact the business of banking as defined in section 5(b) of the Banking Regulation Act and may engage in one or more forms of business specified in section 6(1) of the Act.(BCom Different Audit Notes Study Material)
(2) According to section 10 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, each nationalised bank is required to close its books of accounts on December 31 each year with the previous approval of the Reserve Bank. The auditor of the bank shall be appointed by the Board of Directors with the prior approval of the Reserve Bank of India. The remuneration of such auditor will be fixed by the Reserve Bank of India in consultation with the Central Government.(BCom Different Audits in Auditing Notes Study Material)
(3) Under section 10(3) of the 1970 Act, every auditor should be supplied with a copy of the annual balance sheet and profit & loss account and a list of all books kept by the nationalised bank. The auditor should examine the financial statements with the accounts and vouchers relating thereto. In the performance of his duties, an auditor will have all those powers and rights which are laid down in this regard in the Companies Act, 2013. He shall have, at all reasonable times, access to the books, accounts and other documents of the nationalised bank, and may, at the expense of the nationalised bank, employ accountants or other persons to assist him in investigating such accounts and examine any officer of the nationalised bank(BCom Different Audit Notes Study Material)
According to sec. 10(1) of the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970, the audit of banks would be conducted in the manner given, in short, below:
- The appointment of an auditor would be made with the prior approval of the Reserve Bank of India.(BCom Different Audit Notes Study Material)
- The remuneration of an auditor would be determined by the Reserve Bank with the advice of the Central Government.
- The qualifications of such an auditor would be the same as have been laid down in sec. 141 of the Companies Act, 2013.
- Such an auditor would have the following rights:
(i) to appoint accountants for his help at the expense of the bank;
(ii) to examine all the books, accounts and other documents of the bank, and
(iii) to examine custodians, officials or employees of the bank in the matter of accounts.(BCom Different Audit Notes Study Material)
- The auditor would submit his report to the Central Government and send one copy each to the Reserve Bank and the bank. The report would cover the following points:
(i) In his opinion, the Balance Sheet of the bank is full and fair and gives a true and fair view of the state of the bank’s affairs;
(ii) He has obtained all the information and explanations necessary for his work and they are satisfactory:
(iii) The transactions affected by the bank are within its powers;
(iv) The Returns received from the branches of the bank are adequate for the audit work;
(v) The Profit & Loss Account exhibits a correct balance of profit or loss; and
(vi) Any other important matter which the auditor wants to bring to the knowledge of the Central Government.(BCom Different Audit Notes Study Material)
The Central Government shall cause every auditor’s report and report on the working and activities of such bank to be laid for not less than 30 days before each House of Parliament as soon as may be after each such report is received by the Central Government(BCom Different Audit Notes Study Material)
(Schools, Colleges or Universities)
- The Charters, Trust Deeds, Acts of various Universities etc., containing Rules and Regulations should be examined and those Rules which relate to accounts in particular should be taken note of in detail.
- The auditor should inspect the Minutes of the Board of Management to ascertain from them any resolution specially passed in respect of accounts. He should confirm how far such resolutions have been complied with.
- He should examine the internal check system and ensure how far it is satisfactory.(BCom Different Audits in Auditing Notes Study Material)
The sources of income of an educational institution are fees from students, grants from the Government or the local authorities, subscriptions and donations, income from Investments, etc.(BCom Different Audit Notes Study Material)
The auditor should note the following points:
- He should check the cash receipts on accounts of fees by reference to the counterfoils of the Fee Receipt Books used and, if necessary, the Students’ Register should also be inspected. For free studentship, he should see that it is duly authorized by responsible officer.
- Admission fee or examination fee received ordinarily once in an year should be vouched with reference to the proper documentary evidence. He should ensure that such fees have been properly recorded in the relevant books and registers.(BCom Different Audit in Auditing Notes Study Material)
- If there is a part of fees which is totally not recoverable, he should see that it is written-off by the person duly authorized for it. If he comes across something unfair, he should make the fact known to the Committee of Management.
- He should see that the fees unpaid for a part of the academic year but exempted to that extent have been properly accounted for or adjusted.
- It should be seen that the fees paid in advance have been duly carried forward and adjusted in the accounts subsequently.
- He should vouch the grant received from the Government or a local body with the help of correspondence or any other documentary evidence.
- Receipts from donations and subscriptions, etc., should be verified with the statements in the Annual Report. Such receipts should be checked with the counterfoils of receipts issued in this respect. The cash book should also be checked. The auditor should ascertain that such receipts are being utilized for purposes for which they have actually been received.
- If the institution has some landed property, endowments and securities, etc., the income therefrom should be verified by reference to proper vouchers. Investments may be vouched by reference to the Bank’s Certificate.
- Any other income should similarly be vouched with the help of proper vouchers.(BCom Different Audits in Auditing Notes Study Material)
- The auditor should vouch all items of capital expenditure and ensure that such an expenditure is duly sanctioned. In case of some abnormal expenditure, its checking should be done very carefully. He should confirm that distinction between capital and revenue has been clearly made.
- Sanction of increases in the salary of the staff should be checked by reference to the Minutes of the Committee of Management.
- He should examine the internal check system with regard to the purchases of materials, etc., for the boarders, proper control has to be exercised on the purchase, issue and preservation of such provisions.
- He should verify the stock of provisions, furniture, stationery, etc., and see that it is properly preserved.(BCom Different Audit Notes Study Material)
- He should confirm that an adequate reserve is being maintained for contingencies.(BCom Different Audits in Auditing Notes Study Material)
- He should ascertain that all outstanding assets and liabilities have been taken into account.(BCom Different Audits in Auditing Notes Study Material)
- He should further see that the provident fund money of the staff is being regularly invested outside in proper securities. Such fund is to appear separately on the liabilities side and investment on the assets side of the Balance Sheet.(BCom Different Audits in Auditing Notes Study Material)
- He should see that all taxes which are deducted at source are properly refunded. Educational institutions are not subject to Income-tax payment.
EMPLOYEES’ PROVIDENT FUND
The Provident Fund is a matter of concern for all employees engaged in different capacities and in different enterprises. Some relevant points in regard to auditor Employees’ Provident Fund are given below:
- The auditor should first of all examine the Provident Fund Rules to ensure that the transactions regarding Fund have been within the powers of the trustees and accordingly, accounts have been prepared.
- It should be seen that monthly deductions in regard to wages and salaries have been made correctly and as per rules in force in the unit from time to time. The amounts so deducted have been deposited in the Scheduled Bank pending investment.(BCom Different Audit Notes Study Material)
- The employees’ contribution and also the contribution of the unit or company have been credited to their accounts properly.
- If the employees have taken loans from their Provident Fund Accounts, it is to be ensured that such loans have been repaid within the time-limit fixed and loans of retiring employees have been deducted before the amount of Fund has been paid to them.(BCom Different Audit Notes Study Material)
- It should be seen that each year a statement is invariably prepared and sent to every member of the Fund showing the contribution made by the employee, the contribution of the employer, the interest credited and the balance standing to his credit at the end of the year. Such a balance should be confirmed by the members and in case of dispute, proper investigations should be made into the reasons therefor.(BCom Different Audits in Auditing Notes Study Material)
- The auditor should examine the minutes of the meetings of the Governing/Management bodies and check that the decisions are in accordance with rules and are also put into effect properly.
- The auditor should vouch the purchase of investments which should always be in approved securities.(BCom Different Audit Notes Study Material)
- If some of such investments have been sold to meet the large claims, their sale should be vouched with reference to the authority for sale and the broker’s sold notes. It is to be seen that the profit or loss on such sales is correctly arrived at and treated as such in the books of account.
- The interest on investments should be properly accounted for and proper adjustment should also be made for the outstanding interest or investments correctly.(BCom Different Audits in Auditing Notes Study Material)
- It should be ensured that the amount of interest has been properly credited to the members’ accounts and such amounts have been actually earned.
- If necessary, the personal files of employees should be referred to and the authorities should be asked to explain the matters under doubt.
- The lapses and forfeiture on account of resignations or dismissals of employees should be verified by the auditor and it should be ensured that their amounts have been correctly settled according to rules.
- There should be a proper reconciliation of the total of the balances of members’ ledger with the control account which is maintained in general ledger.(BCom Different Audits in Auditing Notes Study Material)
- The auditor should vouch the payment of the amount of the Provident Fund to the retired employees and ensure that such payments have been made in time, are correct and admissible under the rules.
A co-operative society is framed under the provisions of the Co-operative Societies Act, 1912, and hence, its accounts are prepared under the Rules and Regulations laid down for the purpose. The auditor of such a society is appointed by the Registrar on Co-operative Societies. He conducts the audit on behalf of the Registrar and also submits his report to the Registrar. The fees of the auditor are paid by the society as per the status of the society. Sometimes the fees are determined on the basis of the turnover or business which the society transacts.
Formerly, books and records were maintained by a society as prescribed by the Central Co-operative Societies Act of 1922 but now they are governed by the State Co-operative Societies Act, 1912 and State Legislations have provided for the maintenance of books and accounts as on the lines stipulated under section 128 of the Companies Act, 2013. However, much depends upon the size, nature and business transacted by particular society in this regard. No specific formula can be laid down in this respect. It is also laid down that a member cannot hold more than 10 per cent of the share capital of the Society.
The following points may be noted in the audit of the Co-operative Society:
- The auditor should go through the rules and regulations of the Society and see how far they are being followed by it.(Different Audit Notes Study Material)
- He should examine the capital structure of the Society and find out the number of its members and also their shareholdings. He should inspect the Minutes of the Members.(BCom Different Audit Notes Study Material)
- He should also examine the internal check system in operation in the society.
- He should vouch the receipt of cash on account of share capital with the Register of the Shareholders and also on account of deposits with the Cash Book and counterfoils of receipts issued. If it is a Consumers’ Society, its sales should be vouched with the summaries and Sales Account.
- He should vouch the receipt of interest and return of loans from the borrowers. Proper records must always be maintained for this purpose.
- He should vouch the loans granted to the borrowers by reference to the agreements(BCom Different Audit Notes Study Material)
- Other management and establishment expenses should also be checked by him.(BCom Different Audit Notes Study Material)
- A Co-operative Society pays dividend to its members as per the rules and regulations. It should be ascertained as to how such a dividend is calculated and is recorded in the books. The rate should not exceed 6.5%.
- He should verify the assets and see that the stock is properly valued.
- He should specially verify the cash in hand and investments of such a society.
- He should note that 25 per cent of the profit is transferred to the Reserve Fund and 10 per cent is carried to the Welfare Fund.
- He should ensure that the accounts of such a society are prepared in accordance with the provisions of the Co-operative Societies Act, 1912.
AUDIT OF NON-PROFIT ORGANISATIONS
Non-profit making organisations raise funds from members, donors or contributors apart from receiving donation of time, energy and skills for achieving their social objectives like imparting education, providing medical facilities, economic assistance to poor, managing disasters and emergent situations. Therefore, this definition of non-profit organisations would include religious organisations, voluntary health and welfare agencies, charitable organisations, hospitals, old age homes, research foundations etc. The scope of services rendered by non-profit organisations is extremely wide and as such cannot be covered in a small definition. Some examples of non-profit organisations operating in India include Child Relief and You (CRY). NORAD, UNICEF, Godhuli, Vidya, Concern India Foundation., etc.
Sources and applications of funds
The main sources of funds include grants and donations, fund raising programmes, advertisements, fees from the members, technical assistance fees/fee for services rendered, subscriptions, gifts, sale of produce or publications, etc.(BCom Different Audits in Auditing Notes Study Material)
Donations and grants received in the nature of promoter’s contribution are in the nature of capital receipts and shown as liabilities in the Balance Sheet of non-profit organisation. These may either be in the form of corpus contribution or a contribution towards revolving fund. A contribution made towards the capital or the corpus of an non-profit organisation is known as corpus contribution. The donors are generally required to specify whether the donation/grant given by him shall form part of the corpus of the non-profit organisation. Such contributions are generally given with reference to the total funds required by an non-profit organisation. Section 11(1)(d) of the Income Tax Act 1961 also states that income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution shall not be included in the computation of total income. The objective of a contribution or grant towards a Revolving Fund is to rotate the amount by giving temporary loans from the fund to other non-profit organisation or beneficiaries for their projects and then recover the loan so as to give temporary loans again and so on. However, any interest earned from the beneficiary on such temporary loans from the revolving fund could be either added back to the fund or credited to the Income and Expenditure Account depending on restrictions laid down by the authority providing the contribution (for the revolving fund) or by the rules and regulations laid down by the concerned non-profit organisation in this regard.
Donations and grants received for acquisition of specific fixed assets are those grants whose primary condition is that an non-profit organisation accepting them should purchase, construct or otherwise acquire the assets for which the grant is given.(BCom Different Audits in Auditing Notes Study Material)
Many a times non-profit organisations receive contributions in kind. These contributions include assets such as land, buildings, vehicles, office equipment, etc. and articles related to programmes/projects such as food, books, building materials, clothes, beds, and raw material for training purposes, e.g., Wool, reeds, cloth, etc.(BCom Different Audits in Auditing Notes Study Material)
The areas of application of funds for an non-profit organisation include Establishment Costs, Office and Administrative Expenses, Maintenance Expenses, Programme/Project Expenses, Charity, Donations and Contributions given, etc.(BCom Different Audits in Auditing Notes Study Material)
Provisions Relating to Audit of Non-profit Organisations
The auditors of an non-profit organisation registered under the Societies Registration Act, 1860 (or under any law corresponding to this Act, in force in any part of India) or the Indian Trusts Act 1882 are normally appointed by the Management of the Society or Trust. The auditors of non-profit organisation registered under section 25 of the Companies Act, 1956 are appointed by the members of the company.(BCom Different Audit Notes Study Material)
While planning the audit of non-profit organisation, the auditor may concentrate on the following:
(i) Knowledge of the non-profit organisations work, its mission and vision, areas of operations and environment in which it operate.
(ii) Updating knowledge of relevant statutes especially with regard to recent amendments, circulars, judicial decisions viz. Foreign Contribution (Regulation) Act 1976, Societies Registration Act, 1860, Income Tax Act 1961 etc., and the Rules related to the statutes.(BCom Different Audit Notes Study Material)
(iii) Reviewing the legal form of the Organisation and its Memorandum of Association, Articles of Association, Rules and Regulations.
(iv) Reviewing the non-profit Organisations chart, then Financial and Administrative Manuals, Project and Programme Guidelines, Funding Agencies Requirements and formats, budgetary policies if any.
(v) Examination of minutes of the Board/Managing Committee/Governing Body/Management and Committees thereof to ascertain the impact of any decisions on the financial records.
(vi) Study the accounting system, procedures, internal controls and internal checks existing for the non-profit organisation and verify their applicability.
(vii) Setting of materiality levels for audit purposes.
(viii) The nature and timing of reports or other communications.
(ix) The involvement of experts and their reports.
(x) Review the previous year’s Audit Report.
The audit programme should include in a sequential order all assets, liabilities, income and expenditure ensuring that no material item is omitted.
(i) Corpus Fund: The contributions/grants received towards corpus be vouched with special reference to the letters from the donor(s). The interest income be checked with Investment Register and Physical Investments in hand.
(ii) Reserves: Vouch transfers from projects/programmes with donors letters and board resolutions of non-profit organisation. Also check transfer of gross value of asset sold from capital reserve to general reserve and adjustments during the year.(BCom Different Audits in Auditing Notes Study Material)
(iii) Ear-marked Funds: Check requirements of donors institutions, board resolution of non-profit organisation, rules and regulations of the schemes of the ear-marked funds.(BCom Different Audit Notes Study Material)
(iv) Project/Agency Balances: Vouch disbursements and expenditure as per agreements with donors for each of the balances.
(v) Loans: Vouch loans with loan agreements, counterfoil of receipt issued.
(vi) Fixed Assets: Vouch all acquisitions/sale or disposal of assets including depreciation and the authorisations for the same. Also check donor’s letters/agreements for the grant. In the case of immovable property check title, etc.(BCom Different Audit in Auditing Notes Study Material)
(vii) Investments: Check Investment Register and the investments physically ensuring that investments are in the name of the non-profit organisation. Verify further investments and dis-investments for approval by the appropriate authority and reference in the bank accounts for the principal amount and interest.
(viii) Cash in Hand: Physically verify the cash in hand and imprest balances, at the close of the year and whether it tallies with the books of account.
(ix) Bank Balance: Check the bank reconciliation statements and ascertain details for old outstanding and unadjusted amounts.
(x) Stock in Hand: Verify stock in hand and obtain certificate from the management for the quantities and valuation of the same.
(xi) Programme and Project Expenses: Verify agreement with donor/contributor(s) supporting the particular programme or project to ascertain the conditions with respect to undertaking the programme/project and accordingly, in the case of programmes/projects involving contracts, ensure that income tax is deducted, deposited and returns filed and verify the terms of the contract.
(xii) Establishment Expenses: Verify that provident fund, life insurance premium, Employees State insurance and their administrative charges are deducted, contributed and deposited within the prescribed time. Also check other office and administrative expenses such as postage, stationery, travelling, etc.
The receipt of income of non-profit organisation may be checked on the following lines:
(i) Contributions and Grants for projects and programmes: Check agreement with donors and grants letters to ensure that funds received have been accounted for. Check agreements with Check that all foreign contribution receipts are deposited in the foreign contribution bank account as notified under the Foreign Contribution (Regulation) Act, 1976.(BCom Different Audit Notes Study Material)
(ii) Receipts from fund raising programmes: Verify in detail the internal control system and ascertain who are the persons responsible for collection of funds and mode of receipt. Ensure that collections are counted and deposited in the bank daily.(BCom Different Audits in Auditing Notes Study Material)
(iii) Membership Fees: Check fees received with Membership Register. Ensure proper classification is made between entrance and annual fees and life membership fees. Reconcile fees received with fees to be received during the year.(BCom Different Audits in Auditing Notes Study Material)
(iv) Subscriptions: Check with subscription register and receipts issued. Reconcile subscription received with printing and dispatch of corresponding magazine/circulars/periodicals. Check the receipts with subscription rate schedule.(BCom Different Audits in Auditing Notes Study Material)
(v) Interest and Dividends: Check the interest and dividends received and receivable with investments held during the year.
AUDIT OF GENERAL INSURANCE COMPANIES
Under section 12 of the Insurance Act, 1938, the financial statements of every insurer are required to be audited annually by an auditor. Section 2(4) of the Insurance Act, 1938 defines the term ‘auditor’ as a person qualified under the Chartered Accountants Act, 1949 to act as an auditor of a company. The auditor, for audit of financial statements, has the powers to exercise the rights vested in, and discharge the duties and be subject to the liabilities and penalties imposed on auditors of companies under the Companies Act, 1956.
The provisions of Section 12 of the Insurance Act, 1938 apply only in a case where the financial statements of the insurer are not subject to audit under the Companies Act, 1956. A company carrying on general insurance business is subject to audit requirements laid down under the Companies Act, 1956.
The financial statements under section 12 include Balance Sheet, Profit and Loss Account and Revenue Account. Section 12 of the Insurance Act, 1938 does not cover the requirement for audit of the Receipts and Payments Account of an insurer. It may be noted that the Insurance Regulatory and Development Authority Act, 1999 inserted a new sub-section (1A) in Section 11 of the Insurance Act, 1938. The sub-section has an overriding effect over sub-section (1) of section 11 that prescribed the financial statements to be prepared by an insurer. The new sub-section requires that after the commencements OT IRDA Act, 1999, every insurer, in respect of insurance business transacted by him and in respect of his shareholders funds, should prepare, at the end of each financial year, a balance Sheet, a Profit and Loss Account, a separate Account of Receipts and Payments and a Revenue Account in accordance with the regulations made by the IRDA. Since Receipts and Payments Account has been made a part of financial statements of an insurer. It is implied that the Receipts and Payment Account is also required to be audited.(BCom Different Audit Notes Study Material)
The Authority, in exercise of the powers conferred by the Insurance Act, 1938, issue the IRDA (Preparation of Financial Statements and Auditor’s Report of Insur Companies) Regulations, 2000. These Regulations require the auditor of an insurance company to report whether the Receipts and Payments Account of the insurer is in agreement with the books of account and returns. The auditor is also required to express an opinion as to whether the Receipts and Payments Account has been prepared in accordance with the provisions of the relevant statutes and whether the Receipts and Payments Account gives a true and fair view of the receipts and payments of the insurer for the period under audit. This also implies that the auditor is required to audit the Receipts and Payments Account of the insurer.(BCom Different Audits in Auditing Notes Study Material)
Appointment of auditors
The appointment of statutory auditors in the General Insurance Corporation of India, and its subsidiaries and the divisions is made by the Comptroller and Auditor General of India, as in the case of other public sector undertakings. The appointment of auditors of the agencies abroad is made by the Board of Directors of each company.(BCom Different Audits in Auditing Notes Study Material)
Rights and duties of Branch Auditors
It is a practice that the divisional offices prepares a trial balance in a manner that it provides information required to be included in the various formats of financial statements prescribed in the Insurance Act. Each trial balance, in which are incorporated the figures relating to the branches of the divisions, is required to be audited and the report thereon is furnished to the statutory auditors. The divisions of the companies carrying on general insurance business are treated for the purposes of the Companies Act, 1956 as their branches. It follows that the branch auditors appointed to conduct the audit of the divisions have the same rights and obligations under the statute as those of the, statutory auditors to whom they are expected to submit their report.(BCom Different Audit Notes Study Material)
The Authority has prescribed the matters to be dealt with by the Auditors’ Report vide Regulation 3 under Schedule C of IRDA (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2000. The Schedule C is reproduced below:
“The report of the auditors on the financial statements of every insurer shall deal with the specified herein:
- (a) That they have obtained all the information and explanations which, to the best of their knowledge and belief, were necessary for the purposes of their audit and whether they have found them satisfactory;
(b) Whether proper books of account have been maintained by the insurer so far as appears from an examination of those books;
(c) Whether proper returns, audited or unaudited, from branches and other offices have been received and whether they were adequate for the purpose of their audit;
(d) Whether the Balance Sheet, Revenue Accounts and Profit and Loss Account dealt with by the report and the Receipts and Payments Account are in agreement with the books of account and returns;
(e) Whether the actuarial valuation of liabilities is duly certified by the appointed actuary, including to the effect that the assumptions for such valuation are in accordance with the guidelines and norms, if any, issued by the authority and/or the Actuarial Society of India in concurrence with the Authority.
- The auditors shall express their opinion on:
(a) (i) Whether the Balance Sheet gives a true and fair view of the insurer’s affairs as at the end of the financial year/period;
(ii) Whether the Revenue Account gives a true and fair view of the surplus or the deficit for the financial year/period;
(iii) Whether the Profit and Loss Account gives a true and fair view of the profit or loss for the financial year/period;
(iv) Whether the Receipts and Payments Account gives a true and fair view of the receipts and payments for the financial year/period.
(b) The financial statements stated at (a) above are prepared in accordance with the requirements of the Insurance Act. 1938 (4 of 1938), the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999) and the Companies Act, 1956 (1 of 1956), to the extent applicable and in the manner so required.
(c) Investments have been valued in accordance with the provisions of the Act and the Regulations.(BCom Different Audits in Auditing Notes Study Material)
(d) The accounting policies selected by the insurer are appropriate and are in compliance with the applicable Accounting Standards and with the accounting principles, as prescribed in these Regulations or any order or direction issued by the Authority in this behalf.(BCom Different Audit Notes Study Material)
- The auditors shall further certify that:
(a) they have reviewed the management report and that there is no apparent mistake or material inconsistencies with the financial statements; and
(b) the insurer has complied with the terms and conditions of the registration stipulated by the Authority.(BCom Different Audit Notes Study Material)
- A certificate signed by the auditors (which is in addition to any other certificate or report which is required by law to be given with respect to the balance sheet) certifying that:
(a) they have verified the cash balances and the securities relating to the insurer’s loans, reversions and life interests (in the case of life insurers) and investments;
(b) the extent, if any, to which they have verified the investments and transactions relating to any trusts undertaken by the insurer as trustee; and
(c) no part of the assets of the policy holders’ funds has been directly or indirectly applied in contravention of the provisions of the Insurance Act, 1938 (4 of 1938) relating to the application and investments of the policyholders? funds.”
BCom 3rd Year Different Audit Notes Study Material